Comparing London Property Taxes to Texas Property Taxes
It started out as a simple idea.
I just wanted to see how property taxes in London compared to those in Texas.
In the U.S., Texas is known for its high property taxes. Texas, however, didn’t have a real estate bubble 10 years ago. One economic theory says high property taxes discourage real estate speculation and real estate bubbles.
London has been bubbly in recent years with huge increases in house prices. I just wanted to know if London had high or low property taxes.
I thought I could find the answer with a quick Google search. No such luck.
Well, how long, I thought to myself, could it take me to put together a quick and dirty comparison? A few hours? A day?
It turns out property taxes are nothing but rabbit holes down rabbit holes and it took me a couple of weeks to put together the “quick and dirty” graphs you see here.
The surprising results were that instead of being high and ultra-progressive as I had assumed they would be in England, property taxes in England and London are incredibly low and regressive compared to the United States.
- The average property tax in England is £564 (half the average £1,128 council tax) or about $750. In London, it’s even LESS!
- The median property tax paid in Houston, Texas (Harris County) is $3,019 or 4 times more than in England.
I was also shocked to find out that tenants, not landlords, are responsible for paying the council taxes on the single-family homes they rent in England. So, it seems landlords in England don’t have to pay ANY property tax AT ALL on single-family houses unless the house is vacant and even then landlords only pay half the rate a tenant family would pay. To my American sensibilities, that sounded crazy.
It seems property taxes in England would do little, if anything, to discourage real estate speculation. They probably enourage speculation and higher home prices.
I wonder if low property tax policies (unintentionally) contributed to the real estate booms in Sydney, Melbourne, Vancouver and Toronto. My Canadian Twitter friends are saying the property tax rate is ~0.25% in Vancouver which you’ll see later is similar to the overall property tax rate in London (although the London tax is very regressive).
A 2005 OECD study of the Eurozone (UK not included) found property taxes were 0% in Ireland and Belgium. Ireland had a massive real estate bubble. The property tax rate in Spain, another country that had a massive bubble, was in the middle of the pack at 0.4%. The highest property tax rate by far in the Eurozone was in Germany at 1.5%. That’s almost as much as in Texas. Neither Germany nor Texas had a real estate bubble last decade. Both places avoided the deep and long-lasting economic damage caused by real estate bubbles.
I hope it’s fun and educational for my British friends to read an outsider’s view of their council taxes but, of course, I’m an outsider and I’m certainly no expert in the bottomless rabbit hole that is the different council tax systems in England, Wales and Scotland.
Bubbles and Property Taxes
As an agricultural economist who became a Phoenix, Arizona real estate agent in 2003, I got a front row seat to The Great Real Estate Bubble and the economic and personal devastation it left in its wake.
The median metro Phoenix home price fell 60% from the peak in 2006 to the bottom in 2011. In the poorest part of the city of Phoenix, the median home price fell 80%. The bubble was devastating to a lot of families.
In normal times, after owning a home for 10 years, you’d probably have at least 30% equity in the home from appreciation alone. But if you bought a home in metro Phoenix 9, 10, 11, 12 or 13 years ago, it’s probably still not worth what you paid for it. The Great Real Estate Bubble isn’t over for those families.
I want to understand how we can avoid real estate bubbles and the financial destruction they cause to households.
Texas didn’t get pulled into the real estate bubble vortex like California, Nevada and Arizona, and that fascinates me.
Dallas home prices only rose 13% during the boom while Los Angeles home prices went up 126%. During the real estate bust Dallas home prices only fell 11% while Los Angeles prices fell 42%.
Having avoided the economic destruction of the real estate bubble, the Texas economy did amazingly well during the Great Recession and since then.
I wondered if Texas’ crazy high property taxes were part of the reason it was spared from the storm. The property tax rate in Texas is more than double the rate in California, Nevada or Arizona.
Could those high property taxes have discouraged speculators because they raise the carrying cost of investing in Texas houses?
