Monday, 17 March 2014

Killer Arguments Against LVT, Not (320)

Spotted by Kj at Economic Voice, another one trying his luck:

Estate agents have also made the same claim saying that many of these properties [subject to the putative Mansion Tax] would come on the market at once as owners try to downsize so depressing overall prices.

The reality of course is that while high value properties may well fall in price all those trying to downsize (owner-occupiers and investors alike) will be aiming their sights lower.

And, as we are not building anywhere near the number of houses we need, there will be an increased demand pressure further down the chain – this will push the prices of more modest properties below a mansion tax threshold up, not down and that pressure will be felt all the way down.

He's factually incorrect anyway. Even with our rapid population increase over the last ten years and historically low rate of new construction, the total number of dwellings divided by the number of residents has gone up ever so slightly, or at least kept pace; the real problem is lousy and inefficient allocation thereof.

This is another one from the "disappearing homes" sub-category of KLNs.

For a start, there are only about 100,000 £2 million-plus homes, so even if the effect is measurable, it will be tiny.

Next, there are three kinds of people who will be, in the future, living in homes subject to the Mansion Tax:

1. Those who buy in future. Let's say they had enough money to buy a £3 million home, which is now subject to a £10,000 annual charge (one per cent of the excess over £2 million). The rental value of that home is about £100,000 a year, so the tax is about one-tenth of the rental value, pushing its price down to (say) £2.7 million (wiping out several months' worth of unearned capital gains for the vendors. These people's decisions will clearly not affect the selling price of lower value homes by one penny.

2. Those for whom an extra £10,000 a year is a drop in the ocean and who will just pay it. These people's non-decisions will have no impact on prices either way.

3. Tenants, whose rental bill is unaffected. Landlords will see a one-tenth drop in the rent they can collect, in line with the one-tenth fall in selling price, so the home's percentage yield is exactly the same. Such homes will be neither more nor less attractive as investments, so his notion that "investors" will downsize is nonsense. It's like the "investor" getting divorced and the Court ordering them to pay one-tenth of their rental income to an ex-spouse and one-tenth of the selling price in future; that is absolutely no reason to sell such a home.

Next, yes, there might be a few thousand people left in such homes who are wavering about trading down, i.e. those for whom £10,000 a year is not a drop in the ocean (assuming there's no deferment option for PWIMs), and who will duly downsize. Most people for whom trading down makes personal economic sense have already traded down anyway of course, and quite clearly, the surge in London prices over the last twenty years has pushed up prices in desirable areas suitable for retirement, i.e. all along the south coast.

The chances are, these people will decide to buy somewhere a lot cheaper to free up cash (clearly they don't have much spare cash), but they will now have £300,000 less to spend on their next house, so the upward pressure on house prices along the south coast will be slightly muted, if anything.

So any downward pressure on prices will be felt all the way down the chain, and will not push up prices elsewhere. It's the same number of people in the same number of houses, end of, with the bonus that every time people move home, housing gets allocated slightly more efficiently, so the more people are prodded into moving the better.


Ben Jamin' said...

Why is it, every single article I read on the MT states is 1% of the total value? So a £2m home would be liable for £20,000 not the zero it actually is?

It can only be the Tory lie machine running at full tilt.

I've given up leaving comments in The Times/ Telegraph/ Mail about this now. It's become futile. People now believe it. It makes you wonder what is going on in the LibDem press office?

Mark Wadsworth said...

BJ, I guess because people are terminally stupid.

Ed Balls is still yapping on about the 10% starting rate being better than hiking the personal allowance. FFS. How is 10% tax 'better' than 0% tax?

But the Lib Dems could turn this to their advantage (if they win enough seats and Labour don't get an outright majority).

They could just introduce the MT (which is supported by the majority of people in opinion polls), but at the lower rate of 0.7%... on the full value, just like the 'Annual Tax on Enveloped Dwellings' which has worked a treat. That cuts away another swathe of legislation.