Thursday, Aug 14, 2008
Will Herbert Asquith’s radical People’s Budget of 1909 be re-visited?
Citywire: A fresh approach to house price boom and bust
While the current financial crisis is yet to run its full course, it is right that some thought is now being given to how to avoid similar problems in the future. The most widely touted measure is tighter regulation, particularly of banks and the finance sector more generally. And that is surely right, as the events of the past twelve months have proven beyond doubt that banks cannot be left to their own devices.
An essential problem we in the UK need to address is that our political and tax system encourages speculation in property.
Posted by jack c @ 10:45 AM (728 views) Add Comment
14 Comments
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1. mark wadsworth said...
Hurrah for The People's Budget! Land Value Tax and Citizen's Income!
However, to be fair, if we have LVT, we ought to get rid of Council Tax, Business Rates, SDLT, Inheritance Tax, Capital Gains Tax etc (cont. p94)
2. whiteknight said...
Wrong.
Every measure taken thus far to "help" with this problem has infact hindered it.
Every piece of "bail-out" action has delayed or forever cancelled a swift memorable instruction for somebody in how NOT to behave. Thereby leaving them awaiting a more severe and potentially fatal instruction.
Every piece of propping up action has held up capital being used to do something useful and productive over something unsustainable.
Every other person was greedily happy to be led down the garden path when they thought there was a treasure chest at the end of it. Now it is the fraudulent bankers fault all of a sudden. It is all their faults. The lesson should be allowed to be delivered.
Let IT happen. I have heard of people talking of the arrogance of those who would let market devices sort this out. But my jaw drops open at the reverse arrogance. Can anybody truely believe that with any policy or regulation that they have calculated, modelled and/or simulated, that they will cope with the truely staggering number of variables and effects and will do any better than those low level mechanisms.
Therein lies the true arrogance.
What has happened here is that the banks were left to their own devices until a special liquidity scheme was set up for them. That should never have happened. Everybody should have taken the consequences.
3. Dbc. Reed said...
At long last :an article headed by a picture of Henry George.You would have thought this figure, once more popular,by far, than Marx, would have merited some attention,even as a historical curiosity, let alone for accurately predicting what would happen when property prices outran the rest of the economy.
4. mark wadsworth said...
@WK, agreed, they ought to let prices bottom out for the time being. It is only future booms'n'busts that we can prevent. Besides LVT, more sensible enforcement of banks minimum capital etc won't go amiss. But banks were only swept up in collective madness fuelled by the gummint.
5. icarus said...
Let's remember that this isn't a specifically UK problem. It's worth looking at
http://www.ft.com/cms/s/0/4fda2cc8-525a-11dd-9ba7-000077b07658.html
Go to "Map View" and "2003-07". It shows that house price appreciation in England and Wales during this period was about average within Europe (12th highest rise of 23 countries). There's a pattern of higher price rises on the periphery (Poland, Estonia, Spain (but not Portugal)), Scandinavia, Iceland, Northern Ireland and Scotland), and very low rises in the centre (Germany, Austria Switzerland).
6. drewster said...
Mark,
While LVT would be a fairer tax all round, I don't think it will prevent boom-and-bust cycles. LVT is used in Hong Kong and Estonia, both of which have seen huge property bubbles.
A property speculator whose portfolio is rising by 5% or 10% a year isn't going to be worried about a 1% or 2% land value tax.
7. Will said...
'Tighter control of the Banks'
But they run this country - who will enforce tighter control?
Prime Ministers are in their pockets.
8. growler said...
The issue is of leverage. If you put £100,000 of cash up for a "gamble" and buy £1,000,000 worth of shares in the hope they don't lose more than 10% this is one thing. If you put up £100,000 worth of financial assets whose value is uncertain, you're not at risk of 10% break-even loss, but an uncertain amount. Keep this process going and it becomes a "virtuous lending circle" based on re-risked risk - the root of which is uncertain.
There needs to be regulation on classification of assets based on risk and liquidity. As long as we can dream up ways of dressing up the risk, we risk more booms and busts as margins get slashed to "place" the investments on your books.
Mortgage lending needs to be based on more secure assets - and this needs legislation to prevent abuse. Along with this, the person borrowing needs to have his creditworthiness assessed by someone that won't profit from money being lent to him.
9. mark wadsworth said...
Drewster, that's the clever bit!!!
Total UK pure land values at 2007 peak (my estimate) say £2,000 bn (excluding bricks and mortar, worth £3,000 bn) out of total property value £5,000 bn.
Property prices will fall by (say) 30% to £3,500 billion. By subtraction, land values will only be £500 bn. For example, land values went up five or tenfold since mid-1990s bottom, I did a pretty graph using actual and derived figures on my blog a while back.
Total annual receipts from the taxes we want to replace: Council Tax, IHT, etc £50bn.
So a fiscally neutral rate is 10% of land values.
That acts like a 10% higher interest rate on the LAND value. The cost/value of bricks and mortar is relatively stable and unaffected by the tax - there's no penalty for adding a conservatory or a loft conversion etc.
No way would property prices go back up to £5000 bn (ignoring inflation) as people simply would be able to afford to pay 4 times as much in LVT, it will encourage downsizing, rightsizing and new developments, and indeed loft conversions, letting out spare rooms etc.
Reality check - I bought a house for £80k ten years ago, the land value was (say) £8,000 and the council tax bill was £800, I wouldn't have minded swapping a 10% LVT for council tax.
10. icarus said...
growler - with regard to this regulation, do you have in mind something different from, or better than, Basel II?
11. growler said...
It's the demand side that needs control as well as the supply side. If people are led to believe they can afford something by someone/the institution whose benefit increases the more the people borrow then it's dangerous. If you need an independent structural survey rather than one given to you buy the vendor to assure objectivity, then you need an independent buyer survey to ensure you can afford what is being sold to you.
12. drewster said...
Mark,
Thanks for the explanation - you're right, considering land alone (which was a bigger bubble) makes more sense.
I thought most advocates of LVT preferred to base the tax on rental value rather than on capital value, precisely because rents are more stable than prices?
13. Dbc Reed said...
@Drewster 6
It takes a while for bubbles to develop so if land prices are going up by 5%>10%, it would be as well for LVT to go up in tandem till the upward gradient flattens out.There is no reason for the tax rate to stay the same.LVT should be seen as an economic regulator like interest rates.Especially with interest rates, since lowering rates inevitably leads to house price rises ,making a mockery of Keynesian demand management.Every change in interest rates should be accompanied by a long look at the effect on house prices/land prices with countervailing upward or downward revision NB the inflationary element in house prices is the land element: the costs of construction are governed by effective market forces.
14. mark wadsworth said...
Drewster, that is where I differ from most LVTers (several heated debates later, I have yet to make many converts).
I don't like rental values as it is a highly artifical concept and secondly, being stable, won't serve LVT's main aim (as I understand it) to keep prices low and stable (Take Business Rates, being a flat-ish tax on rental values so not a million miles from LVT, this has done little to prevent boom in commercial property values).
Capital values are easier to understand/calculate and a % tax on capital values will act like a higher interest rate. And a fixed high % of a low and stable value is, by definition, also stable.