The British Government’s War on Real Estate

November 26, 2008 at 02:49 | Posted in government, real estate, taxes | Leave a comment

As if anybody really needed more proof that the only thing goverments can do better than private enterprise is destruction, the Globe and Mail – not known for its libertarian bias – published a curious little article on the effects of British property taxes on real estate. 

In a nutshell, the tax code makes it more profitable to tear down perfectly fine buildings during the current market conditions than to keep them standing empty until better times arive. 

Tax code fuels London’s second blitz

Many buildings are being demolished to avoid steep taxes, leaving neighbourhoods looking bombed and hollowed out

From Tuesday’s Globe and Mail

LONDON — In the real-estate industry, they’re calling it “bombsite Britain.”

You can see its effects in a windswept lot in west London, where a mountain of red bricks and broken timber sits. Until recently it was a historic pub called the Lightning, but its owner, unable to find a tenant to get the beer taps flowing again, has demolished it to avoid paying steep property taxes on an empty building.

Or at the other end of London, where an enormous, 35-year-old public-housing complex is in the midst of a total demolition, and maybe a permanent one. The company hired by the government to replace the 2,000 homes with a more attractive development was struck by the economic crisis and may not be able to find financing to finish construction. Officials say the site is likely to become a field, its tenants seeking homes.

Or in the middle of downtown Leeds, where construction of a block-wide office building has ground to a halt, probably permanently, as its builder has failed to find commercial tenants or financiers for the project. The dreary unfinished foundation has helped give a gap-toothed expression to the downtown core.

To many observers, Britain’s urban areas are beginning to resemble the years of the Blitz.

But this time, the empty lots are being caused not by bombs but by a freak combination of disasters in the financial system, the real-estate market and the tax code that have turned one of the world’s largest real-estate booms into a recipe for derelict and abandoned properties.

“We now have almost a million houses that are abandoned, even though there’s a housing shortage, and the economy is not providing any way to match them with occupants, so a good proportion might be slated for demolition,” said David Ireland, chairman of the Empty Homes Agency, a housing charity.

Four in five of those houses were owned by private individuals, often working-class Britons who took advantage of easy credit rules to withdraw equity from their homes and use it to put down payments on second “buy-to-let” houses for rental income. The economic downturn created a domino effect where many people have lost both of their houses in a storm of foreclosures and evictions.

A lot more have simply not been sold because British banks, many of which are still struggling to rid themselves of credit risk after a major government bailout, are now wary of giving mortgages to consumers at any rate. And a spiralling unemployment crisis is making people wary of putting their money down on a house they may be unable to afford.

This has left developers, who built like mad during the boom, stuck with thousands of properties they can’t sell.

You can see that happening on the edge of Birmingham, where a year-old subdivision of handsome red-brick houses, Nether Hall Park, has streets mysteriously devoid of cars or pedestrians. The handful of people who bought houses there a year ago for $800,000 now say they have to walk past blocks of empty houses on the market for half that price before they can find a single neighbour. They wonder if the developer will soon turn them into fields.

Compounding the huge glut of empty homes and business offices is a tax system that requires owners to pay property tax on empty buildings based on their size, with only a six-month grace period to find tenants. This provides an economic incentive to demolish buildings.

“This is like putting income tax on the unemployed … some of our members are taking desperate measures and actually knocking down buildings before they’ve reached the end of [their] useful life,” said Liz Peace of the British Property Federation, which represents builders. “Developers who might be rebuilding city centres just won’t do it now, because they don’t want to be in a situation where they can’t find a tenant and have to pay the tax, and then have to destroy the building.”

Such demolitions have become commonplace. On the outskirts of Newcastle this month, an entire industrial park of 116,000 square feet was demolished because its owners couldn’t find enough tenants to compensate for a property-tax bill of $240,000 a year.

On top of that, many British local governments have given the redevelopment of huge public-housing projects and downtown units to private developers in exchange for the right to build for-profit condominiums.

As the condo market has disappeared and mortgage lending has shrunk 40 per cent, these companies have lost their sources of financing, and there is a real possibility that huge stretches of downtown cores will be unbuilt and left as half-demolished stretches of wasteland.

“This is really a set of circumstances that is unique to Britain, and it is creating a really serious waste of valuable property,” Mr. Ireland said.

Many property builders are simply unable to build anything because they lack funds. Taylor Wimpey, Britain’s biggest builder, has seen its value collapse from $11.4-billion last year to $210-million this month. Most other builders have seen similar falls.

Britain is in the midst of a major housing shortage, with the government estimating that 400,000 extra houses will need to be built to fill existing demand. Of the million empty houses, at least 300,000 are private units that have been empty for more than six months and will probably never be able to fill that demand.

As a result, one of the few growth areas in the British economy has been in the field of property guardians: People, often young adventure-seeking men from Australia and South Africa, who are paid a small sum to live in empty buildings and protect them from being ransacked, stripped, vandalized or squatted.

Those companies are now desperately running advertisements seeking young people willing to live in office buildings, housing projects and stately homes that can’t seem to find buyers in today’s market. It used to be a short-term job to guard a building between tenants, but now it seems to have become a form of palliative care – keeping a building warm until it becomes another hole in the gap-toothed face of the city.

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Frankly, not everything in this article makes complete sense. Particularly curious is the part about the adventurous foreigners who are hired as care-takers for buildins apparently slated to be taken down one way or the other. Why not hire Brits? They can hardly be more prone to drunkeness and other irresponsible behaviour than Australians or South Africans. 

My guess is the poor sod of a reporter felt he add to some more colour to what already is a pretty hairraising piece. 


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