Wednesday, 21 January 2015

OK, let me try to explain it again.

Last week, City AM carried the usual blah blah saying that high house prices are the result of a lack of supply:

The UK, and particularly London, is in the midst of what should be seen as a housing crisis. According to LSE professor Paul Cheshire, new build houses are about 40 per cent bigger in the Netherlands and 38 per cent bigger in Germany than they are in England. And yet housing goes for 45 per cent less per square metre in the Netherlands and, in Germany, prices did not rise throughout the entire 1971 to 2002 period.

A new paper from the Adam Smith Institute lays the blame at the door of the Green Belt. Despite the fact that 90 per cent of the UK is undeveloped, with half of the remainder gardens, Britain is hamstrung by rules hindering development in the places where people most want to live – around successful cities, particularly in the South East.

A reader's letter a couple of days ago referred to an "iron law of economics: if you increase the supply of something, the price goes down".

It's kindergarten Faux Lib economics though. An article in the same paper a couple of days ago looked at actual hard facts. Always start with facts and work backwards to the conclusion. Or establish that there isn't a conclusion, they are just random facts:

London’s population is forecast to hit its highest-ever level this year, surpassing its pre-war peak of approximately 8.6m. Yet it remains one of the least densely populated major cities in the world, according to research by LSE Cities, based at the London School of Economics...

By Burdett’s calculations, London is 30 per cent bigger than it was when its population last peaked in 1939. Even if London’s population density grew, it would bring with it a raft of benefits. If everything is nearby, cars are used less, for example.

LSE Cities’ research finds that holding family income and size constant, petrol consumption per family per year declines by 106 gallons (401 litres) as the number of residents per square mile doubles.

A higher population density can also facilitate a more diverse range of businesses and services than lesser ones can – such as hospitals, airports, theatres, and museums.

So that is the reason why housing in London is so expensive.

It has five time the population of other conurbations in the UK, as well as having most airports and relatively easy rail or car travel to the continent. So there is "a more diverse range of businesses and services etc".

So, glossing over the debate whether we should build outwards at a low density or increase density in the middle (they have much the same effect), what happens if we build more housing in London?

1. People who are currently 'priced out' will move there.

2. So the supply of housing goes up, but the number of people and hence demand for housing goes up pro rata and the effect cancels out.

3. There will be an even more diverse range of businesses and services.

4. So the cost of renting housing and commercial premises will go up even more.

If this were all not true, then the highest house prices would be in the Scottish Highlands and Islands and houses in London would cost tuppence ha'penny.

Whether this is all A Good Thing or A Bad Thing, and if so, what we ought to do about it (liberalise construction and introduce Land Value Tax, please!), or whether it is all irrelevant is an entirely separate debate.
@ Jim in the comments, strictly speaking, the best kind of LVT is based on "site premium" (as explained on KAALVTN) i.e. that part of the total rental value of a home or office or anything else which relates purely to the location.

But most people are unfamiliar with this concept, and simply taking a small percentage of current house prices is a good enough approximation, i.e. for most homes, the site-only rental value is around 3.5% of its current selling price.

It is not a straight line, unfortunately, it's clearly zero % at the very bottom (homes selling for £50,000 and under), rising to about 4% in the upper middle (homes selling for £400,000 - £600,000), then falling again to 2% or lower for multi-million pound homes at the very top. But hey.


Jim said...

Been looking through this blog and the KAALVT Blog, and am coming round to the idea of LVT. Its something that i was initially oppeed to, well thats any tax on anything to me, I object. but after looking into it and finding out its an "instead of", not an "as well as" as a home owner or "homey" as you seem to like calling me, I quite like it, now i have looked more and more into it.

just a quick question really,

Is it the rental value of just the land as is often stated, or is it the market value of the house and the house that's sat on it as is also often stated on both blogs, even the app ask's for market value of houses you earn, which last time i checked included the house, but then many posts contradict that and say its rental value of just the undeveloped land.

Jim said...

OK, thanks for the answer Mark. Makes more sense now.

Ben Jamin' said...

Paul Cheshire and his homey chums at the LSE are some of the UK top c**nts.

Just for the record.

They never go back to basics and ask simple questions.

I can only think they are ideologically opposed to doing so.

Their work reeks of anti-State supply side economics.

