Investing in bricks and mortar? (3)

Here's another chart showing the components of house prices since Q4 1952, adjusted for wages growth (click to enlarge):
As you can see, in the long run, prices increase pretty much in line with earnings, which is hardly surprising - housing in the UK is in more or less fixed supply and housing is a normal good. This makes a mockery of the idea that property ownership can be a route to riches, or even to a comfortable retirement, except in the short term and for a minority of people who bail out in time.

As I have said before, the bubble periods tend to precede nasty recessions and economic turmoil, I would go one further and argue that the bubbles actually cause the subsequent recessions; this is because asset price bubbles and credit bubbles are two sides of the same coin - they reinforce each other on the way up (as well as steering the economy in totally the wrong direction); the same applies to house price crashes and credit crunches.

As I have also said before, there are two main arguments for having a flat rate tax of (say) 5% per annum on capital values in excess of the pure bricks and mortar value:

1. A 5% tax on the 'location value' would raise an average of £1,000-plus per home, just about enough to replace the main property and wealth-related taxes (Council Tax less Council Tax Benefit, Stamp Duty Land Tax, Inheritance Tax), which would be a welcome simplification and be neither 'regressive' nor 'jealousy surcharge'.

2. A 5% tax on the 'bubble element' would dampen off bubbles as they arise. Let's assume that the average house prices drops to £100,000 again and the system is then introduced, in addition to the £1,000 'location value tax', there would also be an extra £500 bubble tax (enough to replace the other property and wealth related taxes like Capital Gains Tax, the TV licence fee, insurance premium tax and VAT on domestic fuel and home extensions, for example). If house prices then jumped ten per cent faster than wages in a year, people's LVT bills would go up, on average by a further £500, probably sufficient to nudge people into bringing empty properties back on to the market or to rent out a room; nudging others into trading down, and deterring first time buyers (whose rent would not have gone up by £500, especially if they still live at home) from entering the market; and pushing down the profits of landlords by £500, who would then be more likely to sell up (and bank a net profit of £9,500) or discouraging them from buying in the first place. Thus bubbles are unlikely to recur, and even if they do, a sensible government would use the tax on the 'bubble element' to pay off the national debt, or "to fix the roof while the sun is shining", as George Osborne would say.

Sources:

1. Nominal house prices, taken from Nationwide's UK series.

2. Wages growth derived from Measuringworth.

3. The figures for bricks and mortar (average £70,000 per home) and true location value (average £20,000 per home) are to some extent arbitrary, you can make up your own assumptions on this. For my previous chart I had guesstimated £75,000 rebuild costs at 2007 prices, and land values around £25,000 per plot at their low-point.