Wednesday 27 October 2010

The freedom to say that two plus two make four.

From the BBC:

US house prices began falling again in August after the expiry of homebuyers' tax credits, a survey suggests. Prices were down 0.3% versus the previous month, on a seasonally-adjusted basis, according to the Case-Shiller index of 20 major US cities...

A tax credit for homebuyers expired in April, leading to a steep drop in home sales over the summer. That same effect now appears to be feeding into house price data, which are published with a two-month lag.


Fair enough.

1. That Homebuyer's Tax Credit was [up to] $8,000 for first time home buyers and $5,000 for repeat home buyers, a sort of negative Stamp Duty Land Tax. I've no idea how long 'chains' are in the USA, but let's call it three, so for each transaction, the total amount of the credit would be [up] to $18,000. Let's also not forget that the two nationalised lenders "own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion", and IIRC are responsible for about 80% of new lending.

2. It's quite reasonable to expect all these direct or indirect subsidies to lead to an increase in the number of buyers and movers, and thus the number of transactions and, most importantly, the prices paid, and most articles I've seen seem to take this as a given.

3. So would it not be fair to say that the value of these subsidies accrues mainly to people who are selling housing, rather than 'helping first time buyers onto the property ladder'? (Cue Dearieme's quote). What the first time buyer gains on the subsidy swing he loses on the price roundabout.

4. If that is true (which it is), is it not also fair to say that withdrawing all these subsidies would actually help first time buyers: prices would fall by the value of the subsidies, but on the other hand, they would have a smaller mortgage to pay off and a slightly lower income tax burden in future (all those subsidies have to be paid for, and the higher government debt will have to be paid off sooner or later)?

5. Once we've gone that far, is there any reason to assume that continually reducing the subsidies until they were negative, i.e. a tax on home ownership, would not affect first time buyers either, and in a subtle way, make them better off in future?

Just askin'.

5 comments:

Rational Anarchist said...

I have a slight issue with your point 4. Given that withdrawing the subsidies would bring the prices down by the amount of the subsidy, the first time buyer would actually lose out slightly, as they were getting more subsidy than others. If the average subsidy per three sale chain is $18,000, then the average per sale is $6,000, so that's how much prices would fall by (I know it would likely vary by cost of house, but I'm trying to keep it simple - in actuality, I'd expect to see the cheaper houses to drop by a little more than this and the more expensive ones to drop by a little less as more first time buyers would buy the cheaper ones and get the $8,000 subsidy on them).

So the first time buyer loses a subsidy of $8,000 and gets a price cut of $6,000 - net $2,000 worse off.

Even if the price fall was equal to the subsidy, the mortgage would surely be the same size, so they'd be no better off that way. The income tax point is valid, but that pain applies to everyone, and if the govt weren't wasting money on this they'd waste it some other way, sadly.

Mark Wadsworth said...

RA, fair points indeed, but:

"I'd expect to see the cheaper houses to drop by a little more than [$6,000]"

Call it $8,000? $7,000? So the FTB loses $1,000 on Day One.

Further, don't forget the muliplier effect - the FTB will likely put that $8,000 towards his deposit, so FTB house prices (and mortgages) would fall by rather more than $8,000, thus saving the TFB a heck of a sight more than $1,000 in interest in the next few years.

"The income tax point is valid, but that pain applies to everyone."

An FTB, by definition, has a longer working/income tax paying life ahead of him, so will pay disproportionately more of that extra income tax in future.

Rational Anarchist said...

I think I must be missing something here. This is what I'm envisaging at present:

originally, house cost $107k and FTB has deposit of $20k

FTB gets subsidy of $8k, so ends up with mortgage of $79k

Instead, remove subsidy and house cost drops by $7k, FTB ends up with mortgage of $80k.

He ends up with the higher income tax bill if he gets the subsidy, but so do all other americans, and he's not likely to see that. With the subsidy removed he has a higher mortgage so has higher interest payments, and is worse off.

At the higher end of the costing, house costing $500k, buyer with $100k deposit gets $5k subsidy. Ends up with mortgage of $395k. After subsidy removed, house cost goes down, but not by as much (as the lower price bands would go down more) - still at least as much as the lower end of the subsidy though - call it $5.5k?* So he ends up with a mortgage of $394.5k, so is slightly better off.

I see clearly that the subsidy is largely a vessel for transferring monies from the taxpayer to the house owner (seller) but it also serves to transfer a small amount to the First time buyer (as they get a larger subsidy than anyone else), while taking it from anyone who is not a first time buyer.

Consider - if they removed the subsidy from everyone else and lowered the FTB subsidy to $3k, would the FTB be better or worse off? House prices should come down by $5k (as that much subsidy has been removed from all purchases). House prices would be slightly inflated by the $3k subsidy to FTB but not by anywhere near as much as the subsidy as not all that many buyers are FTB. So I think that in that case, there'd still be a transfer from taxpayer to houseowner, but it'd be a lot less, and the transfer to the FTB would be more significant.

* yes - I know I'm assuming that all buyers get the maximum of $8k or $5k subsidy. Actually the subsidy would be less in most cases, but so would the price reduction - the idea is just to get an impression of the changes that would occur were the subsidy removed

Mark Wadsworth said...

RA, it is of course not black-or-white. But consider also (using your figures):

House cost $107k
FTB has deposit of $20k
FTB ends up with mortgage of $79k
$79x/$107k = loan to value 74%

Now... subsidy withdrawn
FTB has deposit of $20k
With max LTV of 74%, he can only borrow $57k.
Therefore house price drops to $77k.
It only stays at $100k (your assumption) if bank is happy to allow LTV to rise to 80%.

Yes this is exaggerated as well, but tips the balance towards what I was saying.

If there were only a $3k subsidy to FTBs, the increase in prices would be $3k, give or take. Subsequent buyers/sellers pay the $3k extra and collect the $3k extra.

Rational Anarchist said...

Ok, that makes more sense :-)