But, the irony is, it's the personal prejudice of idiots like him that keep the State the size it is. Because we need it to mitigate the injustice and inefficiency caused by the doctrine of twats like him.


Jim said...

Even us "homies" can be nice about things at times, especially to people who are trying to simplify our draconian tax system.
I am one of those "homies" who bought my home, not as an investment, but more because myself and my mrs decided it was pretty pointless owning one each, so both sold and bought this one as we thought its a nicer place to live.

So i guess to tax us on something we are using and enjoying at the exclusion of everyone else, is a far better idea than to dip into our wage packets, and then charge VAT on anything we buy later.

so to tax us on that, rather than on income and then again as Nat Ins, and then again as VAT sounds a pretty good idea to me.

Mark Wadsworth said...

BJ, are these people evil or just really, really stupid?

I cheerfully admit that until a couple of years ago i subscribed to the simplistic "It's all about supply" school of thought, but Bayard kept pointing out there was more to it than that.

But we have tried chipping away at these Faux Lib idiots and they simply refuse to accept what actually happens in the real world.

Jim, please note, I caved in last year and bought the place we were renting for a stomach churning amount of money. The fact that I am now an owner-occupier has not changed my attitude towards the whole tax system one jot.

I know what I was prepared to pay in rent, and I know that I'd be happy to pay 2/3 of that (or whatever) in LVT… provided of course they reduced the really bad taxes like VAT and National Insurance (for starters).

I also have kids and wonder what sort of world they are growing up in.

Jim said...

You are in pretty much the same boat as me then Mark. I bought this one in june last (its brand new though so i am in the rather unique position of knowing the value of the land and the value of the house and garage seperatly)

Though if I, a person who is only 6 months into a mortgage can buy into the idea, then i guess anyone can

Bayard said...

"Always start with facts and work backwards to the conclusion."

That's what you should do but it is something that is almost never done. Most people look at the facts, jump to a conclusion, then marshal arguments in favour of that conclusion. Any facts that appear to disprove the conclusion can be excluded, either by argument as to why they are irrelevant or by simply ignoring them.

Jim said...

I dont understand why its bad politics though, I mean if a politican stood up and said I want to introduce LVT. I would say BOOOO. but if they then said but i also want to get rid of National Insurance and VAT then Hoooray.

I cant see why so many people people object to it, other than my intial reacion of not ANOTHER tax, but it does not take long to see its not ANOTHER tax its a REPLACEMENT tax.

I really cant see why people who know that bit still object to the idea. I can also imagine it saving a lot of public money as well, lets face it the current system is a nightmare, so it cant be cheap to administer.

Ben Jamin' said...

@ Jim

We are all brainwashed homies, landlords or aspire to be so. The Duke of Westminster stands for all that is good and great about our free enterprise and capitalism system. What's the alternative? Big State socialism right?

That's the only choice 99.999% of people honestly think exists, because just like the North Koreans, we believe the consensus repeated in our education system, media, politics and board room.

Ironically, I think there is more chance N. Korea will end up like Singapore or Hong Kong before we in the UK adopt a proper LVT.


Ben Hardwood at the ASI should know better than making idiotic comparison between the UK and Holland or Germany.

1. What are minimum size standards/quality compared to the UK.

2. What is the over all tax burden. And are there any added costs such as private health. Any difference will lower discretionary incomes and thus HP's.

3. What base did German housing start at, and what was discretionary income doing over that period. What's been happening since 2002?

4. Is there really much of a difference between discretionary income to HP ratios between countries?

Because, if not, the whole planning theory goes out of the window.

As we've seen, average discretionary incomes across UK regions is pretty flat. Which appears to wee all over Prof Cheshires pet theory.

I'd love to see a cross county comparison.

One thing is for sure. It's not as clear cut as the supply side fanatics claim.

Mark Wadsworth said...

Jim, yes, recent purchasers are lumbered with stupid mortgages. Some people say that's an argument against my suggested full-on LVT, i.e. it is tantamount to a 3.5% increase in interest rates.

Well, yes it is. But recent purchasers have the cheapest houses relative to their income, so their overall tax saving (more LVT, less NIC and VAT) would be the largest, and they will be able to pay off their mortgages out of petty cash.

B, agreed.