It’s a common belief among economists that property taxes do, indeed, discourage real estate speculation.
In fact, last year, the IMF came out with a working paper looking at exactly this. It compared how U.S. states with high property taxes fared in the real estate bubble compared to U.S. states with low property taxes.
The United States was a great place to run the study because property taxes vary a ton from state to state, from an average of 0.3% in Hawaii to an average of 2% in New Jersey.
The IMF working paper concluded, “The outcomes of the analysis… suggest that property taxation could be used as an important tool to dampen house price volatility”
Texas property taxes would be closest to the red dotted line, the 2% line on the graph.
The property taxes in the real estate bubble cities of Los Angeles, Las Vegas, Phoenix and Miami are all less than the blue 1% line on the graph.
High property taxes tend to stabilize house prices, according to the IMF working paper.
Now, before we look at the crazy council taxes in England, let’s look at the crazy property taxes in the U.S.
Property Taxes in the United States
Property taxes in the United States are used to fund state and, mainly, local government.
In 1902, over 80% of state and local government tax revenues came from property taxes. That high percentage may have reflected the influence of Henry George.
Then state governments began shifting toward sales taxes and after that toward income taxes for their revenue. Property taxes became the domain of local governments such as counties, cities, towns and school districts.
Today, local governments get 73% of their revenue from property taxes but state governments only get 2% of their revenue from property taxes.
Nationally, 20 state governments, including Texas, get no revenue from property taxes, all the property tax revenue in those states goes to fund local governments.
Local governments mainly use property taxes to fund schools, police, fire and roads. About half of all property tax revenue in the U.S. goes to fund public schools.
Each local government has its own extremely idiosyncratic way of calculating how much an individual property is taxed.
Assessed Value. Typically, the property tax rate is applied, not to the market value of the property, but to the “assessed value” of the property which is always less than the market value. So instead of charging a 0.5% tax on the market value of a home, a local government might charge a 1.0% tax on the assessed value and the assessed value might be only 50% of the market value. The tax paid would be the same in either case but most places go the assessed value route because, apparently, it’s more politically palatable.
Exemptions/Abatements. Most local governments have exemptions from property taxes. A commonly used exception is for homes that are the owner’s primary residence.
If the home is a primary residence, the first $X of the home’s value is exempt from the property tax. In those cases, investors pay higher property taxes than owner-occupants.
Another common exemption is for homeowners older than 65.
The website of The Tax Foundation is a wonderful source of information on U.S. property taxes. Check out the links to their website at the end of this article.
Council Taxes in England
In England, the closest thing to a property tax is the council tax. Think of an English council as a county, city or town. A council is a local government.
The council tax is a weird tax by American standards.
In the States, pretty much every property is given an assessed value and the local property tax rate is applied to the assessed value to determine the tax owed on the property.
The system in England is completely different.
All homes are designated as belonging to 1 of 8 tax groups; A, B, C, D, E, F, and H. The least expensive homes are in tax band A and the most expensive homes are in tax band H.
Within a local council area, before any exemptions are applied, all tax band A homes start with the exact same amount of council tax down to the penny, all tax band B homes start with the exact same council tax down to the penny, and so on.
The tax amount can change from year to year but all homes in the same tax band in the same area start with the same amount of council tax before exemptions are applied. The tax band a home belongs to doesn’t change from year to year.
Which tax band a home belongs to was determined – wait for it – by its value in 1991! I told you it was different in England!
So if your home was originally put into, let’s say, tax band D in the 1990s, you’ve likely been paying the tax band D council tax every year since then.
The relationship between how much each home in a band pays is fixed. So, for example, tax band A homes always pay 1/3 the amount of tax band H homes and tax band D homes always pay 1/2 the amount of tax band H homes and so on. Suffice it to say, once you know what one tax band pays in council taxes in an area, you can calculate what all the other tax bands pay in that area.
