UK property prices up again in May but impact of capital gains tax could halt the recovery

Prices rose 0.5% in May and are now less than 10% below their 2007 peak, according to the latest figures from the Nationwide. The annual rate of house price inflation has dropped from 10.5% to 9.8% and prices are up 12.2% since their February 2009 trough.
 
But the biggest potential impact is a rise in CGT from its current 18% to 40% expected to be announced in the emergency Budget later this month, according to Martin Gahbauer, the Nationwide’s chief economist.
 
He believes that the impact of expected changes in CGT depends on the timing of its implementation. ‘If there is a significant time lag between the announcement of the increase and its actual implementation, then some second home owners and buy to let landlords may decide to sell in advance of the higher rate being introduced. Such a development could lead the supply demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices,’ said Gahbauer.
 
‘However, it is difficult to know with any precision how many people would bring forward a decision to sell. The incentive to try to beat the higher tax rate is most pressing for those who have owned their properties for a relatively long period of time and therefore have relatively large unrealised gains,’ he explained.
 
‘Conversely, those who bought their second homes or investment property within the last five years have little incentive to sell early in order to beat the tax change. House prices have only risen back to their mid-2006 level and the first £10,100 of capital gains is currently tax free. If the new rate comes into effect immediately on 22 June, then supply conditions are unlikely to be affected materially as any potential sellers would not have time to react,’ he added.
 
Ed Stansfield, chief property economist at Capital Economics, also believes there could be a considerable impact. ‘For now, house prices continue to rise, but easing supply shortages, overvaluation and of course, the weak economic backdrop, all argue for renewed falls later this year. Speculation that proposed increases in CGT will destabilize the market, by triggering a wave of sales among investors and second home owners, cannot be dismissed,’ he explained.
 
Melanie Bien, director at mortgage broker Private Finance, said a rise in CGT will hit the property market and reverse recent rises in values as vendors rush to sell their second homes and buy to let properties in order to beat the tax hike. ‘This increase in supply could put pressure on prices,’ she said.