Fiscal pressures fuel talk of desperate measures

In less than a month, property taxation is expected to shift again as Chancellor Rachel Reeves delivers the Budget.

An annual levy of 1% on the proportion of a home's value above £2 million is reportedly on the table, which would cost £5,000 for the owners of a £2.5m property, and would apply to about 150,000 homes in England and Wales, according to analysis for the Times this week. A lower threshold of £1.5m would affect about 310,000 properties, or 1.1% of all homes.

As you'd expect, most are in London and the South East. Almost a fifth of all homes in Kensington and Chelsea would qualify for the £2m threshold, as would 12.3% of homes in Westminster and 7.5% of homes in Elmbridge in Surrey. This would be introduced alongside the scrapping of the capital gains tax exemption on primary residences, the paper reported separately this week.

Doom loop

There's clearly an opportunity here to do away with the current regressive, complex patchwork of property taxation. The FT's editorial board yesterday called for an overhaul of council tax, or "better still, replacing them with a simpler proportional property tax and scrapping stamp duty would do more to unblock the housing market."

Unfortunately, the driver behind this latest policy idea is not a desire for rationalisation or the creation of an efficient tax landscape, but desperation. There are good arguments in favour of annual property taxes, but they rest on the idea that such taxes replace those on transactions and income. In the current situation, however, the concept is that they are in addition to them.

The worse the fiscal outlook gets, the more likely it is that Reeves is coaxed into more radical policy changes, and by all accounts it’s getting worse all the time. The long-rumoured productivity downgrade from the Office for Budget Responsibility (OBR) is likely to force the Treasury to find another £7 billion, the Times reported yesterday, though any improvements to forecasts for wage growth and inflation could soften the blow. JP Morgan reckons the fiscal black hole remains in the £20–30 billion range, "but with the risk that this could be exceeded to some degree," the bank's chief economist Allan Monks told Reuters.

This is unlikely to be the only bad news from the OBR. The Times has a copy of a private letter to the spending watchdog from the Home Builders Federation (HBF) pointing out that the OBR's forecast that UK housebuilding would hit 1.3 million homes a year by the end of the decade, increasing GDP by 0.2%, were too optimistic. Those forecasts had given Reeves about £6.8 billion of extra headroom.

HBF chief executive Neil Jefferson said the OBR’s forecasts would only be achievable with incentives for first-time buyers and "reduced planned taxes on new homes that were making many sites 'unviable'."

The main issue for the Chancellor is that a new tax here or there might plug the gap for this year’s budget, but what happens next year, and the year after that? At some point in this Parliament, the penny will drop: the UK cannot tax its way out of its current malaise. We are likely already well along the wrong side of the Laffer Curve. 

Mixed signals

Last week's positive inflation print quickly fed through to mortgage rates. Santander, NatWest, Barclays and HSBC have all trimmed fixed rates by up to 0.36 percentage points in the past week.

That was a reaction to a relatively small move in swap rates, which highlights how subdued property market activity is, and how eager the lenders are to meet targets in the final months of the year.

We've since had data suggesting the economy is performing better than expected, and that consumer spending unexpectedly rose last month. The mixed data, combined with uncertainty over the Budget, has led economists to put back their expectations for rate cuts by the Bank of England.

Almost nine in ten economists surveyed by Reuters in the six days leading up to October 28th reckon it'll be a hold at the November meeting. A little over half expect no cuts this year – nearly 70% expected a cut before year-end in last month's poll. The remaining 29% expect a cut in December.

Prolonged deals

Investors spent more than £850 million on UK Build-to-Rent (BTR) property in the third quarter of 2025, up 35% year-on-year. This maintains momentum from the first half of the year, where £2.2 billion was deployed and takes total investment for the first nine months of the year to just over £3 billion across multifamily, single family and co-living deals, according to Knight Frank data.

Single family continues to perform strongly, accounting for 40% of spend over the course of the quarter and 46% of investment so far this year, reflecting the ongoing strong appetite and liquidity for houses for rent. But more than £500 million was allocated to developing multifamily schemes in urban locations in Q3, suggesting robust demand still for forward funding of large-scale developments. See this piece for more.

The Purpose Built Student Accommodation (PBSA) market is also busy. July to September marked the largest third quarter on record for investment volumes, with £1.83 billion passing hands. This takes investment volumes in the year to date to circa £3.4 billion, up 3% on the comparable period in 2024. A number of key deals transacted over the course of the quarter including QuadReal’s acquisition of the Apollo Portfolio for more than £550 million, and KKR’s purchase of the Curlew Capital Portfolio for a price in the region of £230 million.

Whilst the numbers suggest a liquid investment market, capital markets intelligence suggests deal times have been prolonged in some cases. Investors have a clear appetite for first generation standing stock assets – where there is upside potential to deliver value-add returns. But for these deal types, fire safety, remediation work, and a later leasing cycle is contributing to elongated transaction timelines. Read the piece for more.

In other news...

From Knight Frank: Stephen Springham unpacks the latest retail sales data, Jennifer Townsend on the money flowing into UK science and innovation and Clare Williams highlights the manufacturing opportunities in European real estate.