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Uriah Heap

How The Boom Should Have Been Controlled

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So what Labour should have done was increase public spending a bit more slowly than they did as the boom developed. The increased spending should have been funded by much more progressive taxation. Big bonuses should have attracted really big tax bills. The boom and bust would still have happened, but with much less intensity, and probably peaking sooner.

When the bust came public spending could have been increased gently funded with much more modest increased borrowing and maybe some tax reductions, targetted at the lower paid who tend to spend a bigger proportion of their income.

As an added benefit, Labour would have stuck to their socialist principles more closely and kept most of their core vote.

Simples!

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To control the housing boom not the wider economic boom the government could have:

1. removed the tax breaks given to Buy to Let landlords

2. made sure that if one took out an interest only mortgage that there was some vehicle in place to pay off the capital

3. put more controls in place on self certified loans

Also when they first noticed that first time buyers were being driven to extraordinary lengths/ forced out of the market they could have increased interest rates, not kept interest rates low and encouraged shared ownership schemes.

I don't know how much of an effect controlling the housing boom would have had on the wider economy. I personally believe it would have had a very large effect, hence why it was encouraged by local and national government not controlled.

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Much simpler than any of that. If they'd used interest rates to control inflation (instead of some meaningless measure of the sterling price of chinese goods), the boom would've been self-controlling: rising asset prices would've pushed up interest rates. Specifically, M4 money supply is driven by borrowing, and remained in double digits throughout the boom.

Plus of course, kill off some of those tax breaks. Average 2004 household: £20k earned, 45% marginal tax rate; £20k house price rise unearned, nil tax - pure profit.

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Much simpler than any of that. If they'd used interest rates to control inflation (instead of some meaningless measure of the sterling price of chinese goods), the boom would've been self-controlling: rising asset prices would've pushed up interest rates. Specifically, M4 money supply is driven by borrowing, and remained in double digits throughout the boom.

Plus of course, kill off some of those tax breaks. Average 2004 household: £20k earned, 45% marginal tax rate; £20k house price rise unearned, nil tax - pure profit.

Yes because interest rates work don't they.

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"Porca Miseria" is right. The main cause of the boom was interest rates - too low, for too long.

But the fault was not the Bank of England (BoE).

In 2003, Gordon Brown changed the Bank of England’s inflation target from one based on the Retail Price Index (RPI) to one based on another measure, the Consumer Price Index (CPI). The relevant difference between the two figures is that CPI is excluded housing costs. This made the BoE set interest rates too low for too long. The rest is history.

Mervin King said to parliament recently that he was against it in 2003, and warned Brown against it.

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All we need to do is remove the speculative component from the housing market.

If we altered the tax system so that people were only paid for producing stuff then the ridiculous game of monopoly that currently prevails would be eradicated because the gains from holding space away from other people would be minimised.

People would get bored with housing and use their efforts more productively.

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To control the housing boom not the wider economic boom the government could have:

1. removed the tax breaks given to Buy to Let landlords

2. made sure that if one took out an interest only mortgage that there was some vehicle in place to pay off the capital

3. put more controls in place on self certified loans

Also when they first noticed that first time buyers were being driven to extraordinary lengths/ forced out of the market they could have increased interest rates, not kept interest rates low and encouraged shared ownership schemes.

I don't know how much of an effect controlling the housing boom would have had on the wider economy. I personally believe it would have had a very large effect, hence why it was encouraged by local and national government not controlled.

An excellent and practical list.

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So what Labour should have done was increase public spending a bit more slowly than they did as the boom developed. The increased spending should have been funded by much more progressive taxation. Big bonuses should have attracted really big tax bills. The boom and bust would still have happened, but with much less intensity, and probably peaking sooner.

When the bust came public spending could have been increased gently funded with much more modest increased borrowing and maybe some tax reductions, targetted at the lower paid who tend to spend a bigger proportion of their income.

Hardly hindsight: Keynes proposed this approach to managing the economic cycle long ago. Temper the boom through taxation and surpluses; temper the bust with spending and deficits.

Sadly, "Keynesian" has now come to be associated with the deficit/spending side alone. It's hardly surprising that the doctor ends up discredited, if only the nice-tasting half of the medicine is actually taken.

