As responses go to the problem of overseas homebuyers, Pedro Sánchez went nuclear. In an effort to arrest his country’s “grave” housing crisis, the Spanish prime minister recently proposed that non-EU citizens buying a property would face a 100 per cent tax.
While it may be eye-catching — especially to thousands of Britons who buy homes on the Costa del Sol every year — it’s far from the first time a country has tried to reduce the number of overseas buyers. In the UK, we’ve been at it for a decade — we were just a little squeamish to begin with. Should we be bolder?
There are problems when it comes to taxing overseas buyers, most notably: who are you taxing? Why? And does it make it any easier for locals to buy or rent homes? Considering how politically popular these measures are, that last one is not as easy to determine as you might expect.
Back in the early 2010s, house price growth in central London was rampant. Newspapers ran panicky headlines about the implications and estate agencies published jubilant reports about how crucial overseas buyers were to this segment of the market.
In 2014, then-chancellor George Osborne reformed stamp duty: but rather than targeting overseas buyers, he made it more costly for all buyers to purchase central London’s expensive homes. Two years later he added an extra stamp duty charge for purchases of second homes.
Growth hit the bricks, and while they may not have been the primary target, the number of overseas buyers fell significantly. Yet it wasn’t until 2021 that foreign buyers were taxed directly, when the non-resident stamp duty surcharge (NRSDLT) was brought in, which added another 2 per cent to the property price. And we’re not finished there: before last year’s election, Labour promised to increase this to 3 per cent. So far, they’ve only increased the second homes surcharge from 3 to 5 per cent.
But here’s the first problem: who exactly are overseas buyers?
Some hardliners say it should be determined by your place of birth (this comes up especially when discussing who accesses the UK’s social housing). But there are plenty — including me and a recent tousle-haired PM — who would fail this definition. In fact, two-thirds of England’s owner-occupiers who were born overseas hold a British passport.
Nationality is another popular option given the ease of checking a passport, but it just creates further complication as the UK and especially London have a large number of foreigners living, working, and studying in it. When I first arrived at university in the capital, the only Londoner I met in halls was the Finnish-Italian guy who’d grown up in the city and was later the best man at my wedding.
Ultimately, the only definition of overseas buyers that matters is the one set by the tax collectors — though it’s hardly watertight. For HM Revenue & Customs deciding whether to charge NRSDLT depends on how many days the buyer has spent in the UK in the 12 months before their purchase: at least 183 days to avoid the tax. Unfortunately, there’s no consistent data based on the HMRC approach, it even resorts to checking bank statements, phone bills and work diaries to check a buyer’s status.
One method analysts use is to look at the contact details included in Land Registry data. Both the Centre for Public Data and estate agent Benham and Reeves have submitted Freedom of Information requests for this, and found that the number of residential properties with overseas correspondence addresses has been on the rise. In the 10 years leading to the pandemic, the number went from 64,000 to more than 174,000; by early 2024 it was around 190,000.
Who is buying tends to reflect global political and economic tensions. For example, the FOI data since 2010 shows a net sell off of buyers registered in Ireland — who were big buyers before the financial crisis. Hong Kong-based buyers have moved into the top spot in recent years; and there are signs that US buyers are on the rise — even before the recent election result.
But then there’s another problem: why are they buying? Will they live in it, use it as a second home, or treat it as an investment?
According to data from estate agent Hamptons, three-quarters of international applicants intend to live in their home rather than rent it out or keep as a second home. If this is the case, non-resident buyers can receive a refund from HMRC if they pass the residency test for a period that extends before and after purchase. Recent data suggests that about one in five NRSDLT transactions are refunded.
Taken altogether, it doesn’t quite suggest that vast swaths of the London homes are vacant all the time, as is often reported (so-called “Lights Out London”). While there may be some truth in this at the very top end of the market in central London — which is also dealing with the non-dom tax reforms — most overseas buyers are buying at more normal prices and many will need the rental income.
This brings us to the final issue: does any of this actually benefit locals?
There are plenty of international examples of outright bans. New Zealand introduced a ban on foreign buyers in 2018 — though the government has been tempted to ease restrictions in an attempt to raise tax revenues. Canada introduced a temporary ban on foreign ownership in 2022, and last year extended it for another two years. Both countries’ housing markets have seen slowdowns in recent years, though this may be a coincidence as they’re similar to the one we’ve seen here due to higher interest rates. Meanwhile, academic research suggests taxes on foreign buyers have “negative, large, and persistent effects on house price growth”. However, the effect tends to focus on parts of the market where they were active — glossy city centre apartment blocks, for example — rather than fixing national affordability problems.
In the UK, overseas buyers have been incredibly important in the development of new city centre apartments. The established model relied on off-plan sales, typically to overseas buyers happily sticking the deposit on their credit card at a sales event in a south-east Asian five-star hotel. These are not the billionaires you find buying multimillion pound houses in central London, but the growing middle classes of Asia seeking a secure investment — sometimes due to restrictions on their ability to invest in property in their home country.
A University of York paper in 2017 found that 54 per cent of overseas sales of London new-builds were mortgaged and my review of the Asian mortgage market that year suggested they were borrowing on similar terms to domestic buyers — the big difference being that, unlike domestic buyers, they could line up a mortgage two years or more before completion.
This approach to financing development has stalled in recent years as tax and interest rate rises have hit buyers’ appetite. The institutional build-to-rent market has stepped in, but has not fully replaced the smallest scale investor.
Given the size of the government’s housebuilding targets, that’s a challenge. Tim Craine from consultancy Molior pointed out that if the London housebuilding industry is to build over 80,000 new homes a year and two-thirds go to private buyers, it “needs to attract half a billion pounds of buyers each week”.
Two things appear to be true at once: overseas buyers have helped get more homes built in the UK, but have probably also contributed to rising prices. Annoyingly, research into the extent of those price rises has mostly been patchy or error strewn.
What is more clear is that the fall in overseas buyers and the end of Help to Buy equity loan has led to a decline in city centre homes being built, especially in London. That’s not good for renters, despite the rise of the build-to-rent sector and not great for domestic first-time buyers either (though I’d warn them off buying a new-build flat, anyway).
For the time being, we probably need to let overseas buyers purchase new- build flats — but maybe it’s time for a revolution in how we fund high-density development. We should keep a close eye on what they do in Spain.
Neal Hudson is a housing market analyst and founder of the consultancy BuiltPlace
https://www.ft.com/content/99e06a77-9a34-4069-a1e1-6e8aacf702b8
