Britain told to tax housing

A Bank of England policymaker has called on the British Government to raise taxes to prevent housing booms in the future.

Adam Posen, an independent member of the bank's monetary policy committee, said yesterday authorities should seek to limit house price bubbles because of the damage they inflict on the rest of the economy when they burst. He also suggested property speculators and second-home owners be subject to additional restraints.

Posen, an American economist, said: "Real estate bubbles tend to have much higher real economic costs than equity bubbles, perhaps because they involve illiquid collateral and local spillover effects."

Posen suggested that real estate taxes, which include stamp duty and capital gains on properties apart from a main residential home, could be used as "automatic stabilisers" - rising during a boom but falling in a slump.

Posen proposed: "Something modest, without any large implications for tax revenue over the cycle ... It would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly, a simple blunt instrument targeted to lean against the wind in real estate prices in an automatic fashion."

Altering loan-to-value ratios and income multiple rules in the mortgage market could have a similar effect. Posen added: "One could be more ambitious and complicate matters by taking into account second houses, speculative purchases and the amount of time owned before sale."

Posen's intervention comes as evidence builds that the property market could be stabilising.

The Nationwide, Britain's largest building society, said yesterday that house prices rose by 0.5 per cent in November, the same as in October, bringing the annual rate of house price inflation to 2.7 per cent, up from 2 per cent in the year to October.

It was the seventh successive monthly rise, and left average house prices only about 12 per cent off their October 2007 peaks. Even so, the rate of increase is stabilising compared to the bounce in the (northern) summer, and few expect it to pick up again in the near future. The average British home is worth £162,764 ($372,000) .

Martin Gahbauer, the chief economist at Nationwide, put the improvement down to Britain's flexible labour market, as fewer job losses meant the expected flood of repossessed homes had not materialised.

"The outlook for the housing market remains crucially dependent on labour market conditions," he said.

"A part of the explanation for why unemployment has not risen to the levels implied by the recession's depth is that in many cases employers have opted to reduce working hours and pay rather than make employees redundant. Whether this strategy is sustainable depends on how quickly the economy recovers."

Some economists see the price rises as another example of asset price inflation resulting from the Bank of England's policy of quantitative easing - injecting £200 billion of spending power directly into the economy.

Another factor that pushed prices higher is a relatively tight supply of desirable properties. Opportunistic cash buyers, a revival in buy-to-let and some foreign interest in properties at the top end of the London market have also boosted values.

- INDEPENDENT