Wednesday, 9 April 2014

Housing Crisis Catch-22

A quick summary of a Q&A I recently had with one of the UK's leading economic commentators.

Question. In general, would you rather live somewhere where land values are high or low?

Answer. High. Except when they make housing unaffordable.

Question. How do you know when housing is unaffordable?

Answer. Because land values are high.

Question. But you just said high land values are a good thing ie, they represent high GDP, high amenities and therefore demand.

Answer. Yes. But housing is unaffordable, so the Government must be restricting supply.

Question. But what evidence have you got for that? The 2011 census showed we've more dwellings per capita than ever.

Answer. Er.. because land values are high?

The point being, housing is only unaffordable because the rental value of land is capitalised into the selling price of land.

We know that affordability as a ratio of discretionary income would increase four fold of an average UK household, if the rental value of land was collected by the State in exchange for freeholders right to exclude, rather than taxes on income and capital.

This rather simple point of fact seems to elude the best economic brains in the World.

We are then left with the Catch 22 of high land values being good, except when they are too high.



Mark Wadsworth said...

Was that one of our usual Neo-Classical chums from IEA or LSE?

Ben Jamin' said...


No, it was from a pro-LVTer.

Serious point thought. Can you think of anything a government could do, that raises the rental value of land, yet is economically or socially harmful? And visa-versa.

If you can, it would be a legitimate KLN.

If you cannot, then it proves the "build, build, build" brigade do not understand economics on the most basic level.

Mark Wadsworth said...

BJ, there are plenty of things a government can do to raise the rental value of land in only some areas, but only at the cost of reducing it by a larger amount elsewhere in the country i.e. to our overall detriment.

I can't think of anything which e.g. the UK government could do which would increase the SUM TOTAL rental value of all UK land which would be the result of something negative overall to the UK.

But even if I could answer the first question, that is still far from being a KLN.

Ben Jamin' said...


Well it would be a KLN, because it could be argued that in order for the State to maximise it's LVT revenue, it could do things that are economically or socially detrimental.

ie, artificially restrict house building.

The fact you don't believe such a thing is possible, means you have a completely different way of looking at the economy to more or less everyone else.

Mark Wadsworth said...

BJ: "ie, artificially restrict house building."

Yes, that is an example of a thing which clearly pushes up rental values in the favoured areas at the expense of "everybody else".

Clearly, you maximise rental values overall by allowing more building overall. The fall in rental value of the no-longer-favoured areas would be lower than the overall increase in the now-favoured-areas plus the increase in value at the "centre" of the now larger towns.

Graeme said...

not wanting to interrupt the love-in but do you know where the surplus housing is compared with the demand? Eg if the housing is in Cumbria or North Wales and the demand is in Kent, then we have a problem Houston. But I guess you guys have already thought of this so you have a chart of supply-demand mismatches by region.

Mark Wadsworth said...

G, as you well know, similar houses sell for vastly different prices depending on where they are in the country, that is one way of measuring the imbalance between "supply" and "demand".

But on the other hand, there is not mass-homelessness in London and the South East but everybody in Wales has several bedrooms to spare.

And the number of vacant/empty houses is pretty constant everywhere, you get that in expensive areas and cheap areas.

Finally, as to this meme that "building more homes will get prices down" just think about it. If they build a load more homes in e.g. London, then the places where prices will fall is not London, it is in the areas from which people move away, i.e. Cumbria or Wales.

DBC Reed said...

I do not understand this argument: I thought the desired balance was high earnings low property prices HELPP?

Dinero said...
This comment has been removed by the author.
Dinero said...

Graeme Thats a good point about regions. And it shows its complications. If building is to bring down prices then the houses have to be built where people what to live. ie. the South East,
and if that is done then it is just a likely to only stop prices riseing and instead bring in more people.
More people means higher economic activity and then, not lower, but higher house prices.
The metroplois of london is an example of this effect.
And importantly the money to buy houses is drawn from the larger geographic region of the whole economy and not only the local area. The whole thing is interconnected and as Mark says houses go down in price in areas that people move away from. But people living in the central areas still have an income flow from selling things to the periphery, and may even end up in an unsatifactory arrangement of sending money back in the form of unemployment payments and other transfers.

