Killer Arguments Against LVT, Not (208)

The Fat Bigot delivers another dollop of self-contradictory Home-Owner-Ist propaganda in the previous instalment, the crux of which appears to be this:

Let's set the bubble aside and assume there isn't one. On that hypothesis your proposal is to impose a capital tax on one form of savings.

Bollocks. He knows perfectly well that LVT is not really a "tax" but a user charge on private consumption of publicly (not necessarily government-provided) benefits. And the rental value of land is not "one form of savings" chosen by the purchaser of land, the rental value is dictated by everything that happens around it (remember the slogan: Location, location, location!). LVT is the opposite of the damaging taxes like income tax, VAT etc which it should replace.

But he reminds us that the Home-Owner-Ists have managed to turn the whole concepts of 'consumption' and 'saving' upside down; in their world, ownership of land (i.e. consumption) is a kind of saving - I don't see how this amounts to an argument against LVT and in favour of income tax, VAT etc - but others have come up with similar nonsense, so let's deal with it:

Putting your money into a house (the value of which on this hypothesis includes no bubble element) rather than into the pocket of a landlord results in you owning a piece of real property after 25 or so years.

After the property is fully paid-for you have no on-going capital housing costs unlike those who have chosen to rent... the net result is that you are considerably better off each month than you were when repaying the mortgage or that the renters next door are.

I don't see anything objectionable about people arranging their affairs in that way. In fact I think it is a very sensible arrangement because later in life earning capacity is often reduced and having lower overheads makes it much easier to cope with any downward turn on income. It also allows pensions to be lower and still provide enough for people to live on.

In effect the purchase of a house is a savings policy. It provides a lump sum that gradually increases as the mortgage is paid-down (let's not quibble about repayment against interest-only because any sensible interest-only plan includes a capital repayment vehicle). Once it is paid-off it provides a substantial monthly reduction in the cost of living.

It's a typical diagonal comparison - the implication is that the only alternative to buying a house is renting and/or squandering your money. The fairest comparison is between buying a bigger house and buying a smaller house and saving up the difference in cash.

If we work through the steps logically and compare like-with-like at each stage, it is pretty obvious to all except the dimmest Express or Telegraph reader that land ownership is NOT saving (in the narrow sense of 'deferring consumption'), not at the level of an individual and certainly not at a macro-economic level:

i. A and B start off their working lives with similar incomes, they still live with their parents and both have £1,000 a month left over paying for essential living costs. A spends all his spare money on 'stuff' and B spends £500 and saves up £500 a month in the building society. Clearly, B is saving more and A is consuming more.

ii. They both decide to move out. A rents the biggest and nicest flat he can afford for £1,000 a month, and B rents a smaller flat for £500 and saves the other £500. Clearly, B is saving more and A is consuming more, as A is consuming more land rental value.

iii. After a few years they both think that renting is a mug's game and decide to buy. A buys the biggest and nicest house he can afford for £200,000 and pays £1,000 a month mortgage; B buys the smallest house he can happily live in, pays £500 a month mortgage and saves up £500 a month cash (B would obviously be better off paying off his mortgage quicker, but let's stick to like-with-like). The relative consumption/saving between the two is the same; B is saving more and A is still consuming more.

iv. Fast forward to when they've both paid off the mortgage and are coming up to retirement; A has a £200,000 house and B has a £100,000 house and £100,000 savings in the bank (plus accumulated interest*). B has built up more assets because he has saved more; and A has consumed more, having lived in a nicer and bigger house and consumed more land rental value for the past twenty or thirty years. In retirement, B can unwind the position and spend his savings in retirement, buy an annuity or whatever.

v. * How much accumulated interest? Assuming all things being equal, that the rental values = the mortgage repayments and reasonably efficient banks, the interest that all the Bs earn on their savings will be roughly equal to the additional interest which all the As have paid. So B's additional interest paid is the sum total of all the additional housing services which all the As have consumed, so again, we see that A has consumed more in the past and B has saved more (deferred more consumption into the future).

vi. Therefore, if we assume that two people spend the same amount of their spare income on 'other stuff' (non-housing services), then buying a smaller house means more saving than buying a bigger house. Therefore, the more house you buy, the less you are saving. Taking out a large mortgage and buying a house is therefore the opposite of saving money, quite clearly, because borrowing money is the opposite of depositing money; paying off a mortgage is a good type of saving, but taking out a smaller mortgage to start with is an even better form of saving.

vii. Now, go back to TFB's closing arguments and rephrase them in like-for-like terms:

After the properties are fully paid-for, neither A nor B has on-going capital housing costs... but because B has cash savings, the net result is that B is considerably better off each month than A.

I don't see anything objectionable about B arranging his affairs in that way. In fact I think it is a very sensible arrangement because later in life earning capacity is often reduced and having lower overheads makes it much easier for B to cope with any downward turn on income, unlike A who will be claiming Support For Mortgage Interest if he loses his job. It also allows pensions paid to B to be lower and still provide enough for people to live on - but A, having no cash saved up will have to be bailed out by the taxpayer.
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And yes, the example is simplified, but t'was TFB who said "Let's set the bubble aside and assume there isn't one" so that's where I started.

We can introduce all these real life complexities - rental values grow as the economy grows; land price and credit bubbles and the ensuing recessions; interest payable on mortgages is at a higher rate than on savings; price inflation erodes the value of cash savings; there is tax on earned income and savings income but not on non-cash rental income from housing or capital gains on your main residence - but these are all dictated by the government. All these complexities are only there because the government i.e. weak politicians under the influence of the the banks, the large landowners etc, wants things that way.

But as long as we introduce these complexities one-by-one on a like-for-like basis, and at each stage in the logic compare the outcome with alternative that we abolish income tax etc and replace the whole lot with LVT (or Domestic Rates or more Council Tax bands, or whatever), we will still see that buying a big house is consumption.

Even if people believe that rising house prices make them richer (as individuals) then this is only because future generations are becoming poorer; and at a macro-economic level, rising house prices make us all collectively poorer. They must do, because the massive gains to the "one per cent" are a drop in the ocean compared to the damage this causes to the economy as a whole, i.e. to the "ninety nine per cent" who do not live off land rents.