Collecting land rent without LVT

There are of course three main ways a government can collect land rent.

1. Just own land and buildings and rent them out. That way there is no need to differentiate between rental value of buildings and of the location. We have that with Crown Estates and Housing Associations (which are QUANGOs and ultimately part of the government) who rent out at or close to market value and council housing, which is supposed to be there for lower income people who can't afford lower market rents.

2. Replace other taxes with Land Value Tax.

3. Lend money to people wanting to buy land and buildings and collect the interest, which is mathematically similar to Land Value Tax. It is largely the private banks that do this, of course, but there is nothing to stop the government doing it.

Somebody asked me about 3. recently, and I did some workings for them. In a perfect world...

a) The goverment, which runs HM Land Registry would simply no longer register private mortgage charges. The same as I can't borrow money secured on my right to vote. That's not for sale. If banks want to make huge unsecured loans to people and just rank along with all other creditors in case of non-payment, there's nothing to stop them, but I doubt they would (see tweaks).

b) The government sets up its own mortgage bank as monopoly mortgage lender, which has easy to access to a bottomless pit of funds i.e. government bond issues.

c) The bank knows what monthly payments people can afford (local rents, mortgage payments for FTBs, there's no right or wrong answer, if it's too high, people won't pay it), and can work backwards from that to choose a suitable combination of income multiples, mortgage term, target house prices and interest rate.

Worked example, at today's prices with private banks: Our average borrowers buy a house for about 7.7 times their income, or £280,000. Knock off ten percent deposit, and prevailing interest of 2%, the monthly repayments would be £938 for 30 years.

The government chooses the following combination:
- Max loan-to-income four or twice joint income,
- Deposit minimum 10%, max 20% (see tweaks),
- Mortgage term 35 years (or however long borrowers have before state retirement age, also up to government to decide),
- Average house prices to level off at about £145,000 (four times income plus 10% deposit),
- The required interest rate, to get monthly repayments of £936 (same as now), would be 8%.

d) The government bank can borrow for about 1%, being backed by the UK government and mortgages which are secured on assets that can only go up in value (in line with wages). So in future, the government bank's profit (monthly repayments IN minus net selling price and interest paid (directly or indirectly) to the vendor OUT) is about £6,000 per year per average home.

e) There's no need to worry about Poor Widows In Mansions, they will have paid off the mortgage and will be left in peace (having pre-paid the land rent before retirement).

f) Once the system is up and running and all houses have been bought and sold, the bank's net profit would be - in theory - £100 billion a year (tricky to calculate, assume two-thirds of homes are subject to mortgages and one-third owned by mortgage-free pensioners).

g) Even if it's only half that, it's a handsome chunk of money, enough to replace Council Tax, SDLT, planning fees and so on with plenty left over.

That is the general idea. It needs some tweaks. Clearly, movers would have to be allowed to 'port' an existing government mortgage and existing equity. Apart from that, there shouldn't be any cash buyers. If you want to buy a house, you just HAVE TO take out a government mortgage for 80% of the purchase price.

When a house is inherited, the government bank would give the executors a deposit with itself for 80% of its value and grant an 80% mortgage under the same terms and conditions as any other buyer. If the heirs want to continue living there, great, they can spend the deposit on subsidising their monthly repayments (effectively cut them by half). Which is Inheritance Tax in all but name, so we can scrap IHT as well.

The eighteen-year cycle

Illustrated
From WalesOnline

Savills have copied my workings.

From City AM:

House prices are expected to surge another £50,000 over the next five years, further reducing affordability in the UK property market, according to new forecasts published today. Estate agent Savills predicts house prices will jump nine per cent this year, driven by the extended stamp duty holiday and prospective buyers rushing to purchase larger homes with gardens...

This explanation is pretty feeble - the SDLT breaks are being phased out and more demand for large gardens means less demand for small or no gardens, so should cancel out.

They then let the cat out of the bag - it's just a credit bubble:

Lower interest rates, an increase in the supply of high loan-to-value mortgages as lenders return to riskier sections of the market and high levels of savings built up during the pandemic are expected to keep demand elevated, Savills said.

Which is exactly what I said here. Going by the previous two 18-year cycles, a further increase of £50,000 before it all *pops* again is on the lower side of expectations.

The 18-year house price cycle

Just for fun, using Nationwide's numbers for UK house prices adjusted for inflation.

The previous three troughs were 18 years apart, +/- six months. The previous two peaks were exactly 18 years apart. If this repeats, the peak average house price will be over £300,000 (adjusted for inflation) in mid-2025, and then it will all turn to shit again.

Land Value Tax would sort out this nonsense.

Schrödinger's Housing - affordable and unaffordable at the same time

Spotted by Lola in MoneyAge:

Annual house price growth in the UK has risen to 13.4% in the year to June, the highest level since November 2004, according to the latest Nationwide House Price Index.

2004 was 17 years ago, so we are now on the final leg of the 18-year land price/credit boom-bust cycle, due to collapse again in 2025 or 2026.

“Despite the increase in house prices to new all-time highs, the typical mortgage payment is not high by historic standards compared to take home pay, largely because mortgage rates remain close to all-time lows – in fact, on this measure affordability remains broadly in line with its long run average. However, house prices are close to a record high relative to average incomes.

So buying a home is cheap but expensive?

"This is important because it makes it even harder for prospective first time buyers to raise a deposit. For example, a 10% deposit is over 50% of typical first time buyer’s income. A potential buyer earning the average wage and saving 15% of take home pay would now take five years to raise a 10% deposit.”

Well, duh. The flipside of affordable monthly payments is paying a massive deposit and vice versa. The bigger the deposit, the lower your monthly payments. Most people could afford the monthly payments for a £1 million home if they can stump up a £900,000 deposit.

"House prices will boom before crashing in 2026"

Spotted by TBH in The Daily Mail (of all places):

Anybody predicting the average house price would rise 10 per cent during the lockdowns would probably have been laughed out of the room as the pandemic hit... If the Bank of England and the property industry itself isn't capable of predicting the future of house prices, who then would be bold enough to do so?

Well, one man is happy to give it a try - and what's more, time and time again he has got it right.

Fred Harrison, a British author and economic commentator, successfully predicted the previous two property crashes years before they occurred - and his 18-year property cycle theory says that house prices should continue to boom before crashing in 2026...

He is able to make these predictions having identified an 18-year cycle that he has mapped out from hundreds of years' worth of data.

As much as I love Fred, that's not quite true. The oldest article I found about the 18-year boom bust cycle was circa 1905, which covered US recessions going back to before it was even the US. But he certainly rediscovered this phenomenom.

What would stop a crash from happening in 2026?

In short, Harrison believes nothing will stop the crash from happening unless dramatic government action is taken to prevent it.

'Nothing can stop the crash of 2026, other than if prices were limited to long-run affordable levels, but governments refuse to contemplate that prospect,' he says, 'If people are happy with the booms and busts, there doesn't need to be a solution.'

The best 'solution' according to Fred and many others being to tax land values a lot more and labour and enterprise a lot less, of course, but it's The Mail and they didn't report that.

Daily Mail firing on all cylinders

The Daily Mail sticks the house price straight into the headline to save its readers the bother of reading the article:

Grandfather’s five pet pugs who nipped at postman as he delivered a parcel to his £800,000 home are spared being put down after court hears he had Beware of the Dog sign up

Daily Mail on top form

From The Daily Mail:

Two grandparents known as the 'heart of the community' were killed in a fire at their farmhouse alongside their dog just hours after wishing their family happy Christmas.

Frank, 90 and Madeleine Dougharty, 86, were found alongside their dog Flash on Boxing Day morning at their farmhouse in the Sussex village of West Chiltington.

Emergency services were called to their £760,000 home at 9.10am after reports of a significant fire which has gutted their remote farmhouse.

They (want to) own land! Give them money!

From the BBC:

... Boris Johnson has promised low-deposit mortgages to help young people get onto the housing ladder.

In an interview with the Daily Telegraph ahead of his party's four-day conference, the prime minister said he had asked ministers to work up plans for encouraging long-term fixed-rate mortgages with 5% deposits.

"We need mortgages that will help people really get on the housing ladder even if they have only a very small amount to pay by way of deposit, the 95% mortgages," he said. "I think it could be absolutely revolutionary, particularly for young people."

Haven't we been doing this for decades - ramped up with Help To Buy - and simply seen house prices increase to soak up the extra borrowing?

Daily Mail on top form

From The Daily Mail:

When police arrived they found [Hancock] covered in blood as he told them 'I'm hardly going to deny it; look at me'.

Hancock, of Etwall, Derbys, had already pleaded guilty at Derby Crown Court in July to two counts of murder via video link.

PE teacher Ms Almey and [her new partner], a company director of a marketing firm, were discovered in a pool of blood at the £400,000 property on New Zealand Lane just after 4am.

Set the controls for the heart of the next crash!

Spotted by Lola at Money Age:

The ‘Bank of Mum and Dad’ (BoMaD) will be a driving force behind the recovery of the UK’s housing market in the wake of the COVID-19 crisis, according to new research from Legal & General and CEBR.

L&G revealed that almost one in four housing transactions (23%) will be backed by the BoMaD in 2020, with 24% of borrowers now more reliant on financial support from family and friends.

From The Telegraph, via MSN:

Average house prices rose by a little over £3,000 in August as the property market reversed losses made during the pandemic and hit a new all-time high.

The cost of a home in the UK hit £224,123 in August, a 2pc increase from the month before, according to the Nationwide building society. It also marks a rise of 3.7pc compared to August last year.

"Can you get a mortgage on a house being sold below market value?"

Mike W spotted a rather strange Q&A in The Guardian, and added "If I make an offer and you accept, I always assumed that was 'market value'. Indeed, 'marked to market' surely? What the hell do they mean here?"

The mortgage adviser replies: "However, not all lenders are prepared to lend to people buying property at less than market value."

Which really is baffling. You'd expect lenders to be paranoid about lending on homes bought for more than market value, but not the other way round.
---------------------------------------------------
On the subject of "below market value", I was chatting to somebody who lives up the road who nearly got a massive sitting tenant's discount when they bought the house they had been renting for four years. Unfortunately, the owner's ex-wife got wind of what they'd shaken hands on and slashed the sitting tenant's discount by about half (they still got a fairly good deal).

I told him that we got the full sitting tenant's discount, we'd been paying rent for six years, and the owners wanted to sell. To my amazement, they accepted our cheeky offer, which was effectively the easily achievable selling price* minus five or six years' rent.

* If they'd put in another £10,000 or £20,000 to smarten the whole house and garden up a bit (all the stuff we've been doing ourselves for the last six years), they could have sold it for a lot more than that, but (thankfully) they couldn't be bothered.

"Supporting the housing market"

From the BBC:

On Tuesday, Nationwide - one of the UK's biggest lenders - effectively pulled out of new deals... Nationwide will now only offer home loans to those with 25% equity or more.

It rules out first-time borrowers or existing homeowners with little equity in their home... [this] will allow it to "focus on supporting existing mortgage members, while continuing to process ongoing applications", it said.

Nationwide blamed "an extremely high number of enquiries about existing mortgages and ongoing applications... That is why we have taken this decision on a temporary basis although, by continuing to offer home loans up to 75% LTV [loan to value], we can continue supporting the housing market."

Other lenders that have taken similar action include Santander and Skipton Building Society but many have gone further, by reducing the loan-to-value ratio to 60%.

On a practical level, you can see why they have retrenched a bit. By "supporting the housing market", what they actually mean is "keeping house prices as high as possible".

In the short term, if potential sellers expect things to return to normal and prices to rebound, then they will hold off selling and we would expect the number of transactions to plummet, Zoopla says by as much as 60%.

But... what if all lenders increased the deposit requirement to 25% or even 40% (call it 30% on average) on a permanent basis? First time buyers have a fixed amount of cash to put down as a deposit, and sooner or later, the Bank of Mum & Dad will run out of things to remortgage. According to this, average FTB deposits are 15% of selling prices. The deposit is a limited/fixed amount of cash, so we would expect selling prices to halve.

Which would be great news for every tenant in their twenties and thirties!

Daily Mail on Top Form, Nearly

From The Daily Mail:

A dog trainer who once worked for Princess Anne is suspected of murdering his wife at the cottage where Boris Johnson grew up.

John Zurick, 67, allegedly shot his estranged wife Debbie, 56, after he discovered she had a new boyfriend. He then turned the shotgun on himself, friends said yesterday.

Paramedics were called to the cottage, on the Prime Minister's family estate in Somerset, on Saturday afternoon but were unable to save Mrs Zurick...

The Zuricks bought the property, where the Prime Minister spent some of his childhood, from Mr Johnson's father Stanley for £440,000 in 2013.

Stanley Johnson owns the neighbouring 14th century farmhouse on the Nethercote estate with his wife Jennifer. A third house on the estate is owned by the Prime Minister's sister Rachel.

Yes, yes, but what would the cottage be worth now (ignoring the murder-suicide stuff)?

Daily Mail on top form

From The Dail Mail:

Helen Hancock, 39, was found dead alongside 48-year-old company director Martin Griffiths at a property in the upmarket village of Duffield just months after she walked out on her husband...

Detective Inspector Steve Shaw of Derbyshire Police told the court the couple were discovered at the £400,000 detached property in Duffield, Derbyshire, the early hours of New Years' Day.

It would appear that some at the Bank of England aren't that stupid...

Subsequent to my recent post, Surely, the Bank of England is not that stupid? (the BoE said banks should increase mortgage-to-income multiples if house prices rose), comes this in The Telegraph (also emailed in by Lola):

Ultra-low borrowing costs have fuelled a huge property boom that pushed house prices beyond the reach of young buyers, the Bank of England has warned.

A five-fold surge in house prices over the past 50 years can be “more than accounted for by the substantial decline” in the cost of borrowing, according to research by the Bank.