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So does counter cyclical policies win elections?

Evidently not ;)

Though they might, for a generation following a massive bust...

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To control the housing boom not the wider economic boom the government could have:

1. removed the tax breaks given to Buy to Let landlords

2. made sure that if one took out an interest only mortgage that there was some vehicle in place to pay off the capital

3. put more controls in place on self certified loans

Also when they first noticed that first time buyers were being driven to extraordinary lengths/ forced out of the market they could have increased interest rates, not kept interest rates low and encouraged shared ownership schemes.

I don't know how much of an effect controlling the housing boom would have had on the wider economy. I personally believe it would have had a very large effect, hence why it was encouraged by local and national government not controlled.

I would disagree with 1. BTL is not given particularly favourable tax advantages - unless you call the 'wear-and-tear' allowance generous (and while it is moderately generous, it is nearly impossible to claim). Like any investment, whether it be in business or other, the cost of finance is allowable - this is not a generous break, but a standard one. Or are you suggesting that no business should be able to claim the cost of finance as a legitimate expense? However, see my response to point 2.

The big mistake that this government made was reducing CGT - from the sliding scale of up to 40% (or your marginal income tax rate) - down to 18% (significantly below income tax, even for low earners). Although it came late, this makes capital gains a highly desirable method of 'wealth' generation for the investor, even though it is usually generally very harmful for the economy. It would be preferable to tax short-term CGT considerably higher than income tax.

2. Products like IO mortgages are open to substantial abuse, and most certainly have been. I would strongly agree that retail loans without provision for capital repayment should be banned - while IO products could be offered, they would be contingent upon proof of regular payment into an investment vehicle (e.g. borrower would be required to provide an annual statement of account on their investment vehicle) - and if the payments stop, then this should be treated as a default and the loan terms changed as appropriate.

I would also go further, and place a limit on total leverage. High LTV loans have been a major contributor to uncontrolled price rises, and to the harm of negative equity. I would cap LTV at 95%, and make loans of 85% or greater subject to tax penalties (e.g. withdraw the interest tax allowance on the proportion of the loan over 85% LTV). This would have the advantage of making marginal investments (traditionally only viable with extreme leverage) non-viable, and avoiding the problem of extreme leverage pushing prices up.

3. I would argue that self certification is almost never appropriate. If a person is in employment, then the contract of employment and/or payslips should be sufficient. If a person is self employed, or has financial affairs more complex than a single employment - then 3 years of accounts signed off by a chartered accountant, or 3 years of tax returns, should be the only proofs acceptable.

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Much simpler than any of that. If they'd used interest rates to control inflation (instead of some meaningless measure of the sterling price of chinese goods), the boom would've been self-controlling: rising asset prices would've pushed up interest rates. Specifically, M4 money supply is driven by borrowing, and remained in double digits throughout the boom.

Plus of course, kill off some of those tax breaks. Average 2004 household: £20k earned, 45% marginal tax rate; £20k house price rise unearned, nil tax - pure profit.

The problem with raising interest rates is that it adversely affects business.

It might be a solution to HPI, it certainly isn't the recommended one for the economy as a whole

tim

Edited by tim123

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I would disagree with 1. BTL is not given particularly favourable tax advantages - unless you call the 'wear-and-tear' allowance generous (and while it is moderately generous, it is nearly impossible to claim). Like any investment, whether it be in business or other, the cost of finance is allowable - this is not a generous break, but a standard one. Or are you suggesting that no business should be able to claim the cost of finance as a legitimate expense? However, see my response to point 2.

The big mistake that this government made was reducing CGT - from the sliding scale of up to 40% (or your marginal income tax rate) - down to 18% (significantly below income tax, even for low earners). Although it came late, this makes capital gains a highly desirable method of 'wealth' generation for the investor, even though it is usually generally very harmful for the economy. It would be preferable to tax short-term CGT considerably higher than income tax.

2. Products like IO mortgages are open to substantial abuse, and most certainly have been. I would strongly agree that retail loans without provision for capital repayment should be banned - while IO products could be offered, they would be contingent upon proof of regular payment into an investment vehicle (e.g. borrower would be required to provide an annual statement of account on their investment vehicle) - and if the payments stop, then this should be treated as a default and the loan terms changed as appropriate.

