Housing: Forever Blowing Bubbles

Taxes on landlords and investors won't kill off demand

Chancellor of the Exchequer George Osborne is expected to take aim at Britain's bubbly real estate market on Wednesday. But it will take more than increased taxes on transactions to sate investors' love affair with bricks and mortar.

Record low interest rates, a shortage of homes for purchase, and London's perceived status as a safe haven from political turmoil have fueled a boom in the residential market.

Cash In The Attic

Average UK house prices have rocketed since the financial crisis

Source: Nationwide Index, Feb. average price

The Bank of England isn't expected to raise rates until at least next year. Meanwhile, buy-to-let investors can get rental yields of 3 percent to 4 percent for residential property in London and more outside the capital.

It's not hard to explain, then, the increased interest from money managers in the residential sector, which in the past has taken second place to offices and department stores. Legal & General has set up a "build-to-rent" fund while Hermes and Countrywide launched a residential property fund last year.

Hungry for Homes

Big investors are expected to put more money into U.K. residential property in the next five years

Source: Knight Frank (2015 actual, 2020 estimated)

Osborne is unlikely to smash this dynamic. While private landlords might have to swallow an increase in stamp duty (a tax on transactions) on second homes, there's talk of an exemption for investors buying 15 or more homes -- a potential relief and incentive for big institutional or overseas buyers to invest in large new developments. And while foreign home-buyers were hit last year with new measures to force them to pay capital gains tax, some real-estate experts say the weaker British pound has softened the pain.

Institutional funding for new home-building will no doubt be welcomed by the Chancellor. New investment may help the U.K. deliver more housing supply in the long run, but it's hard to see that easing prices in the short term.

Osborne is clearly getting tough on Britain's cohort of individual landlords. That's an understandable political priority given the property boom's eye-popping imbalances: London's stock of residential property is valued at about 1.6 trillion pounds ($2.3 trillion), according to Savills, or more than the value of all the housing combined in Scotland, Wales, Northern Ireland and the North of England.

But whether those imbalances will be cured by the current squeeze on landlords is doubtful. Political encouragement to invest in and build more homes outside the capital should be a good thing for the rental industry. Just don't expect supply to outstrip demand any time soon. 

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at

    To contact the editor responsible for this story:
    Edward Evans at

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE