A. When he's a landowner.
In the comments, I suggested Land Value Tax as a free market solution to the question of whether the State should be allowed to permit ramblers access to coastal paths even where they cross somebody's land. I don't think that The State "should" as it happens, but as a quid pro quo, under LVT, landowners would pay extra for exclusive access to the view over the beach, the sea and sky (which is what this is all about, really. I don't see how the owner of a cliff-edge plot can claim to 'own' these) and came in for the usual ill-informed flak.
FWIW, I concluded with this:
LVT is not a tax on "mere ownership of property", it is raising tax in the least bad way (per Milton Friedman) by expecting payment in return for the right to restrict the activities of others and for those particular benefits that accrue to you* but for which you do not otherwise pay. LVT does not apply to shares, incomes, moveable property, bank accounts or buildings or any other form of property (except maybe landing slots at airports and other special cases)
* A good example is owning a house near a railway station. The rental value increases merely because it is near a station, even though it is the passengers who pay for the railway, not the landlord.
If you are really a libertarian, then I assume you believe in free markets?
OK, if you own a plot of land, as a true Libertarian you say "I can do what I like on my land" but as a faux-Libertarian you then say "But I don't want my neighbour to do what he likes on his land because that reduces the value of my land". But in restricting what your neighbour does, you are infringing HIS 'property rights'.
As a free market enthusiast, I can only say that the best way to balance these competing interests is LVT. If your neighbour builds a block of flats that takes away 'your' sunlight, then your land value goes down and you pay less LVT. Your neighbour obviously pays more LVT. Automatic compensation, problem solved.
Free markets are easy to understand and they work. There is no special pleading or favouring one group over another, it all sorts itself out.
Thursday, 11 December 2008
Q. When is a libertarian not a libertarian?
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I'm sympathetic to the idea of a LVT, but the main problem I have (and forgive me if this has been covered in depth before) is one of valuation. I'm also generally sympathetic to Austrian economics, and it seems to me to be simply impossible to work out the fair market value of a piece of land without actually selling it on the market. In addition, the problem becomes even more immutable when you're trying to figure out the unimproved value of the land in question - how do you do this in any consistent and plausibly correct way?
I've given up on precise valuations.
The best thing we could do in the UK is to
a) Wait until the bottom of the market in 2011 or so;
b) Deem one third of total property values in each area (e.g. postcode sector) including undeveloped sites with planning permission, to be 'location value'
c) Average out total property values over the total size of all plots in the area to get a deemed location value per square yard,
d) And then take it from there...
Dampening property price bubbles is just as important, don't forget, so my proposed LVT kills three birds with one stone (it is also intended as a replacement tax for ALL other property or wealth related taxes).
My thought is that presently there is no pressure on landowners to ever sell & move on because they pay nothing to society as "rent". A pain which you know is going to go on forever is much less bearable than one which may stop.
How about something like a "claiming rule" in which the landholder states what he'd sell it for, then require the sale if anybody offers that price. Complications would occur, of course, because if somebody buys the land how do you reckon the value of the attached buildings? Require the land buyer to fork over the building replacement cost as well?
OP, that rule is of little general application, but would be ideally suited to the strip of land along the cliff top. This is pure location value and has nothing to do with buildings.
If landowner pitches too high, the council tells him they're not interested and collects LVT on the too-high amount. If he pitches too low, the council forgoes the LVT and puts up a fence, job done.
"OK, if you own a plot of land, as a true Libertarian you say "I can do what I like on my land" but as a faux-Libertarian you then say "But I don't want my neighbour to do what he likes on his land because that reduces the value of my land". But in restricting what your neighbour does, you are infringing HIS 'property rights'.
As a free market enthusiast, I can only say that the best way to balance these competing interests is LVT. If your neighbour builds a block of flats that takes away 'your' sunlight, then your land value goes down and you pay less LVT. Your neighbour obviously pays more LVT. Automatic compensation, problem solved."
I don't accept your starting point and because that is, I believe, erroneous, so is your conclusion about compensation.
Leaving aside labels and looking at the substance, my understanding of libertarianism is that I can do what I want with my land provided I do no harm to others (or, at least, insufficient harm for it to justify the intervention of the law). If my acts do sufficient harm to others to justify the intervention of the law, the next question is what form that intervention should take.
Therefore if I build a block of flats which restricts my neighbour's view or cuts out sunlight to his land I am doing him harm and the question is whether that is sufficient harm to justify the intervention of the law to provide him with a remedy against me.
If it isn't, then he has no claim against me. Nonetheless, the value of his land is diminished so his LVT goes down to reflect that diminution. My LVT will also go up, not because I have reduced the value of my neighbour's land but because I have increased the value of my own. The increase is likely to be greater than the diminution, the two are connected only in that they are caused by the same event, but they are not connected in amount.