Okay, let’s get back to comparing property tax rates in England and Texas.
The average tax band D council tax in England in 2016 was £1530. From there I estimated the other tax band tax payments. That £1530 is the average council tax band D tax paid after exemptions.
I mentioned that U.S. property taxes usually have exemptions, for example, an exemption for owner-occupied homes that reduces the property tax owner-occupants pay.
Council taxes have exemptions too but it seems council taxes in England have a LOT more exemptions. My favorite English exemption is that you don’t have to pay the council tax when you’re in prison. I told you England was different!
So I know the estimated average tax payments for the 8 different tax bands in England but I don’t know the values of the homes in the 8 different tax bands.
To convert those tax band tax payments into percent of property value, I need to estimate the property values in each band.
But today, a tax band A home just pays the tax band A amount for that council area, the payment is not directly tied to the value of the home. Well, not anymore, anyway.
It all goes back to 1991.
In 1991 when they originally put each home in England into 1 of the 8 tax bands, the tax bands were based on the value of the homes at the time.
To calculate a ballpark estimate of where the home values might be today in each of the 8 tax bands, I looked at the original bands in 1991 and adjusted them for the change in the average home prices from 1991 to 2017.
Original 1991 Tax Bands
Band Value of Dwelling (estimated April 1991)
A £40,000 and under
B £40,001 – £52,000
C £52,001 – £68,000
D £68,001 – £88,000
E £88,001 – £120,000
F £120,001 – £160,000
G £160,001 – £320,000
H Over £320,000
Again, the council tax bands have NOT been recalculated since 1991! 1991 is the most recent data!
To update those values, I used the average UK home price in 1991 (£54,547) and in 2017 (£206,665) (Nationwide Building Society) to estimate what those 1991 tax bands might look like today.
Every council has different council taxes so I used the average council tax for England as a whole. (Wales and Scotland are a bit different.)
My Estimates of 2017 Average Tax Bands & Tax Amounts in England
Band Value of Dwelling Tax (Full)
A £150,000 and under £1,000
B £150,001 – £200,000 £1,170
C £200,001 – £260,000 £1,330
D £260,001 – £330,000 £1,500
E £330,001 – £450,000 £1,830
F £450,001 – £600,000 £2,170
G £600,001 – £1,200,000 £2,500
H Over £1,200,000 £3,000
Graphic Comparison of Property Tax Rates in England and U.S.
Here’s another surprising twist. It turns out council taxes are not solely property taxes.
Council taxes have a 50% property tax element and a 50% personal tax (or head tax or poll tax) element.
That means the council tax on vacant houses is only 50% of what it would be if the house were occupied by a family.
And that means the property tax portion of the council tax is only half of the tax amount shown in the table above.
When we then add to the graph the effective property tax rates (taxes actually paid after exemptions) in a few U.S. states, we see that property taxes in England are tiny and regressive by U.S. standards.
Also be aware that council taxes in London are actually LESS than the average in England. The tax band D average is £1,306 in London versus £1,530 in England as a whole.
And finally, the average council tax paid per dwelling in England in 2016-2017 is £1,128. (FYI, about two-thirds of dwellings are in council tax bands A, B or C.)
If we assume half of that £1,128 is the property tax element, and we use £206,665 as the average home value, that means you could say the average property tax in England is 0.27% of the average house value. That’s about one-third the rate of the typical U.S. state property tax.
However, given the structure of the council tax bands and tax amounts, the rate is actually quite regressive in England.
It depends on how the exemptions shake out but the property tax rate will be much lower than 0.27% for the most expensive houses and much higher than 0.27% for the least expensive houses. (Mouse over the yellow line on the interactive version of the graph on the top of this page to see the estimated council tax rates for different home values.)
Surprisingly, despite American stereotypes of England being high-tax and ultra-progressive, it turns out that Texas property taxes are FAR higher and FAR more progressive than in England or London.
