Thursday, Dec 10, 2015

More welfare for landowners and banks

BBC: Help to Buy 'propping up housing market'

The Government's Help to Buy scheme for new homes has become a critical factor in keeping land values high thus destroying jobs, investment and our children's future

Posted by pete green @ 11:42 PM (5811 views)
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1. britishblue said...

The article talks about a rush for landlords to avoid the 3% stamp duty. I remember another rush in 1988 when couples rushed to avoid the end of joint Miras. It precipitated one of the largest housing crashes in history.
I am flabbergasted at just how hard the speculative buy to let market will be hit in the future by changes to government policy. As of yesterday there are now 5 major changes all which have happened in the last year.

1. Removal of tax interest which will be tapered in over the next few years
2. Removal of standard allowances for costs
3. Additional 3% on stamp duty - which i am sure will be increased in future budgets
4. Paying of capital gains tax when property is sold, rather than at a later time period
5. And yesterday it was reported that the Basel Committee, which sets financial standards for the whole world, want banks to hold twice as much capital against mortgages when the repayments are dependent on income from tenants.

Speculative, high leveraged buy to let didn't exist 26 years ago when we had the last major crash that was allowed to run its course. Is this the start of the end of it?

I also don't buy this nonsense about it will reduce supply. The supply will remain exactly the same whether a buy to letter owns a home or it is sold to someone else. Rents are set by what the market can afford, not costs. If it were the latter, then all rents should have come down when the bank lending rate came down.

Friday, December 11, 2015 08:03AM Report Comment
 

2. cyril said...

Yes there are more taxes but policy always tries to encourage spending (i.e. borrowing) and then milking it as much as possible through taxation. Its a fine balance and the obvious danger is they will kill the goose that lays the golden eggs.
But it seems to me that housing is still a fairly safe bet in investment terms because when all is said and done it's backed by the government. I think things were different 26 years ago - that crash was allowed to run its course because the political thinking of the time was all about privatisation and people were left to fend for themselves a lot more. More recently the thinking has shifted to using taxpayer funds to subsidise private interests so if there is a crash, I would expect homeowners to be protected better than before.

Friday, December 11, 2015 11:53AM Report Comment
 

3. mombers said...

What's interesting is the rise in housebuilders' shares when Help To Sell was introduced and then turbo charged. For them to have jumped so much, maybe investors are thinking that they'll be making fatter profits due to higher prices? Throwing more money at an inelastic supply is fairly uncontroversially recognised as a recipe for price rises of new builds - ceteris paribus.

Friday, December 11, 2015 01:09PM Report Comment
 

4. mombers said...

@1 have you not seen all of the threats from landlords to start charging higher rents? Watch this space!

Friday, December 11, 2015 01:11PM Report Comment
 

5. judgandury said...

"have you not seen all of the threats from landlords to start charging higher rents?"

Phuck them, they are a spent force. When even the Tory party turns on them, you know that their little game is coming to an end. More legislation coming to turn the screws further.

Friday, December 11, 2015 01:28PM Report Comment
 

6. pete green said...

In this regard I am in full agreement with flashy -

It will be a fascinating economic experiment to see what pips are left to squeak from renters but more importantly the ability to tax on borrowed money and speculative gains.

Friday, December 11, 2015 02:35PM Report Comment
 

7. mombers said...

@5 and @6 -> +1
The funny thing is that landlords have a long time to get ready for this - more than 4 years until it is fully in force I think. Plenty of time to get LTV down to a level that will spare them making a cash flow loss. A lot of the articles I've seen bang on about the poor landlord with an 80% LTV mortgage and the loss they will make. There are no 80% LTV BTL mortgages out there last time I looked - 75% is the max. And they bang on about being unfairly taxed on turnover, not profit, completely ignoring the fact that VAT raises 17% of revenue in 2014/15.

Friday, December 11, 2015 03:40PM Report Comment
 

8. mombers said...

@6 let's keep this thread a bit jollier than recent ones and not provoke :-)

Friday, December 11, 2015 03:41PM Report Comment
 

9. latterdaysinner said...

The question of whether landlords can pass on taxes to tenants is not a new one, it was written about by Smith and Ricardo, with the consensus being that, largely, they cannot. However, it's always nice to see some empirical evidence. This study, which ironically has been commissioned by the property industry, confirms what economists have known for centuries.

http://www.bpf.org.uk/sites/default/files/resources/Who%20pays%20business%20rates%20research%20%28BPF-BCO-BCSC%29%20Final.pdf

Saturday, December 12, 2015 04:37PM Report Comment
 

10. judgandury said...

