Cash-rich foreign buyers have driven London house prices beyond the Bank of England’s control, its Governor Mark Carney has admitted.
Mr Carney’s remarks on Sunday reignited the argument over whether there should be a mansion tax on millionaires’ homes, proposed by the Liberal Democrats and backed by Labour, but opposed by the Conservatives.
While Mr Carney played down any immediate risk of a nationwide housing bubble, he said the bank was ready to use mortgage rates and lending rules to keep it in check should the situation arise.
These measures are ineffective in London, however – where the price of an average house is rising by more than £1,000 a month – because foreign buyers do not rely on loans. “The top end of London is driven by cash buyers. It’s driven in many cases by foreign buyers. We as the central bank can’t influence that,” Mr Carney told the BBC’s Andrew Marr Show.
“We change underwriting standards – it doesn’t matter, there’s not a mortgage. We change interest rates – it doesn’t matter, there’s not a mortgage, etc. But we watch the knock-on effect.”
Stephen Williams, a Liberal Democrat minister responsible for housing, said on Sunday: “There are many arguments for a mansion tax, and this is certainly one of them.”
Wealthy foreigners who buy second homes in the London contribute very little in tax, which is why Liberal Democrat and Labour politicians have proposed an annual charge of 1 per cent on the value of a house worth over £2 million – meaning that someone living in a £3 million house would pay £10,000 a year.
London’s Mayor, Boris Johnson, has opposed the idea as “absurd”, saying that it would “trap people who are cash poor”.
But Mr Williams said: “People can be very creative about tax avoidance in many ways, but a mansion tax is a tax that is virtually impossible to avoid. It’s unlikely that a charge of £10,000 on a £3 million house is going have a catastrophic effect on the owner, when house-price inflation outstrips 1 per cent every year. But I have no doubt that will be in the scare-story toolbox of those who oppose this tax.”
The Governor added that the Bank was watching out for the knock-on effect of the London price boom, but said that, outside the capital, the housing market still has not fully recovered from the 2008 banking crisis.
“What we’ve seen in the housing market is an adjustment from very low levels. So if you look at the level of transactions – how many houses are purchased, how many mortgages are struck – they dropped by more than 50 per cent from the average before the crisis. They’ve now bounced back, but they’re still more than 25 per cent below historic averages,” he said.
“But we have to be very conscious of the economic history in Britain, and there is a history of boom and subsequent bust in the housing market. That’s one of the reasons why the Bank of England has been given additional powers and one of the reasons as of last November we started to use those powers. So we’ve tightened up on underwriting standards, we’ve tightened up on capital standards, we’ve taken away special stimulus programmes that existed before.”
He added that the Government’s Help to Buy scheme, which has been criticised for increasing demand for housing without increasing the supply, was “pretty small” in its effect on prices, and “it’s all outside London”.