Bayard said...

D, that would partly explain why building booms in the past and elsewhere have been accompanied by average price rises, not falls: the places that people want to live go up by more than the places people don't want to live go down.

Lola said...

I have to say, BJ, that that is a very well expressed post.

As to the current 'boom in house (aka land) prices' it seems patently obvious that all the taxpayers money (and even more invented money) being pumped into it, land prices, is now having its desired effect. I think that that is a Bad Thing. Others, for reasons that to me defy logic, think it is a Good Thing.

L fairfax said...

"Question. But what evidence have you got for that? The 2011 census showed we've more dwellings per capita than ever."
I thought that there was some very good evidence that the last 2 censuses (censi??) were not very accurate.

Kj said...

I think you are flogging this "building doesn't matter" thing a bit much. In each location, for each person wanting that exact location, it matters very much if building is restricted to one unit (or indeed zero) if it could have been two, three, maybe five, in the same location. The land price will not increase five times. Whether overall rents stay the same, or increase, isn't the only argument to be made.

Ben Jamin' said...


It's not building per se that's of interest.

My only problem with sticking 100,000's of new homes on green sites each year is that it is the sub-optimal solution.

It's the impact of the totality of all State regulation on rental values.

I would say if regulation is good, overall values go up. Bad, they go down.

This doesn't appear to be something any mainstream economists or commentators have considered or agree with.

This does matter very much because it's lead us up the wrong path.

Nowhere is this clearer that the debate surrounding our "housing crisis".

Ben Jamin' said...

@ L Fairfax

Quite right. That BBC piece was written in 2004.

Apparently, the whole "housing crisis" argument rested on faulty data from the census taken before 2011.

Kj said...

BJ: fair enough. Yes, building where there already is infrastructure, closer to where people actually want to live, is obviously better, but planning is a bit of a monkey wrench there as well.

Mark Wadsworth said...

@ DBC, yes, we want low prices and high wages, but we want high rental values because

a) This is the best and simplest measure of whether the government is doing a good job (high wages, low rime, social cohesion, good amenities) and surely we all want the government to do a good job, and

b) that is the ideal source of tax revenue, for spending, repaying national debt or doling out as welfare and pensions.

@ Din, ta, good summary.

DBC Reed said...

Oh no ! The Land Taxers need high land values argument (to increase the tax-take to cure all the problems caused by high land values). Whatever you do don't tax land values too much or the tax base will shrink!Sounds a lot like the nuns in Greene's "A Burnt out Case" who were upset that they 'd have no more lepers to look after to show how selflessly Christian they were because a cure had been discovered.
I am also not sure places like Knightsbridge exhibit social cohesion and high wages.Or those off-plan investment developments where nobody lives. Or The Bishop's Avenue for that matter.
It is partly because of this land tax fallacy (IMO) that I think as much as poss government spending should come from monetary reform obviating taxation and calling the bluff on the banks for creating the money they "lend".

Kj said...

Where to start DBC... I don't think anyone here has said don't tax land values too much or they will shrink. That's exactly the point, land *rental* values stay exactly the same whether you tax them or not, and if you don't, it's a freebie to the landowner.

Ben Jamin' said...


Indeed, used as the main source of revenue, we would expect rental values to rise quite sharply.

A sure sign of good regulation.

Taxation on income and capital shrink rental values.

A sure sign of bad regulation.

Mark Wadsworth said...

DBC, I refer you to the comments of my right honourable friends.

Or look at it this way - if interest rates go up, what happens to rental values? Not much. What happens to land prices? Go down. It's two different variables.

DBC Reed said...

KJ As you seem the most confident of the case for taxing "the rental values", will you explain how, for the purposes of self assessment, the average homeowner can work out what his/her land tax liability is ? Like, in the real world.