Roger Bootle On Top Form

Writing in The Telegraph, of all places:

Since 1946, UK residential property prices have risen by almost 12,000pc, equivalent to an average annual compound increase of about 8pc. In real terms, the respective figures are 280pc and 2pc.

But the facts about commercial property – offices, shops and industrial buildings – are less well-known. Over the same period, commercial property prices have risen by only 800pc, or 3pc as an annual average. That means that in real terms, they have fallen, by 70pc in total, or 2pc as an average annual rate. So the ratio of residential to commercial property prices is now about 13 times what it was 65 years ago.(1)

What explains these radically different trends in the two types of property? Residential living space is something that we demand more of as we grow richer. Indeed, even without the current huge tax privileges to owner-occupiers, (2) the proportion of our income that we wish to spend on it probably rises as we become richer. (3)

1) He suggests other reasons for this divergence, but overlooks the impact of Business Rates, which is like Land Value Tax for commercial land and buildings (it's a flat percentage of the total rental value - and what's left is subject to income or corporation tax). If residential land and buildings were subject to the the same tax rates we could replace a huge chunk of taxes on income and output - the calculation is a virtuous circle, as lower VAT or income tax means that people have more money to spend on rent, which increases total rental values, which increases the tax take therefrom, allowing further reductions in VAT, income tax, more or less ad infinitum.

2) Bonus marks for that sideswipe.

3) Yup, that's as predicted by Ricardo's Law of Rent as modified by Henry George: as the economy grows, an ever larger share goes into land rents. If that growth is capitalised into higher selling prices we then get house price/credit bubbles, each followed by financial crisis, recession.