LVT is irrelevant to the question whether my new block of flats does so much harm to my neighbour that he is entitled to protection from the law. If he is entitled to a remedy it might be that I have to demolish or reduce the block, or I might have to pay him compensation for the loss of value of his land.
LVT does not provide that financial compensation. Say the block of flats knocks £20,000 off the value of his land whereas a block which did not infringe his rights unreasonably would reduce the value of his land by £5,000, my unreasonable act has cost him £15,000 (arguably £20k, but I'll say £15k for now). LVT does not aim to give him back this loss, it simply taxes him according to the lower current value.
Say his place was worth £250k before I set trowel to mortar and LVT is £10 per £1k, he pays £2,500. If I build a reasonable block and the value goes down to £245k he is taxed on £245k, he is not compensated by the taxman because he does not get £5k he just pays £50 a year less in LVT. If I build the unreasonable block he pays tax on a value of £230k, saving him £200 a year. That does not compensate him for losing £20,000 (unless he lives for 100 years but even then it is not by way of compensation for someone having done him harm).
LVT reductions and compensation are different kettles of ballgame.
TFB, you have answered your own question to my full satisfaction.
When granting the planning permission, the council weighs up LVT shortfall from you with extra LVT from neighbour (OK, it's a bit more complicated than that, but bear with me). If there is an overall gain, the flats get permission.
And you ARE being compensated. If you save £XXX a year LVT, that is the same as your neighbour paying you £XXX a year in perpetuity, from your point of view. Do you care where the money comes from? Nope.
And would you yourself perhaps like to cash in and build some flats in the future without worrying about hassle from the NIMBYs next door? Probably yes.
You make a decent case for this tax, but I'm not sure that you address the key question: how dangerous could such a tax become once it's been corrupted at the hands of socialist politicians?
D, good question... easily answered.
Danger 1. Like income tax that started at 1% of the earnings of the richest 1%, it ends up as a tax of 40%-plus on most earners.
But an LVT on capital values depresses the capital value, e.g. a tax of 10% on capital values only raises "a bit" more than a 5% tax; a 100% tax only raises "a bit" more than a 10% tax.
Danger 2. A political party decides to garner the home-owner vote abolishes it for quick political gain, and we're back to boom-bust.
I think LVT is an unworkable, incorrectly/misleadingly named and all in all simply a bad theoretical notion.
[How's that for someone you've never met or even posted on your blog before :) ]
1) Can you begin to imagine the army of officials and surveyors needed to reflect a notional "Monetary Price"?
2) The monetary price of assets dramatically fluctuate as we are currently seeing!
3) Why should people be coerced into using the land in a way that the "market" or the "state" deems is the most economic use?
Just because someone obtains planning permission next to a piece of land I own doesn't mean I should be forced to sell simply because I can not afford the increased LVT which makes it non viable to continue my preferred use.
Sure greedy outsiders might consider my piece of land would gain a high monetary "price" on the open market.However whether my neighbour gains planning or not my land still has the same value to me.
Not everyone wants to build allover everything! One of the great things about Britain in huge variety and diversity in the usage of land throughout the countryside, towns and cites.
The last thing the country needs in swathes of identikit housing estates and high streets.
Anon, I could explain all that, but that pre-supposes that you are in the slightest bit interested, which I doubt.
Your last comment however, gets a special mention:
The last thing the country needs in swathes of identikit housing estates and high streets.
Er ... as opposed to?
"And you ARE being compensated. If you save £XXX a year LVT, that is the same as your neighbour paying you £XXX a year in perpetuity, from your point of view. Do you care where the money comes from? Nope."
That doesn't answer my point. I won't live in perpetuity and even if I did I might want to move in which case I suffer the loss on selling my place and having taken a hit for £20k (on the example I gave) the few quid a year reduction in LVT accrues to the purchaser not to me, therefore I remain uncompensated.
The only way your theory would work is if the reduction in LVT leads to a commensurate rise in the value of the property - on the basis that saving £x a year in LVT gets capitalised and added to the sale price. In other words, losing £20,000 in value through loss of a view / sunlight is cancelled out by the added value of a lower LVT so that there is no net reduction in attainable sale price. This seems highly unlikely and even if it were to happen it would mean there is no reduction in value and, therefore, no reduction in LTV so it falls for impossibility.
And your point about differences in LVT being relevant to granting planning permission is, if I might say so, a cart and horse mis-juxtaposition. You can't tell what the loss of light / view will be until the neighbour's monstrous erection is in place. You can have a rough guess but, particularly in relation to light, you simply can't tell. And then when it proves to be highly intrusive and the court orders it reduced from, say, 4 storeys to three, all the calculations go to cock anyway.