BJ, cross-country comparisons are nigh impossible because it's not just planning which is different.

You also have to look at building standards, the tax system, rent caps, interest rate or mortgage caps etc etc etc.

So on that basis, the UK housing market today is completely different to what it was until about twenty years ago. It might as well be two different countries.

As to Germany, the point is that house prices were STUPID high forty years ago. Off the f-ing scale.

They haven't gone up much because there was nowhere for them to go. In the meantime, our prices have risen to roughly the level of theirs (before you adjust for their infinitely higher building standards).

Jim said...

its still no reason though, thats the bit i don't get. Well at least in my case though i do appreciate others will differ.

I am 39 years old.
Married no kiddies.
House cost £174,000 (not fantastic in london granted, but its in cumbria so it is a very, very nice higher end house)
So the mortgage is around £450 or so each month, but then with our combined earnings and a flat tax of 20% then we win.
think of the mortgage as rent, think of the LVT as income tax, now when we retire sure we have the tax, but we live rent free. besides as you say with the extra money in wages we pay off the mortgage much, much faster, so live "rent free" whilst we are still earning. where is the problem?

Mark Wadsworth said...

Jim, exactly.

If you look at it soberly and rationally, LVT makes sense for the vast majority, but it is the small minority who control things and whip up emotions about "you will never own your home and you will be a tenant forever".

(Clearly, there'd be a roll up option for old people who don't earn anything and who can't pay it. It comes off the kids inheritance, but seeing as those kids will be able to buy a home much more cheaply, they won't need to inherit one. That's how I see it.)

Jim said...

Thanks Mark. I had figured that if people object so strongly, then I must be missing something here, as i cant see why.

I guess it is, exactly as you suggest, just that controlling minority pushing their own interests via scare stories, and people just accepting that without being bothered to find out a little more about it first.

Jim said...

I guess i think differently to a lot of other people as well.

If LVT was introduced tomorrow, would I regret buying this one? - well no, I knew what i was willing to pay to live here, if someone else buys one the same for less, well good for them. I made my bed, I'll lie in it.

much like those people on holidays who have their holiday "ruined" because someone else is there £200 cheaper. Not something that ever bothered me, I was willing to spend £x for a week in the sun, so i did and i will enjoy it. whats it matter what the people in the apartment next door paid?

Bayard said...

Mark, perhaps it would be a good idea to do a "winners and losers" post for LVT. AFAICS, the main losers would be the moneylenders, land speculators (aka "developers") and people like me who live in a large house but have a small income. Anyone else you can think of?

Mark Wadsworth said...

J, good point about holidays. I'm with you on this one. Or at least, once I've paid for something I never check later to see whether the price has gone up or down.

B, it's one large category: people with low earned income relative to the amount of land they own or rent they collect.

So your list is just about all of them, except let's give a shout out to the Poor Widow In A Mansion.

Jim said...

I want to meet a "Poor Widow who lives In A Mansion" it would be a life time first.

I know a few less well off widows, I know a few financially well off ones too. But i dont know any who live in mansions.

any widows i do know, who lived in larger houses generally could not wait to sell them after becoming widows, for a smaller house that's easier to manage.

Bayard said...

Jim, Mark thinks he might have found one or two in Northern Ireland, but I am convinced that they are a mythical beast, like the mermaid or the unicorn. When the phrase was coined, back at the start of the C20th, there were probably quite a few about, but they all seemed to have died out. The Daily Mail is very good at producing one or two examples of a category of person that it is supporting or castigating, e.g. the Immigrant on Benefits with Lots of Kids, as if the fact that there are one or two proves that there are thousands, but while they often mention the concept of the PWIM, they never produce a real live example.

Bayard said...

"people with low earned income relative to the amount of land they own or rent they collect."

Not quite: owner-occupiers should pay less in income taxes and more in LVT and the two will largely cancel each other out, so the amount they can afford to borrow should remain the same, therefore land prices will continue to be governed by average disposable income and interest rates.
Tenants' incomes should go up a lot, so Ricardo's law of rents states that the rents landlords collect will rise accordingly. Where landlords would be worse off would be when properties fall vacant, although I wouldn't put it past any government to allow tax relief on vacant properties.

Random said...

Tax relief on vacant properties?
What a bad idea!