How Osborne’s budget affects the housing market

THERE are not many ways to make a 10 per cent tax hike look business-friendly, but Chancellor George Osborne pulled off a neat trick this week by doing just that.

Expectations of a massive capital gains tax (CGT) rise had been building since the Liberal Democrats, who had promised to raise CGT to close to the top rate of income tax at 50 per cent, entered government with the Tories.

So when Osborne came out with the actual rise – a jump from 18 to 28 per cent for top-rate taxpayers – many property developers and estate agents felt relieved. “Honestly I don’t think it was that bad. Certainly not as bad as I expected,” says Martin Bikhit of Kay & Co estate agent. Ivor Dickinson of Douglas & Gordon agreed: “It was nothing like as bad as anyone expected.”

Not everyone is so sanguine, however. The CGT rise might not make a huge difference for overseas or private residential buyers, but for buy-to-let landlords and business investors, it erodes their margins. FindaProperty’s Nigel Lewis says: “Taking money from the people who are likely to reinvest it into the property market is counterproductive. Liquidity in the market is essential to maintain the churn that the property sector needs to stay healthy.”

That churn has picked up somewhat since last year, with the number of new properties on the market resulting in prices almost flat-lining. But the extra tax could set this back as owners hold on for longer or business owners decide to profit instead via rising rents. This could be particularly appealing because agents report that lettings prices have taken off recently due to the scarcity of the rental stock coming onto the market.

In certain areas, however, new budget measures are likely to cause a sharp drop in prices as new housing benefit limits come into effect. Osborne has reformed the system both by matching the benefit amount at the thirtieth percentile of local rental rates (instead of matching it to the median rate) and by introducing absolute caps of £400 per week for a four-bedroom accommodation down to £250 per week for one bedroom. Moreover, because the benefit will now be uprated in line with CPI instead of local rental rates, it could fall significantly behind lettings prices.

Lukman Miah, of Kenneth Lloyd estate agent in Aldgate, and says that around half of his lettings clients are housing benefit claimants. “Most of the people here who are on housing benefit have families,” he says. “Their child tax credit and child benefit has been stopped and if their housing benefit goes down they’ll have to fork money out of their pocket.” As a result, Miah is looking at the possibility of a 10-15 per cent fall in rental prices.

The changes could also mean that some of Britain’s one million households that draw housing benefits have to move area entirely, says Mark Thomas of the charity, Shelter. “Almost half are already making up a shortfall of almost £100 a month,” he says, and further reductions could force them to seek properties in cheaper areas.

But while the top end of the private market looks set to absorb CGT with relatively little pain and lower-end rentals are going to be hit hard, one group has been left in the dark. The government is still considering whether or not to abolish stamp duty relief on properties under £250,000 for first-time buyers: the policy is now “under review” until further notice. At least part of the market, then, is still awaiting its fate.