TFB,
Bearing in mind that the current tax system gives you NO compensation if the council gives your neighbour planning permission for a block of flats, and something is better than nothing ...
1. Although in cash flow terms the "few quid a year reduction in LVT accrues to the purchaser", all things being equal that enhances the re-sale value of your property.
2. 100% compensation is probably not achievable, but so what? Everybody's property has fallen in value by a fifth over the past year (and will fall by a further third over the next two years), unless the government goes mad, there'll be no compensation for that either.
What will happen to property prices in Aberdeen if and when the oil runs out? They'll plummet. Should local landowners be compensated for that? There is a certain limit where you have to accept that "the loss lies where it falls".
3. The higher the rate, the higher the effective compensation. Let's assume we go for 5% on capital value, your LVT reduction is now £1,000 a year, which means that a purchaser has £1,000 extra to pay towards the mortgage, which at an interest rate of 5% means you can charge £10,000 extra for the home, so that's 50% compensation.
4. In the spirit of horse-trading, you could do like churches in Manhattan that sell the notional 9 storeys that they could build above their church to the site owner next door, so that they can now build 19 storeys high and not just 10. That's a market solution to the problem.
In other words, the local council says to you "Your garden is 400 sq yds. Your are compensated for half the loss in value anyway, so we'll charge you LVT as if your garden were only 350 sq yds (or whatever is required) and charge the neighbour as if his plot were 50 sq yds larger than it really is."
5. As to estimating the loss of light, builders where I used to live in Germany had to knock up a wooden frame the size of the finished building before they started so that everybody could see where the shadows would fall and adjust accordingly.
It is all perfectly do-able. Will LVT lead to a perfect world? No, of course not. Will LVT lead to a slightly better world? Yes of course.
There's no point arguing with MW on LVT I'm afraid. He has decided that it is the answer to all our problems and no amount of discussion will alter that fact.
Theoretically LVT may be better than what we have now, but without actually putting it into practice we have no way of knowing what would be the outcome in practical terms in the UK. Given our small island, with strict development rules, and correspondingly large differentials between the value of developed and undeveloped land, I foresee a nightmare of govt officials, valuers, appeals processes etc etc. All a way of the govt having even more control over property owners than they do now. If there were no development rules whatsoever, LVT could work because the value would be entirely determined by the usage. Then if I choose to leave my garden as a garden, I don't pay extra just because my neighbour gets planning permission for a house in his. Taxes should be based on what you actually do, not what you could do.
That's before I get on to what a nice cash cow LVT would be for politicians wanting extra dosh. You can bet your bottom dollar that what ever rate it was set at initially would never go down............
Just in case Anonymous is interested...
1) Can you begin to imagine the army of officials and surveyors needed to reflect a notional "Monetary Price"?
I can, and I imagine it being far smaller than the army currently engaged in managing the morass of taxes, exemptions and benefits that are part of government policy now. We already carry out a limited amount of land value assessment; almost by accident in some ways. LVT would result in an increase in that activity, but remove the mess that is existing taxation.
2) The monetary price of assets dramatically fluctuate as we are currently seeing!
Quite, and by removing speculation on those prices LVT would at least dampen those fluctuations.
3) Why should people be coerced into using the land in a way that the "market" or the "state" deems is the most economic use?
I suppose you don't want to be 'coerced' into paying market value for your pies/car/porn either. OK; that was a glib response, but there is an element of truth to it in that individuals can either accept the market 'value' of something or walk away. That 'value' may be the price of a pie or the most efficient use of land in a given location and with the applying permissions.
Just because someone obtains planning permission next to a piece of land I own doesn't mean I should be forced to sell simply because I can not afford the increased LVT which makes it non viable to continue my preferred use.
Sure greedy outsiders might consider my piece of land would gain a high monetary "price" on the open market.However whether my neighbour gains planning or not my land still has the same value to me.
In LVT as I see it, planning permission for the land next to yours doesn't change the value of your land, so your LVT wouldn't change. If you own a farm next to a town, then don't get planning permission to build houses and your LVT will remain low.
Not everyone wants to build allover everything! One of the great things about Britain in huge variety and diversity in the usage of land throughout the countryside, towns and cites.
The last thing the country needs in swathes of identikit housing estates and high streets.
Why would you think we'd build over everything? Apart from anything else, there simple aren't nearly enough people to make building everywhere anything but pointless. Actually that's wrong; it would be pointless and expensive. In addition to that, LVT would tend to limit suburban sprawl since that's not an efficient use of residential land.
sobers:
Then if I choose to leave my garden as a garden, I don't pay extra just because my neighbour gets planning permission for a house in his. Taxes should be based on what you actually do, not what you could do.
