Want to know how a pied-à-terre tax could impact the market? Look to London

City Hall wants to hit luxury apartment sales with a mansion tax and is even pondering an annual pied-à-terre tax. Brokers have bemoaned the taxes as market-killers, but what impact could they really have? We may soon be closer to an answer, thanks to a guinea pig across the pond: London. 

The U.K. hiked up taxes on luxury home sales last year, and as of April 1, a tax for buyers of secondary homes (akin to a pied-à-terre tax) will be tacked on. Given that both London and Manhattan are considered prime property markets for the global elite, observing the effects of the secondary home tax could offer valuable lessons for the market here.

The new U.K. taxes are stamp duties, or one-off levies on home purchases. In December 2014, George Osborne, the Chancellor of the Exchequer, raised the stamp tax to 10 percent from 5 percent for home purchases between £925,000 ($1.3M in USD) and £1.5 million ($2.1M), and to 12 percent from 7 percent on on purchases above £1.5 million ($2.1M).

The tax is progressive, meaning that the effective rate for a £2 million ($2.9M) luxury home is around 8 percent, according to the Guardian.

As of April 1, buyers of London pieds-à-terre will pay an additional 3 percent on the purchase price. For example, a wealthy international buyer who picks up a £2 million ($2.9M) pied-à-terre in London will pay more than £200,000 ($290,000) in stamp taxes.

Sofia Song, who runs research at Douglas Elliman, told The Real Deal that the taxes are a “disincentive to invest in London” that could benefit New York. And the Daily Telegraph, a conservative-leaning newspaper in London, asked: “Has London finally lost its status as the luxury property hotspot of the world?”

London and New York are locked in a battle for foreign millionaires looking to buy homes in a cosmopolitan English-speaking city with a strong economy and good schools. So far, London has been a tad more popular among many foreign buyers, in part because it is closer to wealth centers in Europe, Russia and the Middle East. But some observers now wonder if the tax hike might tip the balance in favor of New York.

Britain’s tax hike also matters to New York because the de Blasio administration has proposed something very similar. City Hall wanted to include a 1 percent mansion tax on home sales over $1.75 million in a reform of the 421a tax break program, which was rejected by Albany, and considered an annual pied-à-terre tax. Neither proposal seems likely to be implemented anytime soon.

Proponents, including the Real Estate Board of New York, argue that such taxes raise much-needed revenue for affordable housing and ensure that wealthy apartment buyers pay their fair share of taxes. Some in the real estate industry, however, said that such taxes would do more harm than good by discouraging investment and pushing wealthy foreigners to spend their money elsewhere, leading to a net decline in tax revenue.

At least in London, the evidence is mixed. The number of London homes sold for north of £1 million ($1.3M) dropped by 11 percent in the first half of 2015, according to Lloyds Bank data cited by the Telegraph. (Of course, that could be due to many factors other than the late 2014 tax hike.) A January report by brokerage Savills argued that London’s prime housing market is likely to “remain price sensitive over the course of 2016 and 2017, as the additional costs (of the taxes) are absorbed.”

But Liam Bailey, global head of research at Knight Frank, said sales volume recovered in the second half of 2015 as sellers priced in the added tax. The problem, he suggested, wasn’t so much the higher tax rate itself, whose effect on an already very expensive real estate market is “not that dramatic.”

“I think one of the problems is just the rapidity of tax changes,” he argued, adding that the U.K. has changed property taxes more than 20 times in the past six years. “This generates a degree of uncertainty, particularly for developers.” Condo developers need to make financial estimates for years in advance to determine whether a project makes sense. Not knowing what property taxes will be two years from now makes that harder, which could have a chilling effect on new construction.