Burnham’s First Fortnight: Early Signals for the Property Market

After his first week as Prime Minister, somebody presumably told Andy Burnham to distance himself from a land value tax.

Following months of speculation that his government would introduce the levy to replace council tax and stamp duty, he ruled it on Tuesday.

The conjecture had understandably dented demand as buyers had wondered how long stamp duty would continue to exist.

“It had definitely been a topic of conversation, and we expect more buyers to come forward now that it has been ruled out,” said James Cleland, head of Country sales at Knight Frank.

The seasonal spring bounce has certainly fallen a little flat this year. Mortgage approvals and transactions have been going sideways, while Zoopla and Rightmove have both flagged a slower-than-normal market.

This behavioural impact is something the Conservative Party should consider if their plan to abolish stamp duty for primary residences ever becomes a realistic prospect.
Burnham’s apparent U-turn was also a reminder that his plans won’t always survive contact with reality. Warnings from Labour backbenchers this week about the extent of welfare spending cuts were also a sense check for the new Prime Minister.

Flurry of Announcements 

There has been a flurry of announcements since Burnham entered 10 Downing Street on 20 July as he attempts to set a more positive tone than his predecessor Keir Starmer. Pledges have included a £2 bus fare cap in England, a cut in business rates for pubs and clubs and abolishing VAT on electricity bills.

How Chancellor John Healey will fund the proposals, which include a plan to overhaul the social care system, is unknown and Burnham, like Starmer, has talked about “difficult decisions” in the Budget.

Given the bond market won’t permit a government spending spree, Labour backbenchers won’t sanction meaningful spending cuts, and the Labour manifesto has ruled out income tax, VAT or national insurance rises, in some ways the decision will be easy. 

For the third consecutive year, the default choice appears to be the so-called Smorgasbord option of smaller wealth-based tax rises. It means the High Value Council Tax bands introduced in November increasingly look like introductory rates.

Mortgage Rate Pressure

As well as the stamp duty speculation, demand has been undermined by higher mortgage rates, primarily as a result of the conflict in the Middle East, which means energy prices, inflation expectations and swap rates have all risen.

The five-year swap rate, which is used to price five-year fixed-rate mortgages, fell to just under 4% at the end of June as hostilities de-escalated. However, it climbed above 4.4% last week and was at a similar level on Wednesday.

I discuss the impact of the conflict on the property market and Andy Burnham’s first fortnight in power with financial market analyst Michael Brown on the latest episode of Housing Unpacked. We also explore the financial constraints facing the new Chancellor and how that is likely to shape this autumn’s Budget.

"The OBR at the March outlook expected that we had £23.5bn worth of headroom against the fiscal rules," said Michael. He estimates that rising borrowing costs, a weaker economy and spending pledges mean the Treasury may instead need to find £40 billion.

“Although you've changed the Prime Minister, you've not changed the fiscal arithmetic," he said.

Meanwhile, the Bank of England surprised nobody by voting to hold Bank Rate at 3.75% on Thursday. However, one additional member voted to hike compared to last time due to the fallout from the Middle East conflict.

Even so, there is unlikely to be a hike this year, Michael said on the podcast. He suggested weakness in the UK economy, including in the labour market, has so far limited the inflationary effects of the conflict.

A distortive proposal

If the prospect of a land value tax does emerge again, it’s worth bearing in mind two things that were largely overlooked in the speculation, which focussed on a proposal by the Fairer Share group for an annual charge of 0.48% of the property’s value.

First, introducing such a tax would take many years. Valuing every plot of land or property in the country is a huge undertaking and would inevitably be subject to legal challenges. Even if it had been proposed in this year’s Budget, implementing it before 2030 would have been a significant challenge.

Furthermore, under the Fairer Share proposal reportedly being considered, second-home owners and overseas buyers would pay double (0.96% per year) as well as an unspecified rate of stamp duty.

That would inevitably distort prices and undermine demand in the sort of high-value postcodes from which the government would presumably wish to collect large amounts of revenue.

Such an approach doesn’t have a great track record. Taxing the top-end of the property market over the last decade more aggressively has caused prices and transaction volumes to fall by more than a fifth in prime central London, for example.

As Burnham and Healey plan their next move, the state of the UK’s finances means the focus should be on maximising tax revenue rather than political point-scoring that is ultimately self-defeating. 

Will that happen? With the Labour Party moving into its soft-left political comfort zone, it must be unlikely.