Tuesday, May 18, 2010

CPI Benchmark Target Increased to 4% or Interest Rates Up?

Housing costs must be included in inflation target, says Osborne

"Chancellor George Osborne has backed plans to include housing costs in inflation measures, reversing the move many blame for allowing the housing bubbl" ABOUT TIME!

Posted by magnaman @ 01:08 PM (5074 views)
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32 thoughts on “CPI Benchmark Target Increased to 4% or Interest Rates Up?

  • stillthinking says:

    I am glad to see this is considered an inclusion over the longer term…

    Given that house prices are undoubtedly going to come down, to suddenly include them now is tantamount to covering up CPI inflation with the purpose of providing wealth transfer from savers to debtors. Quite aside from implying that over the last decade lending rates have been too low as a consequence, another rip off.

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  • mark wadsworth says:

    Nope – this is the Home-Owner-Ist ratchet at work yet again:

    1. When house prices are rising, they exclude house price inflation as an excuse for keeping interest rates lower than they should be (to stoke further house price inflation).

    2. When house prices are falling, they include them in the index so that they can keep interest rates, er, lower than they should be (to prop up the bubble).

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  • krustyatemyhamster says:

    Ordinarily I’d agree with what MW’s just said about house prices being not included on the way up, but then throwing them in on the way down to disguise inflation and keep rates low, but I’m not sure Osborne’s that far advanced to realise that prices are doomed. Why would he agree to stick 40% CGT on second homes without taper relief if he was sticking to the home-ownerist agenda? I thought he was dead anyway – they kept him well hidden during the election campaign.

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  • mark wadsworth says:

    KAMH, George’n’Dave are hardcore Home-Owner-Ists (to the extent they’ve ever actually given it a second’s though), but they are in coalition with a party which received six million votes to the Tories’ ten million, so there has to be a bit of give and take.

    For all the Lib Dems faults, at least two of their cabinet members are Land Value Taxers and they have managed to get some concessions, is all.

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  • Normally agree MW, but if you take the view they ought to be included, then better include them. If he tries to remove in future, it will be harder to justify than putting them in now.

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  • Think it through Mark..

    ..aside from being Tory policy for some time, changing back to RPI or RPIX will force the BoE to act more aggressively, and give them little choice but to raise interest rates..

    ..result: credit bubble pricked, with HPC sooner rather than later – so hopefully all settled and sorted by the next election..

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  • mark wadsworth says:

    Uncle Tom, I have not just “thought it through”, I have also observed the real world around us and how politicians behave.

    What they will do is include HPI on the way down and exclude HPI on the way up, for the reasons I explained above.

    Like ST and Growler above, I wholeheartedly agree that HPI should be included, but it’s funny they only listen to us on the way down.

    (of couse, HPI is yet another of those stupid economic phenomena which Land Value Tax would nip in the bud…)

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  • MW, What are the downsides of LVT? I read an article a while back on the planned introduction of LVT in Auckland and how poor people who happen to live in an affluent area would be priced out of their homes because of it’s introduction.

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  • the number cruncher says:

    I’m with Mark W on this one, this is an ‘no brainer’ choice for a new government peering down the cliff of land values.

    I bet the inflation measure will not be RPIX but an new measure that includes house and rental prices, but will report the lowest inflation possible over the next 5 years, including the deflation of house prices and other bubble assets.

    I bet you whatever government we have in 10 to 15 years time, on the back of the next house price bubble, will be moving back to a land price less inflation metric.

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  • Mark,

    You’re missing the point. The new govt has absolutely nothing to gain from playing silly number games that will ultimately come out in the wash – nearer the election maybe, but not now..

    The govt is fully aware that public debt is not the only skeleton in the cupboard, and the last thing they want is a consumer debt crisis just before the next election.

    If the govt believes a crash in house prices is inevitable, they will want it to happen as soon as possible. Personally, I suspect they fear a crash, but are not sure it’s inevitable; they will especially fear it happening as the next election looms into view..

    Political logic dictates that the sensible thing to do is get interest rates back to normal levels as soon as possible. If the housing market crashes, then it was going to do so anyway; so better it happened sooner. And if it doesn’t crash, they’ll have some ammunition if things look shaky close to the election.

    Hard to believe perhaps, but we might have the govt. covertly on our side now..

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  • Totally agree with MW. It’s interesting on the timings of these “choices” isn’t it. UT, I’m afraid the colour of the government
    isn’t a facotr when the power players are in the pockets of the Rochskinder.

    “I vote for the puppet in the right hand. Well I vote for the puppet in the left hand. Wait a minute !!! ..”

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  • mark wadsworth says:

    Tom 101, the traditional “killer argument” deployed by the Home-Owner-Ists is “what about a poor widow living in a mansion” (and all its variants).

    This is twaddle of course; most poor people leave in small houses or in cheaper areas where LVT wouldn’t be much; most rich people live in big houses in nice areas where LVT would be a lot.

