Sunday, 12 January 2014

Killer Arguments Against LVT, Not (313)

Some more closely related KLNs are "House prices will plummet and millions will be trapped in negative equity" and "House prices will plummet and banks will go bankrupt

".

Firstly, as the LVT envisaged here would greatly reduce the tax payable by prospective and recent first-time buyers, so there is no reason to assume that house prices would change much.

Secondly, even if house prices fell by half, recent purchasers would have so much more extra post-tax income that they would be able to pay to pay off their mortgages in ten years, and they would be out of nequity after five years anyway.

Thirdly and slightly more radically, assuming that house prices fell by half, what would happen if all higher loan-to-value owner-occupiers' purchase mortgages were written down to the new reduced selling price of the home on which they are secured so that people can still sell their homes and walk away/start again if they so wish?

Let's assume that the 'losses' are split three ways: between borrower, bank and government/taxpayer generally.

a) Total outstanding residential mortgages in the UK are about £1,200 billion, of which approximately one-quarter relates to mortgage equity withdrawal and buy-to-let mortgages, which leaves £900 billion under consideration.

b) If you just look at principal, the numbers don't look too bad. Because of the fairly straight-line distribution of loans to value, the total principal amount of mortgages on which there would be a degree of write off is about £675 billion and the total write-off of principal would be one-third of that = £225 billion (or about 2% or 3% of what UK banks claim, probably spuriously, are their total assets).

c) That £675 billion is only part of the story of course. It is just a number on a bit of paper. What is actually relevant is the total future cash flows going from borrowers to banks. Assuming an interest rate of 4% and twenty years left to run, the total repayments for £675 billion in mortgages are £50 billion per annum, with total payments over the next 20 years of £1,000 billion.

d) The £450 billion replacement mortgages could be at a higher interest rate. So if these were at 6% interest, total annual repayments would be £40 billion, meaning that banks would receive £800 billion over the next 20 years, a loss to banks of £200 billion and a gain to borrowers of £200 billion.

e) The government could chip in (say) half that and give banks non-interest bearing government bonds with a nominal value of £100 billion which are redeemed at £5 billion a year for 20 years.

f) So borrowers would see their mortgage repayments fall by £10 billion a year or one-fifth (hooray); banks only have an annual shortfall of £5 billion (which they can easily recover by reining in salaries and bonuses at the top end) and the exercise only costs the taxpayer £5 billion a year for the next 20 years. Recent purchasers will end up paying the lion's share of that £5 billion in future, so it all pans out nicely.

9 comments:

The Stigler said...

Do we need to do big bang LVT?

Could you start by just reducing the amount paid by central government to local councils and increasing council tax. I know it's crude, but you would ease the transition from taxing earnings to taking property. And reducing the cap on housing benefit too.

Mark Wadsworth said...

TS, we don't "need" to do anything.

Your system comes to the same thing - provided the reduction in central govt grants were reduced pro rata to land rental values in each council.

So councils in high value areas would see their grant cut by a huge amount, councils in low value areas would continue to get the same grant.

Ben Jamin' said...

@TS I use to be in the gently does it camp, for neg-eq reasons. However, in order for a transition to a 100% LVT system to be permanent, the positive results for it need to be translated into political momentum.

It's not until you crunch the numbers via MW's LVT liability calculator, you see that even in the worst case scenario (mortgage taken out day before LVT announced, prices drop by half) the average house hold could pay off their total debt in 10 instead of 25 years. After that, it's all extra discretionary income.

Negative equity really isn't a problem. IMO.

Robin Smith said...

You forgot to speculate on what would happen to wages and profits with an LVT. And rather than use absolute numbers, to use relative numbers. That is, what would hapen to earned incomes with an LVT *** COMPARED *** to the cost of a home. Not to use nominal prices directly.

Have you seen this graph?:

http://www.meltfund.com/2011/06/who-is-getting-your-earnings-useful.html

Might earnings and profits converge back on rent and taxation? And what else will change, impossible to predict. Would the problems focused on here disappear?

Our problem is we think of what might be in terms of what we have today - corruption, rent seeking billions, inevitable welfare state. And forget that with an LVT the world will change. Are we brave enough to consider that?

We are unwilling to face this central question, as much as a muslim that The Prophet, peace be upon him, was 'just a guy'. We are trying to do reason, logic and rationality with 6 billion irrational people.

Is it possible to tame the unconscious?

read on...

https://docs.google.com/document/d/1-E7lWHTdlgbeWLrkno-GIwczrhQyQxOwlHljekPu1xg/pub

Ben Jamin' said...

@RS

It's understandable that you present LVT as a "believe" system. I get what you are saying, but bringing religion into to it will only confuse/anger/alienate 99.9% of other people.

Even if constructive, logical, factual argument is futile, it's the only type I'm willing to use.

I suspect that how most other "LVTers" see things too.

Lola said...

What about the companion to LVT - the Bank Asset Tax? Surely this would fund the 'taxpayer' component of your plan anyway? That would make your plan a double bubble. Yay!

Mark Wadsworth said...

L, yes of course, the extra govt bail out bonds would be repaid out of Bank Asset Tax, with plenty of spare change :-)

Lola said...

MW. As ever, where do I sign?

Mark Wadsworth said...

L, for the time being, the only place you can sign is at YPP.