Sunday 9 December 2018

Absolute and relative values

Example One - Ted Heath. Having stoked the house price bubble in the early 1970s (the top of an eighteen year cycle), UK governments then had to spend five years deflating the house price bubble, but to avoid people noticing so much, what they did was create massive wage and price inflation; the correspondingly high interest rates kept house prices at the same absolute nominal level, but after five years wages (and all other prices) had doubled, so in relative terms, house prices had halved.

(Let's not get bogged down in precise dates and amounts, it is the principle that matters.)
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Example Two - people say a weakness of the Council Tax system is that it is based on 1991 values; in some areas nominal house prices have 'only' increased threefold since then, in others they have increased tenfold. Which leads people to say that there should be a revaluation.

As a matter of fact, because of the way the Council Tax system operates mathematically, a full revaluation to 2018 values would make little difference. This is because each local council has to collect a certain arbitrary £ amount. So let's imagine an area where all homes are worth roughly the same amount (a suburb consisting of three-bed semi-detached houses). In that area, the tax per home is simply the total £ amount divided by the number of homes. It does not matter whether you use 1991 value of £80,000 each or 2018 value of £320,000 each.

Clearly, there will be less valuable and more valuable homes in any local council area, but it is only relative values that matter. So if the selling prices of all homes in an area have increased by a similar percentage since 1991, the final bills will be much the same.
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Example Three - some time at the start of the Tory-Lib Dem coalition in 2010, a senior Tory (I can't track down exactly which one) said that one of their goals for government was to ensure that house prices would increase slower than wages, i.e. that in relative terms, housing would become more affordable.

UPDATE: RS in the comments points out it was their Housing Minister, who at the time went under the name Grant Shapps, who "spoke of a 'rational' market in which house prices fell in real terms, by increasing by less than earnings."
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Example Four - I had a heated discussion with another Georgist recently (he has posting rights on this blog so is free to put his side of the argument). He said that 'we' want to keep house prices (i.e. land prices) as low as possible. For sure we do, but my point was that to placate the Homeys, we must make the point that absolute house prices would not fall if the tax shift were done properly.

If absolute house prices stay the same and disposable incomes go up (so houses are much cheaper in relative terms), then everybody's reasonably happy. It must be clear that selling prices are largely determined by credit availability i.e. banks willingness to lend and borrowers willingness to borrow i.e. borrower's ability to repay mortgages. As first time buyer disposable incomes would be significantly higher (the LVT on the homes they buy would be half as much as the reduction in taxes on their output and earnings, not to mention the boost to the economy), the tax shift can be easily be tweaked so that house prices do not fall at all.

We ended up agreeing to disagree, but I like writing things down for posterity.

13 comments:

Bayard said...

"It does not matter whether you use 1991 value of £80,000 each or 2018 value of £320,000 each."

But having up-to date valuations make it much easier if you want to check that your house has been valued correctly. Trying to find out what a house was worth so long ago is very difficult.

Mark Wadsworth said...

B, find something similar and it should be in the same Band as the similar one.

Robin Smith said...

Grant Schapps was chief housing fiddler in 2010 ISTR

Mark Wadsworth said...

RS, ta, I have found the quote and updated.

benj said...

Of course what you say is true depending on what rate you set LVT and what other taxes you replace and what time scale, assuming revenue neutrality.

If LVT replaced Council Tax, IHT, CGT, IHT, then I wouldn't expect much in a change in house prices as opposing forces would cancel each other out.

But once you start lowing taxes on incomes,VAT you will start to increase the disposable incomes of renters in marginal locations and therefore the decrease ability of landlords to raise rents to cover the tax.

So in order to keep houseprices frozen, the replacement of bad taxes with LVT above that set by current property taxation would have to be pretty glacial.

I think we could work it out given we already have enough information to do the maths.

Do you want to give it a go?

benj said...

" Council Tax, IHT, CGT, IHT"

Council Tax, IHT, CGT and SDLT. Duh!

Lola said...

But once you start lowing taxes on incomes,VAT you will start to increase the disposable incomes of renters in marginal locations and therefore the decrease ability of landlords to raise rents to cover the tax. Don't you mean 'increase [the] ability of landlords to raise rents to cover the tax'.?

Mark Wadsworth said...

L, no he doesn't. Rents in high wage area = the difference in wages between that area and the margin. So, increase net wages at the margin and hold wages in high area constant = lower rents in high wage area.

Mark Wadsworth said...

... but if wages everywhere go up by same amount, then no impact on rents.

MikeW said...

'But once you start lowing taxes on incomes,VAT you will start to increase the disposable incomes of renters in marginal locations and therefore the decrease ability of landlords to raise rents to cover the tax.'

Yes I read this bit from BJ with interest too. Thanks for the question Lola and for the clarification MW. What are the political implications you two are thinking about?

Would also love the Anon person above to open up their wish/ discusssion about keeping land - house price as low as possible. I would ask them, do they mean from an effeciency persective or a political/social justice one?

If I may, my humble thought abpout the second was always that the first throw to this project was the 'LVT Lite' model anyway.

Also the whole bank reform question dovetails in to this LVT Lite question. In particular, the Banks as a 'business' that can fail model. In this regard, Musgrave's campaign for NS&I 'Debit' accounts also has its vital part. I notice Labour has finally reached the Glass/Steagel stage in public too. Great.

benj said...

@ Mike W

The selling price of land represents the capitalised net transfer of incomes from one group in society to another. So in a civilised society, it should be regarded as a measure of injustice, just as we would now regard the selling price of a human being ie we should aim to have it as close to zero as is reasonably practical.

Regarding practicality, what Mark says is valid, as anything that moves us in the right direction is better than doing nothing, including a workable political sales pitch to those that the above justice issue hasn't occurred to yet i.e everyone.

However, I'm a little sceptical that merely freezing HPs gets bad taxes replaced at a sufficient rate to make much different.

But there's good reasons I might be wrong, which we won't know until we do the maths and see what such a policy actually looks like. Could be there is an exponential curve whereby a good chunk of bad taxes can be replaced before the incidence on land really starts to bite(probable).

Its certainly worth looking at as it might be picked up by say the Tories as a workable proposal. Interesting if nothing else.

The YPPUK plan would lead to sharp reduction in HPs IMHO, as it would lead to large overnight increases in the disposable incomes of renters. Obvs although the plan starts off as a 100% LVT at current land values, the day after enactment that falls to more like 65%.

Mark Wadsworth said...

MW, clearly in an ideal world, LVT would be such that land sells for nominal amounts only, for the reasons that BJ gives.

BJ, it would be impossible to predict how this pans out in the long term, because there are too many variables, some under direct or indirect government control and some down to free markets sorting themselves out...

- LVT itself pushes down prices
- lower transaction taxes (SDLT, IHT, CGT) pull up house prices
- higher wages and lower taxes on earnings push up rents
- economic growth pushes up rents
- LVT reduces net rents
So impact on net rents unknown

- selling prices are a function of
-- net rents and credit availabilty
-- net rents might go up in short term, long term would go down
-- credit worthiness of borrowers, which would go up
-- interest rates (net rental value divided by) which could be steered down or up. In extremis, govt could grant mortgages at zero interest rates and offer sellers deposit paying zero interest.

And so on.

If I were in charge I could tweak it so that nominal house prices stay flat for the time being. Real terms house prices will drop. After one or two Parliaments, people will have got used to this, at which stage they will accept a few of percent nominal house price drop each year, because they will be earning real money five or ten times as much as their house price is falling.

Gently wean people off Home-Owner-Ism.

Bayard said...

"find something similar and it should be in the same Band as the similar one."

When I wanted to get my house re-banded, the Valuation Office said they required a retrospective valuation. Bastards!