Osborne's $1.3 billion property tax cut won't stoke bubble
George Osborne's tax cut for homebuyers isn't reviving concern about another property bubble.
That's according to Bloomberg's monthly survey, which showed two-thirds of 36 economists don't expect the move to increase the risk of overheating. The U.K. chancellor of the exchequer announced the decision to reduce transaction taxes on most homes on Dec. 3, just five months before the U.K. general election.
The 800 million-pound ($1.3 billion) stamp-duty overhaul, which comes at a time the housing market is cooling, will add some support by giving buyers extra cash for their down payment, though it's impact may be limited by tougher mortgage rules.
"The stamp duty reform won't on its own lead the housing market back to overheating," Rob Wood, an economist at Berenberg Bank in London, said in a telephone interview. "But it's a significant stimulus for parts of the market at a time when interest rates remain very low, house building is woefully short of what's required, and the economic recovery continues."
Property activity has softened in recent months. Mortgage approvals fell to the lowest in more than a year in October and the Royal Institution of Chartered Surveyors said last week that its house-price index dropped to its weakest since May 2013.
'Softer Trend'
The Bank of England introduced measures to limit risky mortgages at the Financial Stability Report in June, citing the need to shield financial stability from risks posed by residential property. A review of the home lending market has also tightened criteria.
Osborne unveiled the new stamp-duty system in his end-of- year Autumn Statement. The change, which took effect immediately, replaced fixed price brackets with gradual increases similar those used for income, and will lower costs for most buyers barring the top end of the market.
It "could reverse the softer trend in buyer enquiries," RICS said last week. The impact on house prices will depend on whether potential sellers put their properties on the market, boosting supply, it said.
Property website operator Rightmove Plc forecast yesterday that asking prices for homes may increase by no more than 3 percent next year after an 11 percent surge in 2014. The average forecast is about 4 percent, according to Acadata.
Inflation Outlook
The U.K.'s Office for Budget Responsibility said the tax change may "increase the overall volume of property transactions as the costs associated with the vast majority of transactions will be slightly cheaper." Carney said last week that the new levy would support the market "on the margin."
The Bloomberg survey also showed that economists cut their inflation forecast for the early part of 2015 and now see price growth averaging 1 percent in the first quarter and 1.1 percent in the second. That compares with the BOE's target of 2 percent.
Data today showed inflation slowed to 1 percent in November, the least since 2002 and staying below the goal for an 11th month. BOE Governor Mark Carney, speaking in London at the presentation of the central bank's semiannual FSR, reiterated today that consumer price gains may slip below 1 percent in the coming months, dragged down in part by lower commodity prices.
Domestic risks posed by the housing market haven't increased since June, though Osborne's change to housing- transaction tax could still revive the property market, the BOE said in the FSR. Tighter lending standards may still be contributing to a slowdown in mortgage approvals and might be deterring borrowers and banks from high-risk loans, officials said.
'Reluctance to Lend'
"High household indebtedness continues to pose risks to financial stability," so recommendations in June against risky mortgages "continue to act as insurance against a significant deterioration in lending terms," the BOE said.
On interest rates, 98 percent of economists in the Bloomberg survey see the BOE keeping the benchmark at a record- low 0.5 percent until after the general election on May 7. The survey was conducted from Dec. 5 to Dec. 12.
"Banks' reluctance to lend despite the economy's strength this year is likely to have partly reflected uncertainty about regulations," said Samuel Tombs, an economist at Capital Economics in London. Unless there are big failures, "a stronger recovery in bank lending will get underway soon."