Killer Arguments Against LVT, Not (227)

In the comments to KLN #226, Phil Jones said:

Now if [LVT had been] introduced from scratch, house prices and therefore mortgages and LVT would be low as no-one would really want to buy fearing increases.(1) It would be worse in a transition as high mortgages coupled with high LVT and low sale prices would bugger a lot of people.(2)

1) The first bit is quite correct, that's the good news. It's a question of what our starting point is; from the point of view of the future, NOW is the starting point, so we might as well get on with it.

2) I assume he's alluding to negative equity, which is very much a transitional issue.

i. As we are talking about tax and house prices, it seems reasonable to me to put some numbers on it: let's say that typical recent first time buyer household earns £40,000 gross, has bought a house for £160,000 with a 75% mortgage of £120,000. At 4% interest over 25 years, they are paying £7,700 a year in mortgage repayments.

ii. Let's assume that under full-on LVT, house prices would halve. So that typical household now has £40,000 negative equity. Using the tried and trusted spreadsheet, we establish that such a household would be paying £11,300 a year less in tax, so if they use this surplus to pay off the mortgage as quickly as they can, that gives them £19,000 a year to pay off their mortgage, so they will be out of negative equity within three years, and if they continue paying off the mortgage at £19,000 a year, it will be completely paid off after seven.

iv. For the remaining eighteen years of what would have been the mortgage period, they can spend that £19,000 if they wish, but comparing like-with-like, they could also put it to one side (they wouldn't have been able to spend it under the current tax system); even ignoring compound interest, that would give them a pot of over £300,000.

v. Households who buy their first house after LVT has replaced taxes on earned income will be laughing; if they knuckle under, they will be able to save up a deposit in a year or two and pay off an 80% mortgage in about four years.