Even more surprising, landlords of single-family houses don’t pay the council tax (property tax) on their rental properties! Tenants are responsible for paying the tax in England!
Overall it seems the English council tax/property tax system favors landlords over homeowners and does little to discourage speculation or “parking” money in English real estate by foreigners or by anyone else.
To be fair, council taxes likely were not intended to stabilize home prices. And perhaps it was believed that low council taxes would actually make homeownership more affordable, not less. That seems intuitively correct but it’s probably wrong economically. Perhaps the English chose to depend more on taxes that were thought at the time to be more fair, like income taxes or consumption taxes.
Although to be fair to property taxes, they can’t be dodged with fancy accounting like income taxes. And property taxes can be fantastically more transparent than income taxes. In my county, for example, I can see online what every property in the county pays in property taxes.
High property taxes act as a friction, or a bit of a brake, on real estate speculation and real estate bubbles. When for whatever reason a bubble gets started, higher property taxes will tend to slow the bubble down. High property taxes make the highs lower and the lows higher.
High property taxes don’t necessarily stop real estate bubbles but they dampen them. They increase the annual out of pocket cost of speculating in real estate.
Some economic studies say property taxes are the most hated of taxes. I think it’s safe to assume that real estate speculators also hate paying property taxes and the impact of high property tax rates on discouraging speculators is likely significantly greater than just the monetary amount of the tax.
In the modern global economy with easy international money flows, I think low property tax areas will tend to see more frequent and more damaging real estate bubbles.
As the IMF and other studies suggest, high property taxes have the effect of stabilizing home prices. They likely also keep home purchase prices down and more affordable.
The Paradox of Property Taxes and Homeownership.
Lower property taxes can lead to more real estate speculation and higher net house prices.
Higher property taxes can make homeownership MORE affordable if they keep house prices lower than the net increase in property taxes paid AND they discourage real estate speculation.
Despite the IMF’s optimism, I assume it nearly takes an act of god to increase property taxes so property taxes don’t make a great macroprudential measure.
The takeaway here seems to be that areas with low property taxes are significantly more prone to damaging real estate bubbles, therefore, any macroprudential measures taken by governments or central banks to discourage real estate bubbles and stabilize home prices will need to be significantly stronger in areas with low property taxes.
That is, to be effective, I think any macroprudential measures, such as a property speculation tax, taken to stabilize home prices in London with its small, regressive ~0.27% property tax would have to be vastly larger than the measures needed to be effective in Texas with its large, progressive ~1.7% property tax.
I suspect neither the English nor the Texas property tax systems were designed with real estate speculation and real estate bubbles in mind.
Nevertheless, their property tax policies have significant impacts on real estate speculation, real estate bubbles, home prices, rates of homeownership, household debt, household wealth and income inequality.
# # #
- “Can Property Taxes Reduce House Price Volatility? Evidence from U.S. Regions,” Poghosyan, IMF Working Paper, 2016.
- “Tax Incentives and House Price Volatility in the Euro Area: Theory and Evidence,” Van Den Noord, Economie Internationale, 2005.
- “Council tax levels set by local authorities in England 2016-17,” Department for Communities and Local Government, National Statistics, 2016.
- “Live Tables on Council Tax,” Department for Communities and Local Government, National Statistics, 2017.
- “House Price Index,” Nationwide.
- “Council Tax Guidance Manual,” Valuation Tribunal Service, 2013. (archive)
- “Council Tax,” Wikipedia.
- “Property taxes; An unexploited resource,” The Economist, 2013.
- “How High Are Property Taxes in Your State? (2016),” Walczak, Tax Foundation, 2016.
- “Which Places Pay the Most in Property Taxes?,” Scarboro, Tax Foundation, 2017.
- “Unpacking the State and Local Tax Toolkit: Sources of State and Local Tax Collections,” Walczak, Tax Foundation, 2017.
- “Using Tax Policy to Address Real Estate Concerns,” Potosky, Tax Foundation, 2016.