    Assuming that other taxes were cut accordingly, shifting from income tax/VAT to LVT would help the 95% of poor people who live in small houses. The 5% of poor people who happen to live in a big house in a nice area will have to trade down; roll up the tax to be repaid on death; take in a lodger; get their heirs to pay it etc etc. Such is life.

    Without LVT, when that little old widow in a mansion dies, her heirs will of course sell the house to a rich person; LVT merely speeds up the transfer of nice houses to rich people (which is fine – that is the whole point of being rich) and does not fundamentally alter anything much.

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  • Please stop arguing with MW : he is nearly always right ,as on this one,and when he is wrong he just carries on anyway.
    Another problem with including house prices in cost of living/ inflation indices is that when house prices go up in the usual ruinous bubble,they slap on higher interest rates which kill off the rest of the economy .What they need to do is slap on LVT and stop using interest rates to both increase production and control house prices ,the two being incompatible.,

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  • MW, many thanks.

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  • dbc: putting the number in the stats is the right thing to do.

    I don’t think that the automatic policy of IR to combat inflation – especially if caused by house price booms – is gogin to be seriously proposed as the antidote.

    I’m not an LVT advocate because I can see the system is based on valuations and assumptions – and therefore red tape and lots of consultants.

    My view is CGT on first house onwards. Tax the gain on disposal as income less expenses. Property transfers all record prices on conveyance. Remove allowable expenses, etc.. “Everyman” can understand it. LVT is fine, but I think it will fail the everyman test – which will ultimately lead to it becoming stillborn … possibly along with the principle of taxation for 1st properties.

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  • mark wadsworth says:

    Growler: “I’m not an LVT advocate because I can see the system is based on valuations and assumptions – and therefore red tape and lots of consultants.”

    I accept that this is what the opponents always say, but that doth not necessarily make it true.

    What about Council Tax, Business Rates, the 0.78% domestic rates in Northern Ireland? There are very few appeals against banding or valuations, what would be the point? If everybody argued to be in a lower band, they’d just hike the tax in the lower bands to compensate. Loads of countries have some kind of ad valorem property or land value tax, it’s the oldest tax in the book.

    Sure, these taxes are to a large extent “a made up figure x an arbitrary percentage”, but so what? Once you lump in income tax, national insurance, tax credits, VAT and so on, your marginal tax rate is a compeltely random % of anywhere between 0% and 100% of an arbitrarily chosen figure.

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  • charlie brooker says:

    In view of the disgraceful front page headline in the Daily Excrete yesterday, I agree with the move.

    Most of us agree that over the next decade or so property prices will fall; surely this move can only act to deter future property price booms.

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  • charlie brooker says:

    PS for the avoidance of doubt I’d prefer LVT but this move is a good start.

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  • MW – *sigh* – another day, another LVT convert.

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  • Little Bear says:

    to uncle tom’s comment – didn’t k. clarke stand back and let the last crash happen? isn’t it tory to let the market run it’s course.

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  • wanderinman says:

    I still don’t see how including housing costs in the CPI index would prop up house prices. The base rate is pretty much as low as it can now go and the armoury of other policy measures have already been used up. They can’t, in future, drop the base rate, using the excuse of a small headline inflation rate.

    Part of the coalition agreement was that state pensions “are raised by the higher of earnings, prices or 2.5%”. So, assuming the government does believe that house prices will be falling, perhaps including housing costs in the CPI is a way for them to keep a lid on increases in pension commitments … and even future wage demands as they’re typically linked to the inflation indices.

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  • @ 21 wanderinman

    Because it won’t prop up house prices.

    Which is why you can’t see it ;o)

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  • : ) MW

    I know, I know. I’m a CGT fan… but tbh, here’s a case where we certainly do not need a zero option. If it must be LVT, then so be it. It’s just – as you say – it’s the oldest tax in the book

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  • mark wadsworth says:

    Growler, I accept that if there were a 100% CGT on property gains (however measured), this would at least completely remove the incentive for people to put their houses on the market for silly prices – they’d be happy to take anything at least as much as what they paid for it. But this would still not capture the ongoing long run increases in rentals values, provided people just never sold.

    So I think what would happen is that property would be concentrated in ever fewer hands – if you paid £10,000 for a house a few decades ago and it can now be rented out for £10,000 a year, you would be daft to sell it for £10,000 – you would just find another house to buy and rent out the old one.

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  • This new gvt have sat on the sidelines and watched the tricks of Brown & Co and realised what they were up to. Osborne has been clear, he wants an economy built on business not on financial services and a low IR rate/debt fuelled housing boom. He also realises second homes deprive someone of a first home, both supply and price wise.

    Its hard to get used to after the high politics of Labour, where everything done/said had a sneaky reason for it that people like me didnt get until it was too late, but I really think Osborne & co are that straightforward. I feel watching this new gvt, at last, some hope.

