In Choosing a Broad Base – Low Rate Approach to Taxation the OECD sets out the best areas for governments to raise taxes as part of their fiscal consolidation.
It argues that property taxation is more efficient, more stable and harder to evade than other taxes and can be more progressive.
The report states: “Owner-occupied housing has a favourable tax treatment relative to other forms of investment in many OECD countries through reduced tax rates or exemption for imputed rental income, mortgage interest payment deductibility and exemptions from capital gains tax.”
It says this preferential treatment has caused market distortion leading to capital flowing out of other sectors and into housing.
It also adds that many OECD countries use outdated valuation methods and a proper valuation system is crucial to effective property taxation.
It says: “The market value of real property is not following a stable trend over time, as the recent housing bubble and corresponding collapse in prices have demonstrated in many countries. This creates an additional difficulty in using the market value of real property as a taxable base.”
But the property industry reacted with fury to the prospect of higher taxes.
David Newnes, estate agency managing director at LSL Property Services, says another tax on residential property could leave the UK with no boom and only bust.
He says: “Far from protecting the UK from ‘boom and bust’, squeezing more tax from home ownership and residential property generally would weaken consumer demand, reduce homeowner equity and force thousands more people into the already white-hot rental sector. “
Paul Hunt, managing director of mortgage software provider Phoebus says a recurrent tax on property sounds dangerously like a council tax, which already at punishing levels.
He says: “We already have a massive housing deficit and need an incentive not to build more property like a hole in the head. So before we introduce another property tax, we might think about an unoccupied property tax – rather than the current reduction in council tax offered on such unoccupied properties.
“House prices are high due to demand which in turn is high due to lack of availability. If we agree that people need a home, then dealing with the supply should be the priority. I think the coalition would be daft to pursue this idea further.”
Nicholas Leeming, commercial director of Zoopla.co.uk, says: “In a normal market where mortgages are freely available, house prices are driven mainly by interest rates in the short term, and by our chronic shortage of supply in the long term.
“If you want to limit boom and bust in Britain’s property market, planning law should be relaxed to allow the construction of more decent-sized family homes.”