LVT needn't mean you paying more in that circumstance. That 'could' in "what you could do" can be either absolute or relative. In absolute terms you 'could' build a house anywhere, but in relative terms you could only build it somewhere with the appropriate planning permission. Don't get that permission for your garden and you don't get higher LVT.
That's before I get on to what a nice cash cow LVT would be for politicians wanting extra dosh. You can bet your bottom dollar that what ever rate it was set at initially would never go down...
I sure hope it would never go down. Set it at 100% of rental value and institute a Citizen's Income; a cash cow - albeit a small one - for the people, not the government.
@ Edd:
You are ignoring 'hope value'. If I own land miles away from anywhere, there is no hope value IE it will never get developed for housing or industrial uses. The closer you get to developed areas land prices rise due to the perceived idea that at some stage in the forseeable future you can get planning permission for a non-agricultural use. A field next to a housing estate is worth a lot more than the same field in open country, even though its planning status is identical.
So do you propose to tax the actual value (ie what someone will pay on the open market - and who decides what that is for every little piece of land?) or some notional value tied to the planning status of the land?
The latter seems fairer because then the level of tax would be determined by your own choices, rather than those of your neighbours. But then its not really a LVT.
There are many people who choose not to apply for planning permission on land on which they might well get it, for their own reasons. Why should they be forced to pay to use their own property in the way they choose, which may be at odds with some notion of 'efficient land usage'?
"There's no point arguing with MW on LVT I'm afraid."
No no, Mr Sobers (or is it Sir Garfield?). One of my great pleasures in life is telling mr Wadsworth when he's wrong and one of his great plasures is pointing out my errors. LVT is the perfect subject for us both. More fun than a barrel of well oiled pole dancers.
Mark
The last thing the country needs in swathes of identikit housing estates and high streets.
Er ... as opposed to?
Well planned vibrant mixed communities. Too much emphasis on the economic imperative leads to swathes of the most profitable dwellings for the prevailing market conditions E.g. recently - estates full of 4 bedroom detached houses 3 feet apart! As opposed to for example a mix homes including affordable housing not only to own but also to rent.
With respect to high streets too much emphasis on the levying the current methods of taxation has left us with a fragile high street dominated by a handful of players. The real cost of this fragility we are just beginning to see and will most likely be fully played out through 2009[/10].
Anon, I could explain all that, but that pre-supposes that you are in the slightest bit interested, which I doubt.
I am interested; any thing that theoretically improves the status quo is always worthy of consideration.
Edd
Interesting - thanks Edd, :)
LVT would result in an increase in that activity, but remove the mess that is existing taxation.
I have a nagging feeling it would end up adding to rather than replacing existing taxation.
Quite, and by removing speculation on those prices LVT would at least dampen those fluctuations.
I have a feeling it would open up a huge new ball game which many people would lose from and a much smaller group of people would benefit immensely from during any transition.
I also feel that concentrating too much on the economic “price” would be highly damaging approach, there are more subtle qualities that owners need to prioritise for.
I suppose you don't want to be 'coerced' into paying market value for your pies/car/porn either. OK; that was a glib response, but there is an element of truth to it in that individuals can either accept the market 'value' of something or walk away. That 'value' may be the price of a pie or the most efficient use of land in a given location and with the applying permissions.
I think you could be opening up a whole can of legal worms as the owners of parcels of land would feel the price they paid for the land was “market value” and any changes would be retrospective taxation. Also it’s important to bear in mind not everybody wants to “walk away” especially as people get older.
In LVT as I see it, planning permission for the land next to yours doesn't change the value of your land, so your LVT wouldn't change. If you own a farm next to a town, then don't get planning permission to build houses and your LVT will remain low.
I thought that was the whole basis of LVT in that it is set by the current perceived “market price”, if not the avoidance would be a simple matter of offering an option
Why would you think we'd build over everything? Apart from anything else, there simple aren't nearly enough people to make building everywhere anything but pointless. Actually that's wrong; it would be pointless and expensive. In addition to that, LVT would tend to limit suburban sprawl since that's not an efficient use of residential land.
BTL was pointless and expensive for many people but they still did it. LOL It would be a very brave person who advocates doing away with planning controls and relying purely on LVT and market economics to sort everything out.
@TheFatBigot: Hey, you got the sobers reference! The greatest allround cricketer in the history of the game. Total legend.
