Monday 28 September 2009

Ricardo's Law Of Rent

From The Metro:

The catastrophic news that Jaguar Land Rover is planning to close one of its factories in the Midlands (report, Thu) is economic Armageddon for Birmingham and Britain as a whole.

This will result in thousands of people losing their jobs and a collapse in house prices throughout the region. It must not be allowed to happen and the government must step in to give the motor industry the same kiss of life it gave the banks.

ST Vaughan, Birmingham.


I don't agree that this is economic Armageddon for Britain as a whole; using taxpayers' money to engage in a subsidy war with other big European countries sounds more like Armageddon to me, but he is correct on the impact on house prices. This begs the question of whether he's more worried about unemployment or about the value of his home going down.

Y'see, this is yet another problem with the prevailing ideology of "Home-Owner-Ism" (wide-ish spread of home ownership coupled with high house prices); if you are one of many who lose their jobs, you suffer a huge income loss and a huge capital loss which makes it much harder for you to up sticks and look for work elsewhere (compared to tenants). (I'm sure that DBC Reed knows what I mean!)

With *ahem* Land Value Tax, there would be little or no capital loss, of course, because it would keep house prices low and stable; and in the bad years, you'd be compensated for being stuck with high mortgage repayments on a depreciating asset with a much smaller tax bill.

5 comments:

Weekend Yachtsman said...

"you'd be compensated...with a much smaller tax bill."

Oh yeah, brother.

And there flies another pig.

The problem with all your land-value tax proposals is that you assume the State will be reasonable and indulge in a bit of give-and-take to make it fair.

They won't.

It will be additional to everything we pay already, and it will never go down.

Unless you belong to one of the recognised victim groups, of course.

Mark Wadsworth said...

WY, you've just answered your own question.

If you were the government or the local council and you wanted to garner votes in the affected area, what would you choose - a) pour in a hundred billion quid in subsidies (which hurt everybody else in the country) and which just stave off the inevitable; or b) just cut everybody's property tax bill in the affected area by half? Cutting property taxes will always be a short-term vote winner, and you know that.

TheFatBigot said...

Therein lies the problem, Mr W.

Is the area in question one in which the governing party will need to buy votes? If so, will it buy more votes by pumping in other people's money in finest nanny-state style rather than saying "you're losing your jobs but you don't have to pay as much tax now"?

The preferable solution for the locals, I would suggest, is that they keep their jobs at the expense of the rest of the country. Hence the economically illiterate opinion put forward by ST Vaughan.

The answer to ST Vaughan's point is really nothing to do with LVT, it is all to do with the very simple fact that pumping subsidies into loss-making businesses does no one any favours unless (and instances are a rare as hen's tadgers) current losses are a blip on the balance sheet of a fundamentally profitable enterprise.

But that does not mean your point about LVT is not without interest. Indeed, it is very interesting because it supposes that the introduction of LVT will lead to a fall in house prices. That might or might not be the case. As you know, I am of the view that houses are grossly over-priced but we are where we are. If LVT would cause a reduction it would, indeed, prevent unemployment coinciding with a loss in value of people's main asset, but only because that asset's value would already have fallen.

The double-whammy will be the same, all that will change is the time-scale. Loss of capital value will come first then there will be loss of income, rather than both happening together. The outcome is the same.

Mark Wadsworth said...

TFB, you have to see it as a gradual transition; but is my point about workers at the plant who were tenants, and can thus up sticks and move somewhere else far more easily, valid?

TheFatBigot said...

I'm not sure I do have to see it as a gradual transition. It rather depends how LVT is introduced.

Your point about tenants being able to up-sticks is, of course, valid. So far as it goes. But I'm not sure how far it goes. It certainly doesn't reflect real people's desires and aspirations.

For home owners there is always the risk of negative equity but that is the only substantive downside and it happens in only a small proportion of cases - horrible though it can be for those who suffer it.

There is, however, a huge up-side of home ownership. In fact, with current landlord-and-tenant law being what it is, there are two.

One is the prospect of the day your mortgage is redeemed and you relieve yourself of what is often the biggest monthly bill.

The other is that you have absolute security of occupation while you pay your monthly mortgage dues. In most situations renters have little formal security of tenure these days.

Even if house prices stay static the security of occupation and prospect of one day being free of a massive monthly expenditure will always attract people to purchase.