Another day, another reckless throw of the dice (26)

I've been thinking about these mad taxpayer-funded schemes which the government is using to try and prop up nominal house prices, like shared ownership and government-backed interest only loans.

They keep introducing slightly different schemes, but broadly speaking (and to keep the maths simple), one way of looking at it is that you can buy a home that is nominally worth £160,000 with your own deposit of £20,000; a government-sponsored interest-only 'soft' loan for a quarter of the purchase price (£40,000) and the rest of the purchase price is a normal mortgage from the bank (£100,000). In the absence of the interest-only loan, the bank would still only lend you £100,000, so the most you'd be able to pay is £120,000, so the price of that home would fall to £120,000.

Assuming an interest rate of 5%, you'd end up paying the bank interest of £5,000 a year, and paying the government £1,000 a year council tax and interest of £2,000, or a total of £3,000; with total housing costs of £8,000. Let's also assume that you can keep up the repayments but never manage to pay off the capital element of the interest-only loan until you sell up, at which stage you repay the government one-quarter of the selling price. You make a capital gain on three-quarters of the increase in value.

Now, as a thought experiment, let's imagine that instead of trying to prop up nominal house prices with subsidies paid for by taxes on incomes and production (this is called 'bribing people with their own money'!) the government scrapped all these crazy schemes; scrapped Council Tax; waived the capital amount of the interest-only loans and instead introduced a Progressive Property Tax ('PPT') of 2.5% on the current market value of each home concerned.

Prior to the change, a first-time buyer would have committed himself to paying £8,000 a year in total (see above), and be lumbered with total loans of £140,000.

After the change, another first time buyer, with the same deposit of £20,000 and a maximum annual budget of £8,000 would only be able to afford to pay £120,000 for the home, i.e. of the £8,000, £5,000 goes to the bank, and the balance of £3,000 capitalised at 2.5% equates to a total purchase price of £120,000; he'd own all of the home and not just three-quarters and only be saddled with loans of £100,000.

Somebody who bought prior to the change would be no better or worse off - instead of owning three-quarters of a home 'worth' £160,000, he'd own all of a home worth £120,000, be paying interest to the bank of £5,000 and PPT of £3,000 (£120,000 x 2.5%), total £8,000; and the £40,000 soft loan would be written off, so his total loans fall to £100,000.

For sure, existing home-owners outside the scheme would be a bit miffed that house prices have fallen by a quarter, but at least they no longer have to pay all the taxes to pay for the implicit subsidies and extra government borrowing to prop them up - one is merely the flipside of the other.

Just sayin', is all.