@ sobers
Prices do rise nearer cities, but is it really all due to 'hope' value? What about the access to the amenities the city provides, and the access to the city's market in order to sell the farm's produce? I admit that some 'hope' value does exist as things are, but why does it? Or more to the point: what is it? Surely 'hope' value is just an aspect of land speculation; the expectation of high returns given a particular form of land use. LVT has the potential to kill - or at least severely curtail - that speculation.
Another issue is the fact that our existing systems encourage the development of those agricultural sites outside cities instead of the derelict locations within them. LVT would reverse that trend and thus kill off another source of the 'hope' value. So the value of that field next to the city would still be higher compared to the one out in the country, but the difference would be much smaller. It would also be directly related to the benefits that its location brings to its owner as an operating farm, rather than a speculative location.
The above applies to LVT whether it is levied against capital values or annual rental values, and would result in the convergence of the open market value and the "notional value tied to planning status".
I should say at this point that I disagree with MW on the specifics of LVT; I want to see rental values taxed rather than capital values, partly because of the very issue you raise. LVT may well not completely eliminate the 'hope' value, but that hope is only present in the capital value of land. The annual rental value is simply too short-lived to accumulate any meaningful hope. Levying LVT against rental value will result in market value and 'notional value' becoming one and the same.
@ Anonymous:
I began a reply but it's getting a tad late. Will do so tomorrow.
@ Edd, 21.56, thanks, you're a star, that's pretty much what I would have said had I been able to summon the energy.
The point about taxing capital values is that pure bubble speculative values (as we have seen in the UK over the last ten years) have no "rental value" (in other words, rents for flats and houses have not risen in line with house prices), so a tax on rental values would not dampen bubbles.
By analogy, Business Rates is a tax on rental values of business premises, and the bubble in commercial property prices has been just as bad as in residential.
Yes, if there were no bubble mentality in this country, a tax on rental values would fit the bill nicely, but it is the bubbles that are pure evil.
"it is the bubbles that are pure evil"
Unless they are in a glass.
Anonymous:
I have a nagging feeling it would end up adding to rather than replacing existing taxation.
Human activities can go awry of course, but that's not a good reason to abandon efforts to do better than we are. LVT is a way of doing considerably better than we are.
I have a feeling it would open up a huge new ball game which many people would lose from and a much smaller group of people would benefit immensely from during any transition.
Given the existing distribution of land ownership, with the bulk being held by a tiny minority, reality would be the opposite of your feeling. The transition would have to start at the bottom of a slump, but we happen to be approaching one of those right now.
I also feel that concentrating too much on the economic “price” would be highly damaging approach, there are more subtle qualities that owners need to prioritise for.
What mechanism would you suggest?
I think you could be opening up a whole can of legal worms as the owners of parcels of land would feel the price they paid for the land was “market value” and any changes would be retrospective taxation. Also it’s important to bear in mind not everybody wants to “walk away” especially as people get older.
Existing landholders could be compensated in some way, although whether or not I'm in favour of that depends on my mood at the time. As for older people not walking away; it's actually what a lot do want. They want somewhere smaller when the children have left and perhaps a spouse has died.
I thought that was the whole basis of LVT in that it is set by the current perceived “market price”, if not the avoidance would be a simple matter of offering an option
Correct; that is how it is set. The market value - rental value - includes existing planning permission, but not potential future permission. If permission is obtained in future then the market value, and the LVT, would rise accordingly.
BTL was pointless and expensive for many people but they still did it. LOL It would be a very brave person who advocates doing away with planning controls and relying purely on LVT and market economics to sort everything out.
Building everywhere would be pointless and expensive on a whole different level. In any case, I referred to planning permission more than once in my comment, and Mark has mentioned it as well, so I don't know where you've gotten hold of the idea that planning controls would be abandoned.
Mark:
The key to making rental value LVT work at its best - which includes killing off land speculation - is setting the rate at 100%. Bubble values have no present rental value, but that bubble represents expected, or irrationally hoped for, future rental value. Either as actual rent or rolled up into the capital value upon sale. When people know that any future rental value will be captured by LVT then the seed of the bubble is gone. You seem to be in favour of a Citizen's Income; well, LVT levied at 100% of rental values would be an excellent way of funding that.
I'm not sure business rates are a good example. As you say, they are a tax on the rental value of business premises, including buildings. Not only that, but commercial property clearly does not exist in isolation; it's in the same market as residential land. To kill the bubbles you have to cover all land.
Edd: that's the point about bubbles, and why I still favour taxes on capital values.
As far as I can see, bubbles exist completely independently of growth in expected future rental values. They arise because of expected growth in capital values. They are self-perpetuating, until they *pop* of course.
1. Given the huge resistance to LVT, we now have two or three years' free advertising in which we can point out that property price bubbles are enormously damaging for an economy.