    I will never ever forgive Brown for lying promising not to let house prices go out of control, while all the while he was making sure they did just that.

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  • The essential advantage of CGT is that it doesn’t require some fake valuation. I think we should remove the right to individually own land and instead offer leases. Planning permission would be scrapped and permissions for building, trading, mining, etc granted in the lease.

    The leases would be requested by some legal entity such as a private person or a business and anybody in favour of leasing the land (including the requestor) would put money into a “for”-pot. Anybody opposed to the proposed lease would put money into an “against”-pot. The larger pot swings the decision and the money in the pot is handed back out to those that put money into the smaller pot.

    This would mean that land could never have a “value” and needs no tax to control its value. Rather the community is compensated for someone putting it to a purpose that harms them or is compensating for somebody else benefitting from it instead of them.

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  • voiceofreason says:

    Wake Up to Money this morning debated the 40% CGT on 2nd homes and BTLers.
    Lib Dems have historically been very strong in the South West, which suffers greatly from second home owners pricing out locals.

    Just a thought….

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  • tenant super says:

    The old trick of including housing on the way down and excluding on the way up is as predictable as rain on a bank holiday weekend.

    Still, it indicates there is an expectation of a crash (and I was going through the dark night of the soul doubting this) . I am not wealthy and the 15k per person per issue on NS+I inflation linked certs is enough for my savings needs and that’s where I’ve been putting my money over the last short while.

    Though I am still looking to buy over in Ireland when the ship has sunk to the bottom, I am not ruling out up-sizing over here. I disapprove of home-owner-ism but would have no scruples about playing the game myself .

    I’m an LVT convert but since my belief in its legitimacy is rooted in the fact that land as a finite resource is prone to the violation of Locke’s caveat on ownership (there must be enough left in common for others), it must be a LVT (based on the size of the plot and some factual consideration of transport links and employment opportunities) and not a property value tax (based on the value of the building sitting on it or the social demographics of the neighbourhood).

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  • MW

    I think making the gain (however measured) taxable under CGT is the most pragmatic, realistic answer. It should be taxed as income therefore attract a rate of 40% or 50%

    Getting LVT through – which is probably a “better” system I grant you – I just don’t think is sellable to the population: A population fed by the on-message home-ownerist media.

    Telling people: “Look, we’re going to extend the rules for 2nd property sales to 1st homes for all purchases from today onwards” means that over time, more and more properties will come into the net. People won’t grumble that existing houses they’ve owned themselves as 1st homes are suddenly taxed. People will, however, look at the next home they buy with a different perspective.

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  • mark wadsworth says:

    @ Maihem, that’s another variant of LVT, but I think the ‘losers’ should only get as much money from the ‘winner’s’ pot as they were prepared to put into the ‘loser’s’ pot. Plus, how do you deal with this situation:

    1. I do not live anywhere near Heathrow, I do not own land anywhere near it. I think extending Heathrow is a good idea.

    2. I am prepared to gamble on the NIMBYs getting the upper hand. Would I be allowed to chip in with BAA and collect part of their compensation?

    3.. If the Heathrow expansion did go ahead, would I count as a ‘winner’ (because that’s where I put my money) or as a loser (because I am not BAA and do not benefit directly from the expansion)?

    Tenant, for sure, the purists say the bricks and mortar value should be excluded from LVT. But the land value = size x location x generosity of planning permission +/- bubble value. This land value is easy to measure – it’s what they buy and sell for (minus brix and mortar); or what they can be rented out for (minus return on brix and mortar).

    But the ‘social demographics’ is part of the location value and hence is part of what you pay for – it is just as important as transport links, local school etc.

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  • tenant super says:

    I agree that the ‘social demographics’ is part of the location value as are schools which is linked because league tables are often reflective of the social mix of the catchment rather than any real measurement of the quality of the education provided.

    However, I cannot agree that this should be included in LVT and cannot see any justification for this. I can only just accept including infrastructure and jobs but this would effectively be an extra tax on social class.

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  • @mark wadsworth

    I guess it would only make sense to return the loser’s deposit and an equal amount of the winning pot, if you share the full pot out then the system would just be gamed to approach that anyway.

    In the case you mention that you put a deposit for the third runway you would be counted a winner. This is not about if or how you benefit but simply that you are trading a fair exchange of some sort of right. It doesn’t matter whether there is any measurable benefit to you just that you think you would like to give x-many pounds of purchasing power to have a new runway at heathrow (perhaps you suspect that if it doesn’t get built at heathrow that it might be built near you and you don’t want that). It’s impossible to analyse so the only thing that matters is that you want some decision to be made on a commons so you say what it’s worth to you for the decision to go one way or the other and if it does you get the decision and if it doesn’t you get compensated.

    It would be interesting to see what games might be played with the system and how much it would really represent people’s wants.

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