Markets are supposed to be efficient. But, just at this moment, London residential property prices, seem to demonstrate that they are anything but. The Labour Party is totally committed to the economically illiterate 'mansion tax' which they plan to levy on all properties worth over £2.0 million at a rate of 2%. The Labour Party is also, despite it's inept leadership, quite likely to form the next government either on its own or with the help of what's left (not much I suspect) of the Liberal Party.
So - all things being equal- within rather less than a year a £3.0 million London house could be subject to a annual tax of £60,000! Now -in that event what happens to it's capital value? - come on thicko - think back to you basic maths and basic economics. It is going to collapse in value isn't it? In fact it is going to fall at the very least by just over a £1.0 million- taking it below the £2.0 million threshold but possibly by even more - why so? Because all houses above it in value will also see their values collapse. In other words the £5.0 million house which would, if its value did not change, carry an annual tax burden of £100,000 will also fall by at least £3.0 million. Why the collapse in its value? Because £100,000 represents an annual yield of 2.5% on £4.0 million. In short you cannot expect capital values of London property at any level to be unaffected by the imposition of this ridiculous tax. So why are investors not baling out as fast as they can? It is a mystery to me.
An even bigger mystery is why there are 25,000 luxury homes either in development or planned with, a today's completion value, of £60 billion i.e. with an average value of over £2.0 billion. Now it maybe that developers and owners of prime London property know something you and I don't - that Ed Milliband hasn't a hope of becoming Prime Minister, let alone Nick Clegg. I just wish I could be so sure. But to me it looks like a hell of a gamble. After all -frankly -the upside in London property has to be very limited while the threat of a 'mansion tax' makes the downside a black hole.