Its economists warned that even a housebuilding spree would not have stopped a huge rise in prices caused by the long-term plunge in rates - undermining claims that Britain's property bubble has been caused by a lack of new homes.

I assume that they are referring to this Staff Research Paper, which goes into a lot of detail, but can be summarised as follows (exactly as we explain it):

a) Rent as proportion of average gross earnings is very stable, bobbing around at 35% - 40% for the past three decades (Figure 10). So it can't be 'lack of supply' otherwise rents would have increased faster.

b) Rent (a constant) divided by required monthly repayment rate (interest + principal) = mortgage.

c) Mortgage + deposit = house price.

The paper does not seem to make recommendations, although you'd have thought those are obvious...

"Houses are assets not goods: taking the theory to the UK data"

From Bank Underground:

In yesterday’s post* we argued that housing is an asset, whose value should be determined by the expected future value of rents, rather than a textbook demand and supply for physical dwellings. 

In this post we develop a simple asset-pricing model, and combine it with data for England and Wales. We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates.

Increasing scarcity of housing, evidenced by real rental prices and their expected growth, has played a negligible role at the national level.

Includes lots of lovely charts, tables and calculations.

As I have said many a time, all you need to know is
(1) local average wages in each area of the country, which tell you what local rents will be, and
(2) prevailing interest rates. You multiply local rents by the inverse of interest rates (or divide local rents by interest rates, same thing) and that tells you what house prices will be in each area to within a tolerable margin of error.

There is no need to factor in 'scarcity' to the equation, being impossible to measure once you have done the two-stage calculation.

This also explains why there is a larger variation in very local house prices within larger cities/conurbations. This is because there will also be a larger variation in wages in larger cities. Office cleaners earn the same everywhere, but the higher paid jobs are in the larger cities/conurbations, so there will be a wider range of wages in larger cities/conurbations, hence a higher range of rents and a higher range of house prices.

* "Yesterday's post" is also well worth a read, that also boils it down to the two-step calculation. They also include a section headed "Higher property taxes needn’t mean higher rents…".

That'll help...

... struggling first time buyers to get on the property ladder. ... keep house prices as high as possible.

Home buyers using Help to Buy can now take out a 35-year mortgage

Von Thünen's Law of Rent - it's all about lack of supply... NOT!

In an idle moment, I googled "average disposable income UK regions wages rent", the first relevant result was in This is Money:

The survey compared average city salaries against local rent and other standard monthly outgoings for 30 UK cities, calculating the disposable income of city residents after deducting tax, bills and other necessary general outgoings such as travel and food.

It discovered that the average British person gets to keep £1,083 per month after expenses and tax with the average monthly wage coming in at £2,073, while the average essential outgoings, such as rent, travel and food, total £990...

Despite Londoners' earning the highest wage, they also, unsurprisingly, have the most bills and so feature much lower on the overall list. Their disposable income is £1,095, only £12 above the UK average in the study. Their monthly outgoings of £1,629 are also over £350 more than any other city.

Hull is the city with the lowest outgoings of any city in the UK at just £767 per month. However, residents have a lower monthly wage of £1,816 which means their disposable income is £1,049, below the study’s UK average.

Which is exactly what you'd expect from Von Thünen's law (or even just a basic understanding of human nature). The lowest wage area sets the baseline. In areas with higher wages, the extra wages go into higher rent (other fixed costs are pretty much the same everywhere).

The equilibrium is reached when few people are willing to move because the rent saved is matched by lower wages; or the higher wages are matched by higher rent, which is what we observe in real life.

For sure, there are outliers - the survey mentions Derby with the highest disposable income after rent (£1,456) and Brighton with the lowest (£751). This can't be explained by the basic analysis, but boils down to the fact that Derby is considered boring (no idea if it is, but perceptions matter) and Brighton is considered fun, hip and fashionable, plus has nicer weather and a beach.

To paraphrase W C Fields, "people would rather be dead in Brighton that live in Derby" and they are prepared to pay £700 a month for the pleasure.

Here is their chart which is quite striking (blue dots = wages, red does = rent plus other fixed costs):


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So the next time somebody says that rents are high in London because of "lack of supply", refer them to this.

You do not need to adjust for "lack of supply", all you need to know is average monthly wages in any area. You subtract £1,800 (average wages in lowest wage areas), which gives you location rent. Add on about £400 for cost/value of bricks and mortar and that tells you local average monthly rents.

To estimate house prices in an area, you then divide annual rents by mortgage repayment rates (interest + principal, currently about 3% - 4%).

Daily Mail On Top Form

Man, 24, is found dead in a swimming pool at £3million mansion after 'drowning at house party'