A proposal by London’s mayor to allow certain boroughs to raise taxes on owners of empty homes won’t have a huge impact on overseas luxury buyers if it comes to fruition, experts say.
On Monday, London Mayor Sadiq Khan called on the government to raise the taxes to combat a housing crisis in one of the world’s most expensive cities.
More:Click to Read More About London Luxury Real Estate
"In the midst of a housing crisis, just one home left unoccupied is one too many," Mr. Khan said in a letter to Downing Street asking that prime London boroughs be authorized to levy an empty-home-tax rate.
While it’s still unknown whether and how a new, higher tax rate will be implemented, experts said the impact on luxury buyers would likely be insignificant.
Mark Pollack, founding director of Aston Chase, an agency specializing in high-value properties in Central and North London, doubted the mayor’s plan would become reality at all, noting that monitoring empty homes will be difficult and labor-intensive.
The proposals are a "good soundbite to appease public upset over the number of unoccupied homes across the capital," he said.
More:How Can I Tell If I’ve Overpaid My Stamp Duty Taxes?
Even if it takes effect, since there aren’t actually that many empty properties in London, it would likely have little impact on demand for London property, said Liam Bailey, partner and global head of research at Knight Frank, a London-based global real estate consultancy.
The central London market has been subject to considerable tax reform over recent years, which has raised the tax burden on purchasers and owners of high-value properties, Mr. Bailey said. By his estimate, prime prices have corrected by around 8% from their 2015 peak.
That said, "demand has remained relatively resilient and buyers are active even if they are taking longer to agree to purchases," Mr. Bailey said.
The fundamental drivers of demand for London property remain the same, according to Mr. Bailey, namely, the state of the economy, employment growth and cost and availability of mortgage finance.
Councils currently charge up to 50% extra tax on empty homes
Since 2013, councils in England can charge up to 50% extra Council Tax if a home has been empty for at least two years. But the tax often isn’t enough to incentivize occupation, or to generate revenue to invest in affordable housing, the mayor said.
He cited the case of Westminster’s highest tax bracket, Band H, where properties may be worth millions of pounds, but empty homes tax would cost no more than £688 (about US$896) a year, currently.
The mayor wants to leave decisions up to local councils, and therefore didn’t suggest a new tax rate in his proposal.
Mr. Khan’s proposal came in response to a study on overseas investment in residential properties in London from 2014 to 2016. The study, conducted by the London School of Economics and the University of York, showed that although the number of empty homes in the capital is low overall, they are concentrated among high-value properties in central London.
According to the study commissioned by the mayor, approximately 1% to 4% of homes were sold to overseas buyers and might not be regularly occupied during the two-year period. These homes are mainly in the prime boroughs, including City of London, City of Westminster, Kensington and Chelsea.
Foreign buyers account for 36% of new homes sales in prime areas
Overseas buyers accounted for about 36% of sales of new build homes in central London from 2014 to 2016. By comparison, 6% of new-build sales in outer London boroughs were sold to foreign buyers, according to the study.
Buyers from Hong Kong, Singapore and China’s mainland ranked the top three overseas buyers, with Hong Kong individual buyers accounting for 28% of all overseas sales.
More:Chinese Buyers Still Key to the Success of Luxury Markets
The study also found that foreign buyers were "over" represented in purchases at and above £5 million (US$6.5 million). During the two-year period, 16.2% of new build homes priced £1 million to £5 million have been sold to foreign buyers, compared to 8.8% for the general market. For properties over £5 million, it was 0.8% for foreign buyers while it was 0.4% in the overall new development market.
Although mayor Sadiq Khan’s tax proposal won’t translate into heavy burdens to luxury home owners, it could scare away some investors, said Simon Deen, Director & Head of New Homes at Aston Chase.
"Crucially, such a tax would send the wrong message that London is not a tax-friendly place to be for global investors," he said. "Foreign buyers make a key contribution to luxury home sales, especially in new developments."
London could follow footsteps of Vancouver, Paris and Melbourne
Similar taxes have been levied in recent years in other cities around the world favored by overseas buyers for second homes or investment properties. Their goal: to motivate owners to rent out their empty homes and to curb the trend to use luxury properties as places in which to park foreign money.
At the start of 2017, Vancouver introduced a 1% empty-home tax on any property left vacant for at least six months a year. Owners who fail to file could face fines of up to C$10,000 a day.
Melbourne will enact a similar measure in January 2018. A home left empty for more than six months will face an annual tax equal to 1% of its value.
In Paris, second-homeowners have paid a 20% premium on the annual taxe d’habitation property tax since 2015. Earlier this year, the standard rate was raised to 160%.