Following on from my previous post, the same factors that mean that a 100% LVT replacement tax won't cause a wiping out of the landlord class, mean that LVT won't make house prices "affordable", where "affordable" doesn't mean "prices that people can afford" (using that definition of "affordable", the only unaffordable house is an empty house) but "prices at a level they were in the 1980s" or at least "a smaller chunk of my monthly outgoings than at present".
As can be seen from this graph, house prices are pretty well inversely proportional to interest rates, i.e. they are proportional to what people can afford to borrow:
However, if LVT is a replacement tax and, given no change in interest rates, then, by and large, the average would-be homeowner is going to be no worse off than they were before. The extra they have to pay in LVT will be balanced by the amount they are saving on income tax and VAT, so the amount they can afford to spend on a mortgage every month will be roughly the same as it was and thus the average house price will remain pretty well unchanged. Indeed, the improvements to the economy caused by the removal of deadweight taxes is likely to put house prices up, by making the housebuying public better off.
Sure, Londoners and Roselanders will see prices fall and inhabitants of places like Neath will see them rise, but these falls and rises will be caused by falls and rises in what these people can afford to spend on mortgages, so true affordability will remain unchanged.
What has made houses unaffordable in the past twenty years is not so much the price, because the price of land is linked to what people can afford to pay and therefore is a system with negative feedback, but the requirement for ever bigger deposits, which has no link to anything apart from government policy.
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17 comments:
Yeah. QE and ZIRP. Two complimentary disasters.
Your arguments are only vaguely correct if LVT were really badly implemented, and even then, only vaguely.
You are ignoring the other half of the equation.
Let us turn to the main reason why it is so hard for young people to buy.
We know that at today's low interest rates, the mortgage repayments aren't the problem, cost about the same as renting (which we are agreed is 'affordable' using your definition). Even under full-on LVT, the total package [rents incl LVT paid indirectly] = [mortgage repayments + LVT paid directly]
It is the deposit that is the problem, rustling up £50,000 or £200,000 or something is pretty insurmountable. Existing landlords and home-owners with a lot of 'equity' are miles ahead.
LVT would act like a higher interest rate, pushing down prices (and hence mortgages) and hence pushing down deposit requirements, if they were back down to six months salary, well, tighten your belts for a year or two and you're away.
"Your arguments are only vaguely correct if LVT were really badly implemented, and even then, only vaguely."
Please explain why.
"LVT would act like a higher interest rate,"
Please explain how.
B, under LVT Nirvana, the government nicks a bit of LVT (and related tax) revenues for itself and everything else is rebated equally - health insurance/disability payouts, free schools (or school vouchers) and the rest is Citizens Dividend.
So the average/median household is simply not a net taxpayer, the benefits they receive directly = the tax they pay. Stuff like education (for kids) and old age pensions (for old people) is just a cost spreading scheme over a lifetime.
with 100% LVT (or close to), the purchase price of land is close to zero, a mortgage = the bricks and mortar of a house = max. two years' income for a couple.
Established home-owners have no inherent advantage over their children, the net transfers from productive to unproductive sectors (government, landlords) are minimised.
Ergo, everybody (but landlords and bankers) are hugely better off. Ergo, housing is much more affordable because people simple have more money and land costs nothing (for the median/average household).
Or, everybody (tenants and TFB's alike) are nearly as well off as mortgage-free homeowners nowadays (who have net zero housing costs, notional income and notional expenditure net off to zero).
I accept that this is Nirvana, but however little we advance towards it, it is a step in the right direction.
As to the higher interest rate question, I would have thought that is obvious.
Land has no cost, its selling merely a capitalisation of the transfer of incomes from one group in society to another. Therefore housing isn't unaffordable in aggreagate and a LVT or building X amount of houses to get prices down doesn't change that (although ironically, because building/maintenance is an actual cost it could make aggregate affordably worse).
I also think that while a LVT will make home ownership easier, it also negates some of the advantages of that compared to renting now.
LVT will make assembling plots easier for re-development aiding more turnover. I think this will favour large property developers, who can offer a known brand in the rental market.
So I'd expect home ownership to drop, while smaller landlords to be squeezed out.
"Ergo, everybody (but landlords and bankers) are hugely better off. Ergo, housing is much more affordable because people simple have more money and land costs nothing (for the median/average household)."
How does that square with that quirk in human nature which means that we tend to spend a fixed proportion of our income on food and shelter, or are you disputing that?
If not, although people might have more money, housing will be no more affordable because we will still be spending the same proportion of our income on it. Whether it is on mortgage payments, rent or LVT+mortgage payments makes no difference.
@Bayard
For typical working households, their disposable incomes after having paid their LVT liabilities, will be over £10K a year better off. The discretionary income of working households in the future even more so.
The more LVT replaces taxes on output, the more income gets transferred back to working households from bankers, landlords, the asset rich/income poor and foreign property owners.
Expenditure on housing will go up (improving allocational efficiency) but that will improve affordability for most groups in society.
"For typical working households, their disposable incomes after having paid their LVT liabilities, will be over £10K a year better off. The discretionary income of working households in the future even more so."
But there's nothing to stop them spending that £10K a year on buying a better house, bigger, closer to their place of work, further into the countryside or whatever. If everyone does that, or even spends a proportion of that £10K in improving their place of habitation, then history tells us that we are back on the house-price inflation treadmill. Then, if LVT is increased to compensate, you very rapidly end up in the position where everyone is still spending the same proportion of their income on food/housing/getting to work as they were before LVT is introduced.