2. As a moderate, I see LVT primarily as a replacement tax for Council Tax, Stamp Duty Land Tax, Inheritance Tax, Capital Gains Tax etc. These are, by and large, based on capital rather then rental values. Business Rates are the exception to this.
3. At the bottom of the market, it should be relatively easy (i.e. massively difficult, but not impossible) to do the switch from the above list to LVT. Whether, on Day One, the tax is based on the rental values of site locations or capital values is neither here nor there, in that respect I am not fussed.
4. But the voters and taxpayers have to know that this is not some great tax grab con-trick; if LVT on Day One is based on something easily verifiable and mechanical (like averaged out capital values in each postcode minus a two-thirds deduction for bricks and mortar, AFAIAC) then people understand it.
5. Further, given that bubbles are self-perpetuating, they have to be burst as soon as there is even the merest hint of a chance of them arising.
6. It is easy to work out up-to-date capital values in each postcode sector each year (based on actual sales) and minus off the base-line figure. A 'bubble tax' based on capital values in excess of the base-line would mean a more or less immediate increase in LVT bills (OK, time lag a year or so), if the LVT bill jumps by £500 in one year because of a 10% jump in prices (above and beyond base-line figure plus indexation), then this might be enough to nudge a few more people to sell up in an area and a few fewer people to want to buy.
6. Rental values, as a matter of fact and logic increase more or less in line with wages or business profits (ignoring one-off things like a new railway station, flooding etc). Thus a tax on rental values would not respond to increases in the bubbles in capital values.
Thus a tax on rental values would not lead to an immediate increase in LVT bills were a bubble to arise, because people would still gamble on a future increase in capital values. I mean seriously, what's the rental value of a tulip bulb? Would a tax on the rental value of tulip bulbs have prevented tulip-mania? I doubt it somehow.
7. And, if you are still not convinced, I like to explain this by saying "a tax levied on the capital value of the bubble element would act like a 5% (or 10% or whatever figure you choose) higher interest rate on the bubble element, thus keeping house prices low and stable'.
8. As to your last point, in many areas, commercial premises have been replaced with residential. For some mad reason, local councils sell this as 'rejuvenation'. But there are plenty of areas (City Centres, industrial estates etc) which will always be 90% liable to Business Rates - in that sense, residential and commercial ARE separate markets and can be looked at in isolation. And the bubble in commercial property values (i.e. capital values) was just as bad as in residential.
As to the land/buildings distinction, let's be realistic, whether the 'bubble' attaches to the location alone, the buildings in that location or both, is pretty academic. I mean, on a philosophical point, do land prices bubbles create property price bubbles or vice versa? I suspect the latter, to be honest.
This is quite distinct from the argument that an artificial scarcity of land available for development pushes up the base-level for location values, yes it does, but not by much (and we have to be wary of the NIMBY lobby and The Hallowed Green Belt, I can't take on the whole world - perhaps they are right and we should only increase densities within the city limits and not surface area covered).
Further, however liberal you were with planning permission, the supply of 'town centres' is by its nature more or less fixed in supply. Think about it, although expanding a town outwards would keep prices low at the edges (like in Germany), having a larger Hinterland would increase values in the town centre.
Mark:
Where does the capital value come from though? The material value is obvious; the bricks/steel/glass - or improved soil/barns/irrigation ditches - and so on, and the labour embodied in them. The land value is obvious too; it is "How much is it worth to me to be in this location?". Would you agree that those are the two sources of real value, and that the rest is bubble? I'll keep the rest of this relatively short pending your thoughts on that.
1. Yep; although I would categorise it more as a huge lack of understanding, and just plain awareness, of LVT. There's outright opposition as well of course.
2. The more I think about it the more I become convinced of the value of an un-moderate, full-on Georgist position of LVT replacing all other taxes, and of levying LVT at 100% of rental value.
3. Yep. Given a gradual transition to LVT it probably wouldn't much matter at first whether capital or rental values were taxed. It becomes more important as the transition progresses though.
4. Absolutely; voter understanding and support, or at least acceptance, is vital. That's actually one reason why I'm in favour of making LVT 100% of rental value. It's a simpler system with no raft of different rates, thresholds and exemptions for certain land uses. It's just the rental value, and since the rental value comes from the people it should go to the people in the form of government spending and a Citizen's Income.
5. Yep.
6. An increase in rental value LVT would be just as instant.
6. Errr, again? Trying to confuse me I see. If your statement were true, then as a matter of fact and logic rental values would not vary by location. Ahhh, the tulips; that would be a post all by itself.
7. Still not convinced.
8. Hmmm, this needs a long response. Either that or I'm too tired to come up with a short one.
Edd.
