Housing affordability is measured by the Median Multiple, the ratio of median house prices to median gross household income.
In the UK, the MM is 5.1. So this roughly breaks down to median household income of £28,000 and house prices £143,000.
The trouble with this is, it doesn't really tell us about how affordable housing is once we've stripped out taxes and mortgage repayments. That's what is felt in peoples pockets at the end of the day.
So if we do that, we take off about £6,177 for net tax ( benefits netted off) and mortgage repayments £7,248, which leaves us with £14,575 per year to pay all the other bills and expenditures of life.
Which is a pretty small amount. If we use this as our measurement of affordability we get a ratio of 9.8:1 We'll call this the True Affordability ratio.
Now, what happens under LVT? Well simplistically you might say because the mean house prices will half, we'll end up with a Median Multiple of 2.5. So twice as affordable.
Pretty good, but that doesn't tell us the true picture of how LVT will affect True Affordability. Taken from the KAALTVN LTV net liability calculator here, we get the following.
So after-tax income becomes £29,300 minus £3,624 in mortgage repayments equals £25,676 to pay all the rest of life's expenditures.
To get the True Affordability Ratio we divide £70,000 by £25,676, which gives us 2.73
So under LVT, true affordability improves from 9.8 to 2.73, which results in housing being 3.6 times more affordable, as a ratio of discretionary incomes to selling prices.
Friday, 10 January 2014
Housing Affordability. LVT will sort it out.
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13 comments:
Mroe importantly, even if house prices didn't change (and I suspect they wouldn't), houses would still only cost half as much compared to net incomes.
@MW
So even under 100%LVT, banks and landlords still get to cream off the top in perpetuity? :(?
Hey I'm a landlord :)!
Bj, that is one of the great unknowns.
We know that LLs can't "pass on" the LVT if net incomes don't go up. And we know that rents go up if disposable incomes go up. And we also know that disposable incomes go up if income tax etc. is halved.
So part of me thinks that overall, the halfway house plan would not have a huge massive on net rents received by LLs or the selling price of houses (the capitalised value of the net rents).
Although, it would make rents and housing much more affordable relative to net incomes, as you have shown.
If Policy Exchange have any wisdom, they will immediately respond by saying you are begging the question.
You have no idea what will happen with an LVT proper. You are presuming what you want to happen.
This is the problem for any doctrine, religious and secular. They are blind to reality just like Jesus apparently was supposed to have said. So never make progress short of destroying a lot of stuff.
For example, what will happen in relative terms for ALL things - chronic drug addictions of all kinds, mental health, war fighting, welfare, charity, education, purity of government, working hours, and loads more. Have you considered these rather important factors too?
Not to mention devastating global war. Think about it. Across history back to Babylon, each time LVT was attempted, a civilisation threatening war happened. We are still fighting the war started by Churchill in 1909. There may well be long gaps between the larger battles. So what, it happens.
Do you agree that unless people in general change their minds about being gamblers with the future of our children, especially if those children are not in our own family, state force of LVT will wreak havoc?
And if people do change their minds and decide gambling is not actually good for other people's children, then LVT will just happen anyway, and anyone who opposes it will be considered quite mad. Just like people who propose it today who do not really care about other people's children but pretend to.
@RS The only thing we can't be sure of is the equilibrium point where rents stabilise.
You say low, so there isn't any surplus for a CI. Yippee! It all goes in disposable income.
MW says, it's likely to be so high that government costs, a CI and disposable incomes won't soak it all up. So some with go back into land values.
I say, lets not make this too esoteric, and just assume the equilibrium point just so happens to deliver a perfect amount of revenue and the rest goes to income. Hence zero land values.
OK, so your idealised scenario delivers optimum economic efficiency, but it's all the much compared to the dire system we have now.
That doesn't require a leap of faith IMO. Just a reasonably open and objective mind.
@MW
As rental values rise and these are soaked up by LVT, affordability rises too. Nuff said.
I've tried to keep things simple in order to highlight the relative merits of taxation vs planning in the housing affordability debate.
Not sure about the figures in the spreadsheet. Salary 1 is £20,000, of which £9,440 is tax-free, leaving £10,600 to be taxed at 20%, i.e £2,120. Then there is NI at 12% on £14,332, i.e. £1,719. Also there will be £280 NI to pay on salary 2, giving a total tax bill of £4,119.
Also, the £11,100 "personal allowance" has to be some form of CI, if the difference between it and the tax bill is to be credited to the household income.
So it is hardly surprising that houses suddenly become more affordable if the average couple go from having a tax bill of £6,177 (or, even, £4,119) to having a tax income of £1,300, even if the introduction of LVT doesn't change house prices at all.
The other thing that these calculations don't seem to take into account is Ricardo's law, which says that all the extra disposable income generated by a change in the tax regime will be soaked up in higher land rents and hence prices. What is important is the level of taxation, not the form of taxation. LVT may be better for the country due to having lower deadweight costs, but any additional disposable income it generates will feed into higher land prices as disposable incomes rise.
B, you might not be sure about the figures in the spreadsheet, but I am. You've missed off employer's NIC, VAT, Council Tax, TV licence and so on.
And no, those calc's do not take into account Ricardo's Law as they are for an existing owner-occupier household who can be heartily indifferent about changes in rents or house prices.
Further, those calc's assume fiscal neutrality, so while "hard working homeowners" will be a lot better off, those merely waiting to inherit £££s from a PWIM will pay more (or inherit less).
@Bayard
See the dispute between RS and MW for your answer to this.
Yes rental values will rise. But so will the a) allocational efficiency(PWIMS swap with families)b) the relative affordability of Homeownership c) the relative affordability of other goods and services.
So on one hand you've got an upward spiral of land rents, and on the other less relative demand.
Riccado's law isn't 100% GDP to rents, because otherwise we'd all (99%) still be as poor as Victorians. There is a split between taxes/capital/rent.
I like it. Where do I sign?
MW, I know you've done the figures on this before, but aren't you assuming a vast reduction in government expenditure to go from the average household being a net contributor of tax of around £6K to a net recipient of benefits of around £1K. If so, given the history of the UK, isn't that a rather unlikely scenario?
My point about Ricardo's law was aimed at BJ's assumption, which he takes as a given, that LVT will halve house prices and, therefore, rents. Yes, the calculation is based on an owner occupier, but when they come to buy somewhere else, they will be able to pay a lot more than £140,000 for their next house because their disposable income will have gone up.
B: "MW, I know you've done the figures on this before, but aren't you assuming a vast reduction in government expenditure…"
Nope. Go back the source and look it up.
I have assumed complete fiscal neutrality and that certain specified taxes are replaced with LVT and that the welfare system and personal allowances are replaced with CI, not a penny more, not a penny less.
Cllearly, if other govt spending were kept constant, this would mean continuing massive deficits, but that was their decision, not mine.
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