FinancialAdvice.co.uk asks: Would a mortgage cap kill the property market? and conclude thusly:
There is strong talk in the city of a mortgage cap being introduced by the Bank of England with a suggestion that a minimum deposit figure could be as high as 25%. While there is no doubt that introducing a cushion between the value of any property and the funds forwarded from mortgage providers would reduce the chances of a property crash in the future it could also kill the property sector stone dead.
1. Clearly this is nonsense, it would not 'kill the property market stone dead'. In olden times people had the 'luxury' of being able to/having to pay 25% deposits, because house prices were much lower, so it was easier to save up that amount.
2. But let's assume that their underlying assumption is correct, i.e. that it is perfectly reasonable to expect first time buyers ('FTBs') to take out 100% mortgages rather than 75% mortgages. This would also result in higher house prices, so FTBs are assumed to be able to pay 100% of a higher amount rather than 75% of a smaller amount.
3. Now, if young people who would have a big mortgage either way, and have to cope wit loss of income when Mum has kids etc can afford to service mortgages that are at least a third higher, wouldn't this apply in spades to older home-owners who have paid off most or all of a mortgage that was smaller to start with?
4. Methinks yes.
5. Which leads to me to one of my cunning plans for paying off the National Debt of approx. £1,000 billion in one fell swoop, instead of dumping the burden of past spending excesses on future income taxpayers, namely this:
a. Work out total net housing equity after deducting mortgages, which according to this article is £2,900 billion (after deducting o/s mortgages of £1,250 billion).
b. £1,000 billion divided by £2,900 billion is 34%, so we then just allocate 34p of National Debt for every £1 of housing equity (i.e. if your house is 'worth' £150,000 and your mortgage is £50,000, then your share of the National Debt is £34,000). The average extra loan-to-value ('LTV') imposed on existing home owners would average out at 17% (half of 34%), which is a lot less than the extra 25% LTV (at least) which they expect FTBs to be able to shoulder (as well as the future income tax bill).
c. Yes of course you can make infinite tweaks here, like giving credit for people who paid a big deposit and/or have paid off a lot of the original purchase mortgage out of taxed income; not giving a deduction for mortgage equity withdrawal; indexing up the original cost for inflation and so on, in which case the rate might be 100% of the adjusted lower equity amounts, details, details.
6. Apparently 83% of that 'housing wealth' is owned by people aged 45 or over, so this seems fair enough: those who spent it have to pay it back.
7. The DoublePlus Good news is that no future government would dare do deficit spending if at the end of every fiscal year they had to tell home owners that their mortgages had just been bumped up by several thousand pounds. For example, the Lib-Cons are planning on over-spending by £160 billion this year, which equates to another 8.4% of net housing equity (i.e. continuing the example above of somebody who owns a home 'worth' £150,000 with an £84,000 mortgage, his share of that deficit spending is £5,500).
What's not to like?
Tuesday 25 January 2011
Questions to which the answer is "No"
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20 comments:
This rather assumes all that equity in houses is down to house price rises and therefore fair game in your anti-home owner eyes. But actually some equity is the original deposit and some is what's been paid back in real cash. In times such as these of low/no house price inflation, most or all the equity is made up of the above.
To minimise this tax you'd want a mortgage that always covered near 100% of the current value of the property while syphoning off the gains. It wouldn't take too much financial engineering to come up with a cunning plan to do just that.
In fact that sort of thing could then be turned into a securitised product in which banks and other institutions could invest at virtually no risk to themselves...
So someone in his sixties looking at this proposal will just borrow a large sum as a mortgage loan on his house to reduce outgoings, as Bruce suggests. He'll borrow from, let us say, his children, who will be flush because Ma has just gifted a large wodge of her wodge to them, partly to avoid Inheritance Tax, and partly to facilitate this loan to Pa. The family seem to do quite well out of this. If so, Ma and Pa can repeat next year with their roles reversed.
Bruce, may I paraphrase:
"You rather assume that the National Debt has been racked up by future generations of workers and businesses and so it's up to them to pay it off. As it happens, equity in houses is largely down to house price rises and therefore fair game.
Very little equity is the original deposit and what's been paid back in real cash. People who bought in the last five years with low/no house price inflation, will have paid off barely ten per cent of the original high LTV mortgage, so very little of the equity is made up of the above.
With my system in place, mortgage lenders would be wary of granting high LTV mortgages, because they know that people want a mortgage that always covered near 100% of the current value of the property, thus pushing the risk of nequity onto the bank."
That's better!
D, if that 60 year old can find a bank that will lend him such large amounts, then best of luck to him. And if his wife is prepared to give them the money with no strings attached, then best of luck to them.
I think what you are suggesting is something referred to as "fraudulent tax evasion arising from a pre-ordained series of transactions".
Sounds like a responce to the introduction of mark ot market accounting
Re. point 1: It's not so much that house prices were lower, as that they were much more stable. The current situation has come about because as the British Disease took hold and people started to view their house as a nice little earner, prices started rising faster than people could save a deposit - in fact, the rational decision in that situation was to borrow to the hilt.
Where there's demand, there comes supply, and the newly de-regulated Building Societies and newly-mortgage-empowered Banks obliged in spades.