There is proper location value and bricks and mortar value. Each of these has a capital value and a rental value. Fine so far.
But on top of this is 'bubble value', which by definition ONLY has a capital value and no rental value.
e.g. true story, I bought an investment property in 1998 for £40,000 and I could charge £400 a month rent. Five years later the rent had risen in line with wages to £550-ish, and I sold the flat for £110,000-ish.
Under my scheme, the LVT would have risen from £50 a month to £700 a month*.
Only it wouldn't have, of course because prices would never have risen that far! BTL investors would have bailed out long before then and prices would have stabilised at £50,000 or something.
* Workings:
1998 - £40,000 x 1/3 x 5% = £600 a year (about the same as the council tax was) for pure location value. No bubble value so no bubble tax.
2003 - location value tax £600 (as before) plus £110,000 minus £40,000 = £70,000 bubble x 5% = £3,500. Total tax £4,100, call it £700 a month.
Can you explain, on the basis of the above figures, how the rental value would be calculated in 1998 and 2003?
Hmmm. I still don't like the idea of working with capital rather than rental values, but in developing a response I realise that I need to do some more thinking about the mechanisms and effects involved. That's fine though, I'm a recent convert to LVT - barely a month or two ago - so more thinking is good.
Edd, how else can you measure property price bubbles apart from capital values?
Property price bubbles have no rental value. I could not charge three times as much rent in 2003 as in 1998 because the rental value had only increased with general wage rises. For some reason, most Land Value Taxers overlook this simple fact.
Mark,
given that I was thinking about the fundamentals behind rental vs. capital values (and I still am) I didn't look at your numbers too closely. I've looked again now and one thing jumps out at me: you didn't change the location value between '98 and '03. Are you really saying that the location value didn't alter?
I'm still vexed by the whole question of capital vs. rental - and theoretical vs. real world rental values - but here are the real world numbers as I see them, using the figures you give.
You say the '98 rental value of the property was £400, so using your 1/3 figure for rental portion - probably reasonable for the bottom of the cycle - that gives a rental value for the land of £133, and for the building of £267. So at 100% the rental value LVT charge would be £133. Significantly higher than your figure of £50, but bear in mind the fact that I would like to see LVT replace all taxes.
By '03 the rental value had increased to £550, and you ascribe that to wage increases. I would suggest instead that the rental value increase was due to an increase in the location value. You did say £550-ish too; might that 'ish' have been on the high side of 550? I am assuming that you made no significant improvements to the building, since you didn't mention any. So the value of the actual bricks and mortar will have remained the same; in reality it will have depreciated somewhat, but I'll assume it remained the same. That gives a land rental value - and LVT charge - in '03 of £283 (£550 - £267).
That's an increase of 113% in five years; some way short of the capital value increase, but enough to put a serious dent in speculation. Is it a big enough dent? I'm not sure.
And of course I forgot to answer your question... Capital value = capitalised rental stream + hope for future rental (and interest). I agree that bubble has no current rental value, but it does represent the hoped for future value, so if you can remove that hope you can prevent the bubble.
The caveat of course is the question of just how irrational people are. Is the knowledge that all future rental value will be captured as tax enough to remove the hope? If people fail to make the connection between rental and capital values perhaps not, but if the tax is set at 100% I think it would be enough. Again though; I'm not sure.
1. Are you really saying that the location value didn't alter?
It was the same flat in the same street five years later, you tell me.
2. By '03 the rental value had increased to £550, and you ascribe that to wage increases. I would suggest instead that the rental value increase was due to an increase in the location value.
It's slightly circular. As to physical location value, see point 1. In the long run house prices, share prices and wages increase in line. Maybe the 'location value' had increased because wages were rising in East London faster than elsewhere, and people are prepared to pay higher rents where there are more better paying jobs.
3. So the value of the actual bricks and mortar will have remained the same; in reality it will have depreciated somewhat
Don't imagine that the bricks and mortar depreciated, these Victorian houses last for ever. Whether it's 100 years old or 105 makes NO difference. What is important is the replacement cost thereof - and as building is very labour intensive, the rebuild cost/value will increase more or less in line with wages.
4. That's an increase [in the land rental value] of 113% in five years; some way short of the capital value increase, but enough to put a serious dent in speculation. Is it a big enough dent? I'm not sure.
A small dent is better than none!
But you are using balancing figures to arrive at an unlikely result. If we pro-rate up the £267 building rent by the fact that wages were rising at (say) 7% a year, that gives us building rental value £374 and location rental value £175, an increase of only 31%
It was the same flat in the same street five years later, you tell me.
