Friday, 11 April 2014

Praise be L&G

From City AM:

MOST companies have a bland or predictable worldview. Not so Legal & General, the insurance giant. It has developed a sophisticated analysis of our current economic challenges, highlighting the lack of housing supply and the side-effects of QE.

It points out that consumers are enjoying a £22bn transfer from PPI compensation payments, that home-owners have pocketed £28bn in mortgage interest savings thanks to low interest rates and that many have paid nothing for their homes over the years, with interest payments lower than cumulative capital gains.

Yes, others have pointed out that the PPI payments are just QE for the masses adding 0.5% to household incomes, and artificially low interest rates are just a massive transfer of wealth from depositors to banks and borrowers.

It's the bit about people not having paid anything for their homes which really hits the spot.

A more accurate calculation would be to add together capital gains* and the rental expense foregone over the years (a negative expense is as good as income) and compare that with actual mortgage payments. Thus anybody who bought more than ten years (or whatever, it's different for different people) ago has paid a net negative amount for their home.

Which busts the myth that "I paid for my home out of taxed income!".  No you didn't; you paid for it out of the rent you were saving, with plenty left over; as you end up better off, it's not really an expense at all (whether paid out of taxed income or out of anything else).

* Although the capital gain is largely on paper, logic says that everybody who has not made a capital gain has suffered a loss because they will/would have to take out a correspondingly larger mortgage which will end up costing them double that once you include interest, so whether you count a home owner's capital gain as real income or as another negative expense is by the by, it comes to the same thing.


Kj said...

In the parts of the world where we have mortgage interest deductions, the argument "bought my house out of taxed income" falls entirely flat, unless you bought it with saved cash ofcourse. If we OTOH had schedule A taxation and full cgt-liability, it would be symmetrical and one could argue that the income to buy the house had been taxed.

Lola said...

And that was posted in CityAM? Wonders will never cease.