Latterdaysinner, don't you start mangling Ricardos Law :) I propose a new law which is that no one without an economics degree should be allowed to quote Ricardos Law. I don't want to be a snob about it but I think Ricardo would weep if he saw how badly his work gets mangled and misapplied on this site. I don't want to pick on mombers because his heart is in the right place but a couple of threads ago he gave a good example of said mangling. I didn't touch it at the time because I don't want to be side tracked into giving economics lectures but maybe I should have because the mangling was perniciously used to suggest that building more houses might actually increase the price of housing! He was actually misapplying an aspect of Ricardos Law concerned with production. In simple terms Recardo pointed out that increasing demand (and subsequent higher production) for something like corn can force producers to bring into play some previously unused, less fertile land (in economics terms this is called marginal land). The use of less fertile land obviously reduces the output per acre and the output per unit of labour so the price of corn has to rise (unless people can use an alternative). This however does not apply at all to current UK house building. The cost of a brick or a bricklayer in the UK does not change that much no matter where the location of the building site. The only thing that can change is that land becomes more expensive when it becomes more scarce. However in the UK, we have an enormous amount of relatively cheap agricultural, green belt and brownfield sites that can be given building permission at the stroke of a pen. In Ricardian terms the infertile (marginal) corn field can not be made more fertile but in UK house building terms the land can be changed from without permission to with permission (more fertile) at the stroke of a pen. Fly over Britain and you will see that we have an abundant source of relatively cheap building land that can be made "more fertile" at the stroke of a pen. That's why the NPPF was introduced in 2012 and a new radical planning act is going through now ( the intention of both is to increase the supply/ decrease the cost of building land.

Regarding the study referenced above, it is only tangentially relevant and even then not particularly useful or conclusive. It only covers a period of 24 years which is a hopelessly inadequate time span for these purposes. Even within this 24 years any identified relationship breaks down for the last significant chunk of time and the retail sector doesn't play ball at all leaving only the business sector. I suppose I should have pointed out first that the the study is about business rates (commercial property). It is surprisingly difficult to find much commonality between the commercial sector and the residential sector.

Sunday, December 13, 2015 07:44AM Report Comment
 

11. latterdaysinner said...

I didn't actually refer to Ricardo's law of rent, which isn't really about incidence of tax as you say, although the same logic can be used to derive an argument on tax. A lot has been written on the subject of pass-on of costs (tax or otherwise) since Ricardo's time, which I'm not really an expert on, but know something about. It's rather more nuanced and hinges on factors such as the degree of market power, whether a cost shock is common to all suppliers and whether the suppliers subject the shock are marginal in the sense of having the highest cost of all suppliers that clear the market. I don't think there is much there that will provide comfort to amateur landlords.

Regarding the study, it doesn't look too bad to me. They don't use a stupid econometric technique, which puts them near the top of the pile as far as such studies are concerned. Obviously if they had more data and looked at the residential sector, it would be better. Having said that, I haven't been on Google scholar to find a better example, so maybe I should.

Finally, I agree that land scarcity in the UK is artificial, and I don't think that a land value tax is a silver bullet, so I'll spare you the effort of getting on that hobby horse again :-)

Sunday, December 13, 2015 01:19PM Report Comment
 

12. judgandury said...

OK fair enough. If anyone is interested I'll fully explain 'pass on costs' and Ricardo in this context but it's not needed here. Yes, its not too bad a study but it's rather lazy. Data from other countries is readily available and data is also readily available going back a lot further than the paltry 24 years they've referenced. Sadly, residential rents have wildly outstripped wages over the course of the last 100 years but the likelihood of landlords continuing to be able to pass on their costs and add a large premium still has to be assessed by considering current conditions. They still have some things in their favour (not the least of which is continuing population growth and inadequate build levels) but after a 100 year run of extortion there is only so much more that they can squeeze out of renters. In my opinion the biggest thing that has changed recently is a growing awareness of the morality of the situation. The governments researchers have clearly cottoned on to this and the government has subsequently decided to squeeze the landlords hard. From what I understand there is a lot more punitive legislation on the way. Crucially some of it will be aimed at preventing them screwing more out of renters, so its in a way it will soon be immaterial whether or not they will be able to squeeze more out of beleaguered renters. As I said above, **** them, they are a spent force.

Sunday, December 13, 2015 01:52PM Report Comment
 

13. latterdaysinner said...

Indeed, the change in political tone has been both rapid and drastic. Liberalisation of planning is a classic Conservative thing to do, so I wasn't surprised by that, but I'll admit to being pleasantly surprised by the measures taken against amateur BTL landlords and direct funding of development. After the event, it makes perfect sense. A home owner is more likely to vote Tory than a renter even after all relevant socio-economic and demographic factors are controlled for. BTL is a clear barrier to this. Osborne wants to be PM after the next election. Having a bit more foresight than Brown, he probably realises that he can't guarantee that there won't be another recession before 2020, so it makes sense to shore up his position.

Interesting to see what legislation might come in to protect renters. That makes perfect political sense too given that Corbyn has left Osborne acres of room to occupy on the left. As you can see, I think the main driver is political expediency rather than morality, but I only really care about the result, not the motivation.

Sunday, December 13, 2015 02:23PM Report Comment
 

14. judgandury said...

"I think the main driver is political expediency rather than morality"

Couldn't agree more. That's what I meant by the government researchers having cottoned on. The government only acquired 'the morality' after their researchers told them that their was a growing distaste amongst a large enough section of the electorate.

Sunday, December 13, 2015 03:00PM Report Comment
 

15. pete green said...

Flashy your interpretation of Ricardo's Law seams about that of a undergraduate in economics and limited in the extreme....

Sunday, December 13, 2015 09:52PM Report Comment
 

16. judgandury said...

I think CAPTCHA is a good idea but they shouldn't make them so long

Monday, December 14, 2015 07:14AM Report Comment
 

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