OK, I've looked at a chart you posted a little while ago, splitting capital value of properties into land, building and bubble values. So I see that you do think location value remains static, and that the bubble value is an independent entity; unrelated to either land value or improvement - building in this example - value. I think you're making a mistake there though.
My turn with the true story now. In 1999 I bought a vacation home in the US. Nothing very fancy; it only cost a little less than $35,000, and the bulk of that was the value of the house itself. Land in the area at that time was on the market, and not selling, at around $2,000 for a similar plot size of around half an acre. The place is in the back of beyond and so had little value to most people, but it was worth it to me for the mountains, lakes and proximity to loved ones.
For most of the property boom prices in the area didn't budge. That changed around 3 years ago when a new development was started on the shore of the nearest lake. I didn't get my place valued but other properties were selling at three and four times what they would have fetched just months earlier. So how does this fit with our views of prices?
If the bubble were an independent quality of property it should have applied to my place long before the new development began. This would also true if it were related to buildings. What changed, after first not changing, was the perceived value of the location; of the land. The boom initially had no effect because that location held very little value to people anyway; it was only when the perceived 'quality' of the location changed that the boom moved to town. I use the word 'town' very loosely.
Property price bubbles are not independent entities; they are bubbles in land value.
What is important is the replacement cost thereof - and as building is very labour intensive, the rebuild cost/value will increase more or less in line with wages.
I have a serious problem with this argument. I know that this is how things are done, but I consider it to be a practice which systematically undervalues land. In fact it leads to land being assigned negative value on occasion just to make property value numbers add up.
What happens if your ten year old car goes up in flames? Will the insurance company give you the money to buy a brand new car? No; unless you take out extra insurance to cover depreciation they'll give you the depreciated value of what you actually lost. It should be the same with houses.
But you are using balancing figures to arrive at an unlikely result. If we pro-rate up the £267 building rent by the fact that wages were rising at (say) 7% a year, that gives us building rental value £374 and location rental value £175, an increase of only 31%
So you claim that the rental value of the land only rose by 31%, while the rental value of the building managed to rise by 40%? How is that even remotely possible? Going back to your chart, you agree that building value at best remains flat over time, so how can the building's rental value rise, by 40% no less, while its capital value remains flat? That doesn't even make sense in a stable economy, and makes still less sense in a bubble where growth in capital values exceeds that in rental values.
Edd:
So you claim that the rental value of the land only rose by 31%, while the rental value of the building managed to rise by 40%? How is that even remotely possible? Going back to your chart, you agree that building value at best remains flat over time, so how can the building's rental value rise, by 40% no less, while its capital value remains flat?
The chart you mean is indexed for wages growth, so 'flat over time' in this sense means 'increases in line with wages'.
I agree that the maths is tricky, you make a couple of reasonable assumptions and arrive at one conclusion, I make slightly different assumptions and arrive at a completely different one.
Perhaps the rental value of the building rose 20% and the rental value of the land by 40%, that's all guesswork, let's not split hairs.
But the most important statement that you make is this:
Property price bubbles are not independent entities; they are bubbles in land value.
Again, whether it is land price bubbles pushing up property price bubbles, or property price bubbles pulling up land value bubbles is a moot point.
What is not moot is that true bubbles only have capital values. There is no rental value to a true bubble.
If you had been letting out your vacation home, and had the rental value trebled in line with the capital value, then that is clearly an increase in the rental value of the location.
But in the case of UK housing (which is my specialist topic, not vacation homes in the USA) rental values did not increase in line with capital values, rents went up 50% (at most) while capital values trebled.
Taking a real life example, the bubble in buy-to-let properties here in the UK was easily recognisable for the fact that a year or two ago, people were buying flats to rent out that were so expensive, the mortgage repayments exceeded the rent that they could achieve.
These people were so dumb, frankly, that they thought that future capital gains would more than compensate them for the real money that they lose in the meantime. They are now going bankrupt in their thousands, of course.
That is the flipside of the credit bubble that has now plunged the world into recession (or depression, take your pick). That to me is a very good argument for having a tax on the capital value of the bubble.
This is a completely different subject to LVT being the fairest way of raising the money to pay for the services that the local council provides that create the self same land value in the first place.
Mark,
What it all comes down to is the fact that we have no practical examples to study. All existing or past cases of LVT are just partial implementations; used in conjunction with other taxes. I know you don't want LVT to replace all taxes, but from what I understand you do want the bulk of taxation to be raised via LVT.
Actually, that's another point. Unless LVT does form at least the bulk of taxation its affect on bubbles will be minimal.
Moving from the system we have now to LVT - of any form - will be a far more significant change than switching between different specific approaches to LVT. So now we can start arguing about which to try first ;)
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