Economic Overview – Year End 2013
The UK economy will have grown 1.4% in 2013 according to the latest forecast from the Office for Budget Responsibility (OBR) announced in the Chancellor’s Autumn Statement in early December. For 2014, OBR expects growth to rise to 2.4%. Back in March, the OBR’s forecasts were 0.6% and 1.8% – showing just how much the economy has improved during 2013 (and the margin of error in forecasts, even in very short term forecasts). The International Monetary Fund (IMF) is forecasting a slightly more modest 1.9% growth for the UK in 2014 but that still puts the UK ahead of Germany (1.4%) and well ahead of the Eurozone average of 1%.
Nevertheless it is heartening to see economic growth forecast for the Eurozone – the UK’s biggest export market and the cause of much economic uncertainty. This suggests that its prolonged economic downturn may finally be over.
There is a concern about the heavy dependence of the UK’s recovery on consumer spending and house price growth as well as the rising level of debt being used to fuel the resurgence. This is leading many commentators to forecast slower growth in 2015 and this is in line with the Hurford Salvi Carr forecast for the London housing market of a slowdown in the lead up to the 2015 General Election.
London’s economy has continued to outperform all other parts of the UK. In the five years since 2007, the capital’s economic output has grown by 15.4%, almost double the UK as a whole (8.5%), and this is despite the global financial crisis which damaged London’s important financial sector. It underlines the diversity of the London economy and the contribution of other long established professional sectors such as legal services as well as newer and rapidly expanding sectors such as digital media and creative industries.
London’s strong economy has also been supported by a growing population, which has risen to 8.3 million and is forecast to be 10 million by 2030. This stokes demand for homes in the sales and rental markets.
Mark Carney, governor of the Bank of England remains reluctant to raise interest rates and has indicated that the threshold of 7% unemployment might now be too soon. The bank has brought forward its forecast of 7% from the end of 2016 to the end of 2014. He has said: “ it is unlikely that equilibrium interest rates will return to historically normal levels any time soon”. It now seems that the MPC will wait for ‘a prolonged period of strong growth’ with significantly lower unemployment and higher real incomes before making any changes to interest rates.
Given the government policy aimed at boosting the housing market, the Governor will not wish to risk an overheated housing market, nor plunging it into recession and it seems likely that he will employ other controls over excessive mortgage lending to regulate the housing market.
CAPITAL GAINS TAX FOR OVERSEAS OWNERS
As had been expected, the Chancellor announced in his Autumn Statement that overseas owners of UK property would no longer be
exempt from capital gains tax. However, the new rule will not take effect until April 2015. Under the current system, the tax, which is typically levied at 28% of the gain in value realised on sale of the property, only applies to second home-owners who are UK residents.
The new rule is a response to steep growth in residential property values in London and the large numbers of foreign investors buying homes that they do not live in for any or most of the year. Most commentators see this as an inevitable and fair change to UK taxation. Chancellor, George Osborne said:
“Britain is an open country that welcomes investment from all over the world, including investment in our residential property. But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not.”
It is not expected to have a significant impact on buying patterns and will discourage overseas buyers from selling to realise past price gains. It is not yet clear whether the tax will apply to properties bought before the change but if so, it could prompt some profit taking before the tax comes into effect in April 2015. It seems likely that the government will take this into account when drafting details. There are also questions over how it will be administered. Some commentators think the responsibility for collection will fall to agents or solicitors.