Sunday, 23 February 2014

Valuation Office Agency: Private Rental Market Statistics (England only)

I discovered something new this week at the VOA website.

You can download their spreadsheet for average rents. If you take Tab 2.5 for 3-bed homes, which is primarily semi-detached and terraced houses, which we can take as our basic unit of housing; multiply average monthly rents in 324 local authority districts by 12; add on £22 billion for existing annual taxes on housing (Council Tax and TV licence fee); and finally knock off £4,000 a year per home for running costs/depreciation of bricks and mortar; you end up with a site premium (total rental value less actual running costs) of £162 billion for the approx. 22 million homes in England.

Gross that up for Wales, Scotland and Northern Ireland and you end up with a nice round £200 billion.

You could make
- lots of little downward adjustments to that figure (the average figure for England is skewed upwards by eye-watering rents in Inner London so average rents in the other three countries will be lower); and
- lots of little upwards adjustments (using averages for large areas with approx. 70,000 homes in each understates the total site premium: an area with an average rental value of exactly £4,000 does not have a total site premium of £nil, because half the homes in that area will have a total rental value of more than £4,000 and will thus have some site premium)…
but by and large, my estimate of "about £200 billion" for the total site premium of UK residential land seems about right, and if it isn't now, it will be within a year or two.
On an even more arcane note, I've had debates with three or four different people who agree with the general principle of replacing the big bad taxes on earnings and output (VAT, National Insurance, higher rate income tax etc) as well as existing "property taxes" (council tax, business rates, IHT, SDLT and so on) with a tax on current site premiums for residential and commercial sites.

But their point of disagreement is that this would disproportionately increase business profits and hence the rental value of commercial sites. What they are really concerned about is that in political terms, the best kind of tax is one which somebody else pays, so instead of pencilling in £200 billion for residential and £40 billion for commercial, I should be pencilling in a lower figure for the former and a higher one for the latter.

Well, first of all, I have to admit that we'll never know until we try.

1) One counter-argument to their logic is that taxes on business are ultimately nearly all borne by individuals i.e. households anyway, so most of the tax reduction would increase household incomes (pre-housing costs).

If we got rid of e.g. VAT and National Insurance, it seems highly unlikely to me that all of this would just feed through into higher business rents. For that to happen, gross wages would have to fall by the amount of NIC currently being deducted, and instead of the VAT reduction being split five ways between lower prices-more output-higher wages-higher profits-higher rents, it would all have to go into higher rents collected by the landlord as rent or higher "profits" recorded by owner-occupier businesses.

2) The other counter-argument is that there is no hard and fast difference between commercial and residential land. It's the same land just being put to different uses. With a massive reduction in taxes on actual business activity, the number of businesses, the amount of business being done and the number of people being employed would go up, so some land currently used for residential or not being used at all would end up being used for business activity; whether that's flats above High Street shops being used as offices or people starting a business from home is nigh impossible to measure anyway and certainly impossible to forecast.

Assuming that all sites were being put to their optimum use (ha!) that means that the extra rental value of these re-zoned areas would not be substantially higher than the rental value of adjoining residential land.


Lola said...

All other things being equal I do not think that LVT like would result in higher rents. For a start there is competition. Then there is the adjustment effect since as rents rise so does the LVT take. Also, at the same time as LVT there must be planning aw reform and banking reform to ensure sound money.

Mark Wadsworth said...

L, as I've said before, there is such a huge margin of error, even if LVT were "passed on" £ for £ and tenants just meekly paid the extra, average tenant household would still be £10k a year better off, and there'd be similar savings for actual businesses.

And yes, if rents did rise, there'd be every reason to bump up LVT and reduce the flat rate of income and/or bump up the flat rate personal allowance, and we'd reach the tax-free equilibrium all the sooner.

Planning reg's sort themselves out, and if banks can no longer lend on the strength of capitalised rental values, the whole "sound money" thing happens of its own accord.

Lola said...

OK. Last para., yes, but. Unless something is done about the 1844 Bnak Charter Act and all the Acts and regulationism since then and the central bank / Government money printing thing, it will carry on. Governments and banks will find a way of carrying on the party.

Ben Jamin' said...

Shouldn't someone put the VOA in touch with the Treasury?

The Treasury in order to calculate GDP, have to have a figure on imputed rent.

The ONS puts total residential rent at £170. Less 33% bricks and mortar around £100bn per year land.

Mark Wadsworth said...

BJ, are you sure about that £170 bn?

I can't track down the figure on ONS site, but it appears to be much lower than that around £117 billion in 2011.

Ben Jamin' said...

Yes, £117bn Imputed Rent + Private collected rent = ££170bn approx (guestimate).

It's about half of what it should be anyway!!!

The ONS must be idiots. If you take average income rental yields, say 5% (actually cental London is the lowest 4%, everywhere else much higher)

and cross that with the value of UK residential property, say £6.5trn, you get £325bn per year.

Less maintenance etc, etc.

As a rule of thumb it's not going to be a million miles out. It should definitely flag up at the ONS there current methodology is miles out.

I think you and I can agree on that :)

Mark Wadsworth said...

Bj, we may be doing them a disservice.

There are three main ways of measuring GDP.

The relevant one includes the rental value of bricks and mortar as an alternative to the value of new homes built (ex. land).

The output one does not include land rent, as that is not an addition to GDP it is just the way it is split up between tenants and landowners.