A Tale of Two Cities
Technology is shrinking the world. The other side of the planet is less mysterious than it used to be. Social media has had a figurative Pangea effect on the planet, pulling every nation and every continent closer to one another one YouTube video at a time.
The effect has the same hold over the business world. Our office is in the heart of Manhattan, but our clients are from all over the globe. They come to New York for a day, or a week, or a month, or even for years at a time, or forever. They love the city, but they still want to know that their investment in it was a wise one. Not only compared to the other properties in a building or in the surrounding neighborhood, but also compared to other properties in Europe or Asia.
As the world shrinks, our responsibility as real estate agents grows exponentially. We are number-crunching conveyors of information. And with so much good information ready to be collect and so many tools to help collect it, really there’s no excuse for us not to offer valuable real estate information about any plot on the planet.
One of our clients recently told us he was leaning toward a new investment in London rather than buying in New York. It was safer, he thought, and many others in his family had done so in the past. He asked us to create a comparison of costs and market trends between the two cities.
Here’s what we found:
The Cost of Buying a Condominium (London vs. New York):
Taxes paid at closing to the U.K. government are significantly higher in London compared to the taxes paid at closing to the city and state of New York. New York saw a recent bump to their mansion tax, while the U.K government is pondering an additional Stamp Duty Land Tax paid by non-residents of the U.K.
(A Comparison) New York Mortgage Tax and Mansion Tax vs. London Stamp Duty Land Tax
New York State Mortgage Tax (in New York City) — Buyers in New York that obtain mortgage financing are required to pay a mortgage tax based on the size of the loan (not the price of the unit). The amount of the tax is dependent upon the county where the subject property is located. In all five New York City boroughs, a mortgage borrower would pay 1.8% of their loan amount on mortgage balances of $500,000 or less, or 1.925% of their loan amount on mortgage balances greater than $500,000.
New York State Mansion Tax – Prior to June 2019, there was a flat 1% Mansion Tax levied against all properties sold at a purchase price of $1 Million or more. There was a lot of buzz about creating an onerous Pied-a-Terre Tax. Instead though, lawmakers altered the mansion tax rule and created a tiered structure that charges a higher percentage to people who buy higher-priced properties. The tax is against the full purchase price.
$1 Million – $1,999,999 = 1%
$2 Million – $2,999,999 = 1.25%
$3 Million – $4,999,999 = 1.5%
$5 Million – $9,999,999 = 2.25%
$10 Million – $14,999,999 = 3.25%
$15 Million – $19,999,999 = 3.5%
$20 Million – $24,999,999 = 3.75%
$25 Million + = 3.9%
Stamp Duty Land Tax (SDLT) – -Most homebuyers in England and Northern Ireland pay a Stamp Duty Land Tax. It’s a tiered tax, based on purchase price and whether or not it’s your primary residence. The tax is against the full purchase price.
When Purchasing Your Primary Residence
£125,001 – £250,000 = 2%
£250,001 – £925,000 = 5%
£925,001 – £1,500,000 = 10%
£1,500,001 + = 12%
When Purchasing Additional Property/Non-Primary Residence
£40,001 – £125,000 = 3%
£125,001 – £250,000 = 5%
£250,001 – £925,000 = 8%
£925,001 – £1,500,000 = 13%
£1,500,001 + = 15%
** First-time homebuyers avoid an SDLT on any home with a purchase price under £300,000
*** The U.K. government is considering a new 1% Stamp Duty Land Tax for non-residents of the U.K. who by homes in England and Northern Ireland. This would be in addition to the existing SDLT fees. The surcharge would apply to homeowners that spend fewer than 183 days in the U.K. during the 12 months prior to the date of a property transaction.
Other Closing Costs to Consider
Aside from government taxes, there are other fees to consider when purchasing a property in New York or in the U.K. mostly due to the American practice of obtaining an expensive title insurance policy when purchasing real property, the typical non-tax closing fees in New York are higher than they are in London, but not nearly enough to account for the massive difference between Mortgage/Mansion Tax and SDLT. Ten, twenty, or even $30,000 in title fees isn’t out of the ordinary in New York, whereas in London a buyer might pay a conveyance fee of less than £2000.
Mortgage rates in London were generally about 1% lower than what we see in New York right now.
Lenders in London advertised Adjustable rate mortgages almost exclusively, whereas in New York, we often see 30-year fixed rates advertised just as often.
The State of the Market in London
London had 3,703 annual Transactions in 2018. That number is down in Prime Central London by 15% compared to 2017 and down 45% compared to 2014. For greater London the numbers are down 4% compared to 2017 and 26% lower compared to 2016.
Prices were increasing by about 20% per year from around 2008 – 2014. But in 2018, Prime Central London prices dropped 2.9%. Prices dropped .2% in Great London.
The average price of a home in London was $266,999 in 2008. That average jumped to $473,609 last year. Prices in London were down though by .5% in 2017 and by .8% in 2018.
New construction is typically priced 15-20% above market.
The average home price in London is now 16 times the average salary in the U.K.
High-end transactions are down 25% in London compared to a year ago.
Brexit Conversation Dominates the News
Uncertainty and hesitation are likely the most common words spoken in any conversation that relates to the London housing market. A lot of buyers and sellers are waiting out a Brexit resolution with a current deadline set for Octobert 31st.
The Bank of England’s Mark Carney said an extreme “no-deal,” hard Brexit scenario could bring spiraling interest rates and a drop in house prices of up to 35% over the course of the next three years. Other forecasts were much less extreme though. Most analysts thought there would be some downward movement no matter what the outcome.
Taxation of non-resident investors in U.K. real estate (Major Changes made April 2019)
Non-residents had an advantage over U.K. residents when it comes to the taxation of U.K. real estate. But the British government is attempting to level the playing field.
As of April 6, a uniform tax code applies to sales of both residential and commercial real estate and includes non-residents. The tax charges will apply to gains on direct sales of U.K. real estate as well as indirect disposals of U.K. “property rich” interests.
Non-resident companies would be taxed 19%. Non-resident individuals would be taxed up to 20% on gains from commercial properties and up to 28% on gains in the case of residential property.