The point I am trying to make is that, if it is a quirk of human nature that we spend a certain percentage of our income on food/housing/getting to work, then no amount of alteration to the tax system is going to change that and that if that proportion is currently considered "unaffordable" then without changing the way people think about their expenditure, then it will never be "affordable".
The problem is that there is a lot of inertia in the system, so people can easily look back to a previous "golden age" when incomes were rising faster than land prices and say "that's how affordable land should be" and ignore the times when the rise in incomes has slowed and land prices have caught up.
B: "How does that square with that quirk in human nature which means that we tend to spend a fixed proportion of our income on food and shelter, or are you disputing that?"
There is no such quirk, you just invented it.
1. The % spent on food has declined over the years as wages rise faster than food prices. Richer people spend a lower proportion than poorer people.
2. The % spent on rent has increased over the years as rents soak up a disproportionate share of economic growth. This is exaggerated by the fact that we used to have rent controls and now we don't, but hey.
3. People in low wage areas spend pretty much nothing on land rent, people in high wage areas spent a large proportion of their income on land rent. The land rent is = the extra income you can earn by being there.
So it is more reasonable to say
1. Rent at the margin is always zero (Neath, in your example).
2. Whatever income Neathians have sets the basic living standard.
3. In areas where you can earn more than in Neath, the extra goes to higher rent.
4. We also know that mathematically, the median household in a median home in a median area would receive as much in personal benefits in kind or Citizens Dividend as they are due to pay in LVT.
5. Possibly people in London would all end up paying 80% of their income in rent. So what? Nobody is forced to live here..We can all go back whence we came if we don't like it.
"There is no such quirk, you just invented it."
No I didn't, it is just a recasting of Ricardo's law of rents. Illustrating that was the point of the post. The graph shows that as interest rates go down, the amount we can borrow goes up and the price of land goes up accordingly. There can only be two explanations for this: either that people tend to spend as much as they can afford on land (houses) and that land prices rise with the greater availability of borrowed money or something else is pushing up land prices and people are having to borrow more and more in order to pay for their house.
Now folk wisdom has it that it is the second case: it is the excess of demand over supply that is pushing up prices and people are having to borrow more to keep up, in which case it is mightily convenient for everyone that the government has managed to reduce interest rates exactly in line with the demand pushing the price up, so allowing everyone to borrow more. So using Occam's razor, we see that the first scenario is more likely.
"1. The % spent on food has declined over the years as wages rise faster than food prices. Richer people spend a lower proportion than poorer people."
No, the % spent on food has declined because food has become cheaper, because of supermarket price-cutting and successive government's policy of cheap food via agricultural subsidies. The money saved has gone into rent/mortgage repayments and the combination of food, shelter and travel to work has remained the same proportion of the average income.
As to the rest of it, agreed, but that has nothing to do with people's perception of "affordability" which is the point of the post.
B, you have clearly misunderstood Ricardo's Law of Rent. As updated and modernised, it states what we know to be a fact.
Location rents in the "worst" area (your Neath) are always close to zero. If the average person can make himself £x better off by moving to Area B (better jobs, more generous benefits), then location rents in Area B are £x.
So location rent as a % of income in Neath is clearly zero, and always will be.
Location rent as a % of income in the nicest/best areas (i.e. parts of London) are 100% or more of the local average income that an average person could earn if he lived in that area and found a job within commuting distance.
Rent is not a fixed % of income!! it is close to 100% of the extra an average person can earn in that area minus what he could earn in Neath.
I have done endless posts on this, all these articles about "best place to live" in terms of average local income minus housing costs, it's random places about the country.
B, don't drag "the price of land" into this. That's just rents divided by interest rates. Nothing to do with Ricardo's law.
"Rent is not a fixed % of income!! it is close to 100% of the extra an average person can earn in that area minus what he could earn in Neath."
It's still a fixed %age of income in a given area, whether that be Neath, London or Averageham.
"B, don't drag "the price of land" into this."
What do you mean "don't drag "the price of land" into this"? The price of land and "affordability" is what the f*cking post was about!
One last time, if it is not a "quirk of human nature", how do you explain what is shown by the graph that when people can borrow more, prices go up?
B, we have now got to the silly stage where we are arguing about what we are arguing about.
If your point was that land prices are the inverse of interest rates and/or proportional to credit availability, you are clearly correct. I don't think even the Homeys would argue on this point ("Interest rate increases could spell disaster for house prices" etc).
That is not a quirk of human nature, that is basic maths and logic. If taking out a mortgage and buying somewhere (where you want to live long term) costs about the same as renting, why would you not just take out a mortgage and buy it?
But the fulcrum is always rents. Those are dictated by Ricardo or Von Thunen's law of rent. These laws do not dictate land prices, they merely explain rents, step one. Step two is divide rents by interest rates (plus or minus a bit for credit availability).
"If your point was that land prices are the inverse of interest rates and/or proportional to credit availability, you are clearly correct."
Yes, but why? Why do so many of us spend more on land when we have more to spend? We don't tend to spend more on food, cars or holidays in quite the same way. Most people walk into a car showroom with an idea of which car they would like to buy and try and buy it for the least they can. The same people walk into an estate agent's with an idea of how much they have to spend and try and get the best house they can for that money. That's the quirk.
B, on the cheapest car v best house issue, why?
I don't know. Marginal utility of consumption or something?
But it wouldn't make any difference if people bought houses like they bought cars. Some would go for the rolls royce houses and some would go for (or only be able to afford) the Vauxhall Vectra houses.
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