I would also go further, and place a limit on total leverage. High LTV loans have been a major contributor to uncontrolled price rises, and to the harm of negative equity. I would cap LTV at 95%, and make loans of 85% or greater subject to tax penalties (e.g. withdraw the interest tax allowance on the proportion of the loan over 85% LTV). This would have the advantage of making marginal investments (traditionally only viable with extreme leverage) non-viable, and avoiding the problem of extreme leverage pushing prices up.

3. I would argue that self certification is almost never appropriate. If a person is in employment, then the contract of employment and/or payslips should be sufficient. If a person is self employed, or has financial affairs more complex than a single employment - then 3 years of accounts signed off by a chartered accountant, or 3 years of tax returns, should be the only proofs acceptable.

Whilst I appreciate that Buy to Letters may not get substantial tax breaks, they still get an advantage over first time buyers, who would traditionally be their main competition for properties. Personally I do consider Buy to Letting different from other industries and wouldn't allow it offset the cost of finance against tax. I'm not sure that Buy To Letting significantly employs people who would otherwise been unemployed. The builders plumbers etc would still be employed just working for owner occupiers not BTLs.

I had forgotten about high LTV mortgages, I would have added them if I'd remembered.

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All we need to do is remove the speculative component from the housing market.

If we altered the tax system so that people were only paid for producing stuff then the ridiculous game of monopoly that currently prevails would be eradicated because the gains from holding space away from other people would be minimised.

People would get bored with housing and use their efforts more productively.

I like these words, they sound very sensible.

Working hard, and being "productive" to climb the so called property ladder is surely better for society than buying in the right location, splashing the magnolia, waiting a couple of years, then passing the buck to the next "entepeneur".

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  • include house prices in inflation measures
  • remove tax deductable interest from residential property.
  • legal min 20% deposit and 30% for self certification/limited companies and or offshore investors.
  • replace council tax with a rental value based land tax payable occupied or empty.
  • Make mortgages non recourse (like the usa but without government garuntees)
  • Seperate domestic deposits and residential housing loans from investment banking products. A bank who securitises a loan has to retain skin the game and can be sued by shareholders/investors for making crap decisions. It can only be sold on directly ie HSBC mortgage fund where you invest with them and you can judge their management of the customes credit.
  • Make it illegal to buy insurance against somthing you do not own/issue CDS tomfoolery.
  • Minimum standards and space requirements from new property so that worst comes to worst we can used new flats as social housing.

This has to be prevented from happening again.....but it will not.

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I did put forward a suggestion a few years ago that second homes should be treated as income in its entirity. By that I meant tax any gain as not just the difference between rental income and expenditure but capital gain as well on a mark to market basis yearly. It is not hard to do. It is done on a revaluation every five years and comparables could easily be worked out. The BTL boom was the biggest factor in the explosion of house prices but how many would risk a yearly CGT computation and would have the necessary readies in reserve? If you sold at a loss or values went down in the next tax year you would get an automatic refund-no offsetting and lost rebates. You could bring back indexing to make it even fairer. Too cumbersome? In the age of the internet? B0llocks.

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I would disagree with 1. BTL is not given particularly favourable tax advantages - unless you call the 'wear-and-tear' allowance generous (and while it is moderately generous, it is nearly impossible to claim). Like any investment, whether it be in business or other, the cost of finance is allowable - this is not a generous break, but a standard one. Or are you suggesting that no business should be able to claim the cost of finance as a legitimate expense? However, see my response to point 2.

The big mistake that this government made was reducing CGT - from the sliding scale of up to 40% (or your marginal income tax rate) - down to 18% (significantly below income tax, even for low earners). Although it came late, this makes capital gains a highly desirable method of 'wealth' generation for the investor, even though it is usually generally very harmful for the economy. It would be preferable to tax short-term CGT considerably higher than income tax.

For everyone except BTL, the total taxes on their capital gains are higher than income tax. (a business they invest in pays corporation tax + NI + VAT before they pay CGT). BTL escape all nearly all these taxes, plus they get lots of extra grants and give-aways.

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