The mansion tax has brought the legitimacy of foreign investment back onto the conversational agenda in recent days. A mansion tax to fund the NHS based on a valuation threshold of £2m would encompass many properties in London. At face value, it is difficult to argue with this given the meteoric rise of property prices in the capital. But is it fair?
The dictionary definition of a "mansion" is "a very large dwelling house". In the US, realtors define a mansion as a dwelling of in excess of 7,000 square feet. A traditional European mansion was defined historically as a house which contained a ballroom and tens of bedrooms.
On a daily basis, I see internet advertisements from Right Move and Prime Location for prime properties in central London that range from a £46.5m family home in Hampstead and a £40m penthouse in the Candy Brothers' One Hyde Park development to a £30.5m Mayfair terraced house with four bedrooms. Faced with options such as these for clients, I find myself rationalising that £6m more for a family home in Hampstead is actually much better value per square foot than a penthouse apartment in Knightsbridge. No matter how hard I try, I struggle to wrap my head around the concept of anything with the words "terraced" and "four bedrooms" sitting in the same sentence as numbers that contain millions, even when the address is in Mayfair. All of these properties, however, would meet either the US or European definition of a mansion. The proposed mansion tax though, would catch all properties that are valued in excess of £2m, which would included 2/3 bedroom apartments and small houses with minimal square footage. There are many roads in Kensington and Chelsea, where homes are frequently worth in excess of £5m, which are owned by families who have lived in the area for generations and owned the properties for decades. These people are often not in the same stratosphere as the foreign buyers who have become their neighbours in recent years, and would likely be crippled by a compulsory annual tax based purely on the value of their home.
The willingness of foreign investors to pay for prime Central London properties is undoubtedly creating a bubble. The fundamental question is when will it burst? Some who find the mansion tax objectionable argue that it will deter foreign investment and this would disadvantage London versus its competitors around the world. This may well be the case although it is important to remember that many foreign investors acquiring London real estate are seeking a safe haven for their funds. A quantifiable tax may be a relatively small price to pay for the knowledge that your assets are safe and within your control. Similarly, all talk of a bubble must be acknowledged in the context that the decision-making parameters for foreign investors are often very different from those who are accustomed to the comfort of living in a democracy like Britain. A Russian oligarch, for example, may not be overly concerned about a 5% move in the London property market because he knows that in one, two or three years time, he will still own the property and it will not have been seized by the Government.
The only bubble that will be burst by the implementation of the mansion tax will be that of British Londoners. It will make getting onto the property ladder in Central London even more prohibitive, driving British Londoners out of the capital, and perhaps even out of the country, thereby losing valuable tax revenues as well. The price of Central London property prices may dip but they will remain buoyant as long as London is perceived as a safe haven for foreign money. Perhaps the more pertinent question is whether it is time to recognise London as a City State separate from the rest of the UK since the drivers of the London economy appear to be entirely different from other parts of the country - if London had a referendum, would the answer be "Better Together"...?
The dictionary definition of a "mansion" is "a very large dwelling house". In the US, realtors define a mansion as a dwelling of in excess of 7,000 square feet. A traditional European mansion was defined historically as a house which contained a ballroom and tens of bedrooms.
On a daily basis, I see internet advertisements from Right Move and Prime Location for prime properties in central London that range from a £46.5m family home in Hampstead and a £40m penthouse in the Candy Brothers' One Hyde Park development to a £30.5m Mayfair terraced house with four bedrooms. Faced with options such as these for clients, I find myself rationalising that £6m more for a family home in Hampstead is actually much better value per square foot than a penthouse apartment in Knightsbridge. No matter how hard I try, I struggle to wrap my head around the concept of anything with the words "terraced" and "four bedrooms" sitting in the same sentence as numbers that contain millions, even when the address is in Mayfair. All of these properties, however, would meet either the US or European definition of a mansion. The proposed mansion tax though, would catch all properties that are valued in excess of £2m, which would included 2/3 bedroom apartments and small houses with minimal square footage. There are many roads in Kensington and Chelsea, where homes are frequently worth in excess of £5m, which are owned by families who have lived in the area for generations and owned the properties for decades. These people are often not in the same stratosphere as the foreign buyers who have become their neighbours in recent years, and would likely be crippled by a compulsory annual tax based purely on the value of their home.
The willingness of foreign investors to pay for prime Central London properties is undoubtedly creating a bubble. The fundamental question is when will it burst? Some who find the mansion tax objectionable argue that it will deter foreign investment and this would disadvantage London versus its competitors around the world. This may well be the case although it is important to remember that many foreign investors acquiring London real estate are seeking a safe haven for their funds. A quantifiable tax may be a relatively small price to pay for the knowledge that your assets are safe and within your control. Similarly, all talk of a bubble must be acknowledged in the context that the decision-making parameters for foreign investors are often very different from those who are accustomed to the comfort of living in a democracy like Britain. A Russian oligarch, for example, may not be overly concerned about a 5% move in the London property market because he knows that in one, two or three years time, he will still own the property and it will not have been seized by the Government.
The only bubble that will be burst by the implementation of the mansion tax will be that of British Londoners. It will make getting onto the property ladder in Central London even more prohibitive, driving British Londoners out of the capital, and perhaps even out of the country, thereby losing valuable tax revenues as well. The price of Central London property prices may dip but they will remain buoyant as long as London is perceived as a safe haven for foreign money. Perhaps the more pertinent question is whether it is time to recognise London as a City State separate from the rest of the UK since the drivers of the London economy appear to be entirely different from other parts of the country - if London had a referendum, would the answer be "Better Together"...?