Re. point 2, to my mind the whole idea of imposing controls on how much can be lent to whom is just bonkers. People should be free to borrow whatever's reasonable between a willing lender who's properly pricing risk, and a willing borrower who's properly pricing his own risk (in the form of insurances against loss of income). If property prices are stable, the attraction of a 100% mortgage starts to fade rapidly. What's needed is a proper tax treatment of mortgage equity gains to disincent (can I say that?) the speculative purchasers.
Generally, as one who paid off his mortgage recently (having worked hard to make it happen), I have to say I'd be well perhissed off if a demand for somewhere north of £70k appeared on the doormat. But it's an interesting concept.
I suppose in a very real sense it's a "debt for equity" swap.
OK, I'll get me coat.
Den, sounds interesting, can you explain what you mean?
FT, it is indeed a debt for equity swap in the most literal sense. BTW, assuming you're still earning, you are going to have to pay that £70k one way or another, either through income tax or this way.
I think that this is exactly correct. The National Debt is a mortgage on the UK. It's unsecured - of course, the MP's are not quite that stupid. But, it's not just homeowners that own land, it's also 'landowners'.
Perhaps the 'national mortgage' could be applied to 'land' overall. The nit's be obvious that it was a tax on us, if, as you say, one's 'mortgage' went up each year.
While yer at it, could one not perhaps levy a specific tax on land to pay the interest on the national mortgage? Actually to simplify things, why not just increase that 'tax' to cover all other gummint spending? It seems to me that this would simplify things considerably.
Just a thought. Surely someone must already have thought of this. It's so simple.
Yes, I caught the tax implication; but not all income tax goes into debt repayment or interest servicing so it'll still be there to a significant extent.
It almost seems it'd be easier / more reasonable to divvy up the debt on the basis of height...
How about a scheme where every taxpayer in the country is given the opportunity to donate a lump sum to be applied to repaying the national debt. Their [contribution + n%] (where n is determined annually) would be allowed against future income and inheritance tax liabilities.
Voluntary, fair, reasonable, and encourages those with the real wealth to cough up and be rewarded :-)
Mark to market accounting is the new rule that stipulates that banks must now update their books with the current market value of the collateral, the houses, on their books. Suprisingly they did not used to have to do this. When the market goes down the collateral no longer covers the outstanding loans, especially on 100% mortgages. Apart from the books looking less sound, the value of mortgage backed secirities , and Institutions who use the value of such assets to source funds for future buisiness are affected.
The rule was brought in a few years ago and is sited as one of the triggers for the credit crunch.
This sounds like a response to get the banks inline with this as a whole via a new regulation.
L, I applied to residential only because that's what the first article was talking about, but as you say, if you follow it through to its logical conclusion...
FT, yes, income tax would still be there under this scheme, but to a lesser extent.
Den, this has nothing to do with mark to market accounting, it's taking the Home-Owner-Ist logic from the first article and then applying it to getting rid of the national debt and preventing deficit spending (which I hope most would agree are Worthy Causes). Lola did our banking manifesto and that is the end of that.
I was commenting on the article that the post linked to.
£1,000 billion divided by £2,900 billion is 34%, so we then just allocate 34p of National Debt for every £1 of housing equity (i.e. if your house is 'worth' £150,000 and your mortgage is £50,000, then your share of the National Debt is £34,000).
Yes but now to implement it, Mark.
Den, if I look again at the original article I can see what you mean, but I think it is just the usual VI railing against the 'Mortgage market review'.
JH, do you have any bright ideas?
Ok, so I "sell" my house to a mate, who takes out a 100% interest-only mortgage. I then pay him "rent" of the mortgage interest payments, most of which comes from the return on the invested capital. Yes, it will cost me, but a damn sight less than 34% pa on the total value of my house.
B, again, that is what we tax chaps refer to as a "pre ordained series of transactions without commercial substance".
Clearly, this sort of shock and awe policy would have to be implemented overnight to prevent such tomfoolery. The government then spends the next couple of weeks doing retrospective valuations, asking people how much mortgage was outstanding on the implementation date and so on.
So if you are the man from the example with house £150,000 and new mortgage £84,000, feel free to sell it to your mate for £150,000, in which case you end up with £66,000 cash, for you to spend (or lend to your friend) or to pay rent as you please.
PS, it was a thought experiment rather than a serious policy proposal - we could also do a thought experiment whereby all non-homeowners just move abroad, who would pay off the National Debt then?
it was a thought experiment
Yep, caught that, too (I'm learning, see. Soon I'll learn to pick my knuckles up off the ground while walking).
And the non-home owner thing makes divvying it all up by height so much fairer.....
Or maybe weight, as a crude measure of consumption :-)
You all seem to forget the old 85+ pensioners who live in a house they bought and paid for 40 years ago out of their earnings. They have no income so are unable to get a mortgage of any sort, they have no cash all spent/inflated away. So where do they get the dosh from to pay this bill that lands on their mat, why they get it from the govenment, i.e. you poor taxpayers. ooooooooopps
FT, rule out height, tall people would just move abroad. And people's height is not down to the efforts of 'the community', it is a purely random variable. You can't take land abroad and land values are very much down to the efforts of 'the community'.
Jaffa, I have been a land value taxer for four or five years and you can guess how many zillion times somebody plays the Poor Widow Bogey and thinks it's the trump card. Even Winston Churchill had tired of responding to this nonsense a century ago.
But think about this: for sure, old age pensions are paid out of taxation - but is there any overriding reason why they shouldn't be paid out of Land Value Tax rather than out of income tax?
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