Sunday, 23 December 2012

Killer Arguments Against LVT, Not (295)

David E. Cooper, himself an LVT supporter, in the comments to an article at ConHome slagging off an article which he wrote recently:

Your points [i.e. those from Team LVT] are welcome, but please don't overstate the advantages of LVT. There is no evidence it eliminates property booms - look at the recent news from Taiwan, where LVT is used, and there is an ongoing property price boom.

Indeed one possible consequence of of LVT is that the government, finding that its revenues rely on property prices, takes active steps that encourage ever higher property prices. Something like this occurs in Hong Kong, where most revenue comes from the sale of long term land usage rights, and as a consequence the government is very keen to spend money on infrastructure which enhances their sale value.

Booms and busts will always happen.

Taiwan and HK are separate topics, let's look at the UK.

Commercial land and buildings are liable to Business Rates (pretty close to LVT, the implied rate on site values alone is around fifty per cent) while residential land and buildings are only liable to Council Tax (about as far from LVT as an annual land tax can get; it's more of a Poll Tax plus premiums for larger homes minus reductions for low-income households, making it a bit like Local Income Tax), and which is only about a fifth as high as Business Rates would be on a similar building used commercially.

Apart from that, these two types of land (or land use) face exactly the same other influences (state of the economy, interest rates, planning restrictions etc). So, if the claim (that LVT dampens bubbles) is true, then the bubble in commercial prices would have been a lot smaller than the one in residential, yes?

Oh, it was...*
Call me jaundiced or something, but it seems fair to say that:
- Commercial prices rose fifty percent over four years, reverted to the old level within two years and have since undershot their old level.
- Residential prices rose one hundred and fifty per cent over eight years and are still nowhere near their old level (admittedly, the UK government has been throwing everything it can at preventing them falling back below 2004-05 price levels).

Common sense also tells us that you can make a windfall gain by buying commercial land and buildings (the price of which is depressed by Business Rates, i.e. quasi-LVT) and obtaining permission to change them to residential use (which are only liable to Council Tax, which reduces the annual tax bill by 80% or something). This is pretty much common knowledge among property developers.

* Chart from the Bank of England's Feb 2010 Inflation Report (click to download Powerpoint slides, via the ever reliable Tutor2U


DavidECooper said...

Dear Mark,

OK, OK, I stand corrected.

I was hardly presenting this as a killer argument against LVT!


Mark Wadsworth said...

DEC, no of course not, but we may never make any half-hearted concessions, they'll only use it as evidence against us :-)

Ben Jamin' said...

Neither HK or Taiwan have a 100% LVT. I think HK comes closest with around a third??? In an environment like HK I would imagine two thirds left gives plenty of scope for rising prices.

If house prices are set by affordability, then a 100% lVT must remove the location element from the total.

We would be left with the bricks and mortar value only, which I imagine, would only rise with inflation.

Goodbye bubbles.

Mark Wadsworth said...

BJ, Hong Kong is a most interesting comparison.

What the government does is auction off 30-year leases.

It's basic financial maths that the value of a thirty-year lease responds to changes in rents and interest rates in much the same manner as a freehold. If real interest rates are 5%, then the NPV of a thirty-year lease is 77% the value of a freehold. If, five years later, real interest rates have fallen to 4%, then even though there are only 25 years remaining on that lease, its value is still the same.

But why would the working man care? The land price bubbles might affect land speculators and bankers and so on, but his monthly rent is unaffected.

In gross revenue terms, HK seems to get equal amounts in land auctions and from their flattish 15%0ish corp tax/income tax (no VAT, no NIC!), which seems like a reasonable medium term aim for a UK government under the YPP.

Taiwan's LVT is not much more than Council Tax and can be ignored for these purposes.

Anonymous said...

Just saw a headline on the Indypendent, "Retailers on the brink as business rates fall due. Or something."

Mark Wadsworth said...

RA, nope.

The actual headline is Dozens of retailers on the brink as rents fall due.

And my insolvency friends reliably inform me that the best time for putting a company into receivership (or administration or whatever it's called this week) is just after the Xmas sales but before the next PAYE and VAT payments are due, early January is good.

A lot of the time it is the landlords committing hari kiri by making their own best customers bankrupt, go figure.

Richard said...

Mark, this problem is not unique to you because many people throw around the term "bubble" without any clear definition of what they mean by bubble. Without clear definitions of what is meant we can have a situation where different people are using the term and meaning different things.

Prices went up a lot seems to me a poor definition for a bubble. How many people would describe a large increase in their wages as a bubble? Surely the amount that prices subsequently declined is a telltale sign of what were speculative bubble prices. As opposed to increases related to the growth in disposable income. The losses made by the banking sector on mortgage lending is just about the best indicator. The losses on UK mortgages have been modest and unexceptional. Possible explanation for that is exceptional forbearance by the banks who with weak balance sheets from overseas lending do not want to recognise more losses. Plausible. Low interest rates is not so plausible because they are low everywhere. Compared to residential mortgages the rates of impairments on UK commercial real estate is about double.

I don't think you could honestly look at the data and not conclude that commercial real estate was the biggest bubble. Losses and subsequent declines are smoking guns. This is a really good paper with good charts by Ben Broadbent. I am sure there is lots in it that you where you would disagree but it is worth a read if you get the time.

Mark Wadsworth said...

R, when I say "bubble" I mean it in the same sense that everybody else means it. People borrow to speculate and prices go up and then they go down again.

Your argument appears to be based on the assumption that residential land is correctly priced, nothing out of the ordinary and that prices will not fall again, and that this proves that there was no house price bubble, merely that housing was chronically undervalued for the preceding century or so.

Robin Smith said...

Mr. Cooper seems to be a jolly bloody good fellow.

His comment is the first time, I have ever seen, in history, by anyone, where an LVT straw man was attacked (even if by accident), and the argument when proven false, has been conceded in public.

Bloody well done Mr. Cooper. You are a top man.

On bubbles: there will always be a bubble, all else being equal, when speculation (not a bad thing in itself) is used to 'invest' in assets, whose value is not due to the amount of labour (or capital) invested in them. Always. This is a law of nature. It requires no special intellect or 500 page paper by a professor of economics. It just is. It will happen. It is guaranteed. If it did not happen it would be a miracle.

There will never ever be a bubble in assets where all the value in them is a result of Labour (etc) invested in them. Because we all do the least amount of work needed to produce something and no more unless we are either insane or slaves(we might be slaves). And speculation in productive economic activity like this means the cheapest price will be discovered, by nature, through competition, the higgling of the free market and supply and demand.

This has never been written down so I will call it "Smith's law of bubbles".

Mark Wadsworth said...

RS, yes but D Copper is one of us and open to facts and arguments.

As to bubbles, yes, there will always be bubbles in this that and the other, can't be helped. But the really damaging ones are the ones based on leveraged land speculation.

If there was a bubble in the price of a certain artist's paintings, well so what? If there is a bubble in gold prices, well, they can mine a bit more of the stuff (and the country where the mine is can collect more royalties) and gold is hardly essential in everybody's lives, the only gold you ever need to buy is a wedding ring.