Prime housing market - the ultimate political football?

06 November 2014

The UK’s prime housing market is expected to slow in the run up to next year’s election and resume steady growth thereafter, but if it were to be introduced a mansion tax could change the outlook dramatically, international real estate adviser Savills said today when it released its five year forecasts.  A so-called ‘mansion tax’ could negatively impact five year growth by an average of five percentage points, the firm says.

The high value prime markets – the top five to 10 per cent of homes by value – have already been impacted by increased stamp duty, the introduction of an annual tax on enveloped dwellings (ATED) and the closure of certain tax loopholes.  The rate of price growth has begun to slow, particularly in London.  After five and half years of price growth and having absorbed a number of tax rises, London looks fully valued, particularly given the uncertainties surrounding the mansion tax as election year approaches. 

On this basis, Savills has issued two forecast scenarios: a central scenario and a second based on its estimates of the number of properties in different price bands over £2 million and the scale of possible mansion tax charges given current Labour party proposals.

“Two out of the main political parties still favour some form of mansion tax so owners and buyers will be rightly factoring it into their decisions as the election approaches,” says Sophie Chick, senior research analyst as Savills.  “It would take some time for the markets to accurately price in the impact of a mansion tax, but the threat of it has already slowed the market.  If it becomes clear that a mansion tax is to be introduced after May 2015, we would expect an immediate price adjustment before the market more rationally finds its level.”

Central 5 year prime market forecast assuming no mansion tax:

Savills central forecast would see average prime London house prices slipping -0.5 per cent in 2015, assuming no further increases in the taxation of high value properties.  Growth would be expected to resume post election, averaging 22.7 per cent over the next five years across all prime London markets.

Please click here to view the Savills 5 year prime market forecast – central scenario for 2015-2019.

Regionally, the recovery is yet to become fully established and the market has capacity for price growth to continue through next year, albeit averaging just 1.0 per cent.  Five year growth is forecast to average 23.9 per cent across the UK, outperforming prime London, with prime commuter and lead city locations expected to show the strongest growth. 

The hypothetical mansion tax risk scenario

Savills believes that a mansion tax, if implemented in the form most recently discussed, would trigger average price falls of -5.0% across prime London in 2015 and -3.0 per cent across the prime regions. 

In a worst case scenario, the value of prime London properties over £10 million could fall by -10 per cent and homes worth over £3 million regionally would fall -7.0 per cent.  Homes below the mansion tax threshold would not escape its effect, but the proposed progressive structure of the tax would limit the trickledown effect, with small falls of -2.0 per cent anticipated.

By 2017, the top end of the market would absorb the tax change.  The £1 to £2 million end of the market would see less of a rally, being more affected by mortgage regulation and expected interest rate rises, similarly the £2 to 3 million market remains impacted by the top rate of stamp duty

Please click here to view the prime market forecasts – the hypothetical mansion tax effect, projected by price band.

The prime market already accounts for a disproportionately high share of the total tax take, with £2 million-plus sales accounting for just 0.3 per cent of the housing market, but generating over £1 billion in stamp duty,” says Lucian Cook, head of UK residential research at Savills.   Tax receipts for two central London boroughs generate £54 million more in stamp duty than the combined total for Scotland, Wales, Northern Ireland, the North East, North West and Yorkshire & the Humber.

“We would favour a revision of the council tax system,” Cook says.  “This would be more equitable, without the potential unintended consequence of punishing owners of lower value homes, or those who are equity rich but cash poor.”

The mansion tax sums estimated:

The latest statements of intent on the mansion tax have come from Labour, who would hope to raise £1.2 billion.  They favour a progressive tax, with properties valued between £2 million and £3 million paying £3,000 per year, with higher value homes contributing significantly more. 

Savills estimates that there are some 97,000 homes worth over £2 million in the UK, of which some 40,000 are worth between £2 and £3 million, and a further 30,000 between £3 to £5 million.  To raise £1.2 million – and allowing for tax leakage from stamp duty and inheritance tax as values fall – the charge for homes worth between £3 to £5 million could be in the order of £7,000 a year, rising to £125,000 for the estimated 1,500 properties worth over £20 million.

Please click here to view the estimated split of £2m+ properties and hypothetical full mansion tax charge.



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