Friday 19 October 2018

.. when an insurance company puff piece makes more sense than an ivory tower economics professor.

From Moneywise (emailed in by Mike W):

The actual cost of rebuilding a house only accounts for three-fifths (59%) of its market value, with the remainder based on factors such as its location, according to Direct Line.

While the cost of rebuilding the average property in the UK stands at around £114,000, according to data from the Royal Institution of Chartered Surveyors, this only accounts for 59% of its value, with the remaining 41% derived from factors such as good local amenities, transport links and schools.


(Caveat: Insurance companies overstate rebuild costs (to justify higher premiums) and the cost of rebuilding one individual house (effectively an infill site, with all the complications and restrictions) is far higher than the actual cost of that a house when it was built as part of a larger development. And Direct Line's table at the end showing wildly different rebuild costs in different parts of the country is clearly wrong.)

But their overall point stands, a large chunk of the value of a home is "location, location, location" (median one-half, overall average two-thirds)

Enter Josh-Ryan Collins of the UCL, with a fine article in City AM from a couple of days ago:

For those on the left, there is a lack of public housing due to decades of underinvestment by the state. For the right, the problem is excessively restrictive planning preventing the market from doing its job...

... since the turn of the century, [interest] rates have been falling. More and more loose credit has flowed in to an inherently finite supply of desirable locations, pumping up house prices at a much faster rate than incomes. As prices are driven up, so more financing is required for home purchase, creating a feedback cycle that eventually leads to a bust, as in the crisis of 2007-2008.

Rather than pushing against this feedback cycle, successive British governments have supported it by repeatedly reducing taxes on property, enabling windfall capital gains for those lucky enough to have bought at the right time, as well as fuelling demand with subsidies on mortgage debt and for first-time buyers...

Policymakers and financial regulators must recognise that banks will always be able to create credit at a faster rate than new homes can be built if they are allowed to. In the lead-up to the financial crisis, there were huge construction booms in Spain and Ireland, but prices kept going up as banks poured more credit in to the system. When it finally came, the bust was actually worse than in the UK.

To break the housing-finance cycle, demand as well as supply side policies need a rethink. Fiscal and financial policy needs to do the heavy lifting here. First, regressive council tax should be abolished and replaced with a tax on the annual increase in the value of the land underneath a property.

Second, banks need to be gradually weaned off domestic property and return to their traditional model of business lending.


All good stuff (except for his odd suggestion for taxing land value increases
rather than annual rental values).

Finally, here is the ivory tower nonsense (emailed in by Lola). Let's look at the headline and his three bullet points:

Strangely, building more homes does reduce a housing shortage

Clearly it does. But the UK does not have a housing shortage, it has a crass misallocation of the housing that is available. I have put this to him and his ilk many a time: "There are more buildings inside the M25 than in the whole of Scotland. So why are prices so much higher inside the M25?". They never answer that.

The idea the UK has a shortage of land to build on is completely bogus

Clearly, the UK has no shortage of actual undeveloped land. But, as JRC points out, it has a limited supply of "desirable locations".

Some of the prettiest places in Britain also have some of the densest housing

This is a nod to agglomeration benefits. It is a self-reinforcing cycle, more buildings -> more people and businesses -> higher wages and amenity value -> more buildings etc. But like most Faux Lib/YIMBYs, he is actually in denial about this. He can't bring himself to admit that denser areas tend to be more expensive, so he uses the bizarre euphemism "pretty".

Tax reform will not end the shortage of housing, any more than taxing water in a drought

Price rationing is the best form of rationing, whether that's "desirable locations" or water -> Land Value Tax.
--------------------------------------
The rest of his article is feeble and failed takedowns of JRC's much better explanation of real life. He sticks in a KLN for good measure:

Good luck imposing swingeing taxes not matched to cash flows on a homeowner majority.

The majority of owner-occupiers, i.e. those in work, would be paying a lot less tax if they paid tax on the value of public services at their location instead of paying taxes on earnings and output/consumption. I fail to see how a tax cut is "swingeing". So it's clear - if it wasn't already - that maths and statistics aren't his strong points.

Even if you did, most people would still have less housing than they would like.

Quite possibly so. But every household having 'a bit less' than it would like instead of some having twice the space they need and others having only half; or pensioners in high wages areas swapping places with workers currently forced to commute long distances;has got to be an improvement.

He rounds off with this evidence-free platitude:

There are easy ways to improve the planning system that would lead to vastly better places and more homes over time.

Can we please stop blaming house builders for high house prices? They are ruthlessly exploiting high prices, not actually causing them. In their defence, they have consistently increased the supply of housing faster than population growth in any particular period (apart from 2009 to 2012).

Like any sane business, they just stick to the profit maximising level of output, which happens to be slightly faster than population growth (= approx. one new home for every one-and- a-half additional people). It is quite clear that if you give them more planning permission than this level, they will simply stockpile it. Which is why UK home builders have a decade's worth of plots with planning in reserve.

And I know that home builders do not have a formal or even informal cartel, it is just that they all do the same profit-maximisation calculations and have the same input costs, so they all make exactly the same decisions and move in tandem, as evidenced by Neal Hudson's fine chart showing that in the short term, they build one new home for each nine existing homes which are bought and sold in any year (scroll down to Fig 5 here).

12 comments:

Ralph Musgrave said...

“…UK home builders have a decade's worth of plots with planning in reserve.” I doubt it. Is there any other business which buys up hundreds of millions of pounds worth of inputs and just sits on them for ten years? E.g. do car makers buy up ten years’ worth of steel and leave it sitting around for ten years before turning it into cars? That strategy makes no sense at all.

I can certainly believe that the protracted process of getting full planning permission takes several years, and thus builders have several years’ worth of land which is GOING THROUGH the process of getting full permission. But that’s not the same thing.

I can also see that builders will be reluctant to build on land they’ve acquired and sell houses if the sale price does not enable them to recoup the full cost of acquiring the land. I.e. they’ll be tempted to wait for house prices to rise to where they CAN “recoup”.

But none of that alters the fact that a big increase the availability of land with planning permission could cause a collapse in the price of such land (except in big cities). In that case builders would just have to take a one time hit and accept the loss. House prices would then be permanently lower. Not that that’s necessarily the best way out of the problem: a hefty tax on capital gains earned by land owners when they obtain planning permission would be better, at least in theory.


Mark Wadsworth said...

RM, how do you mean "you doubt it". It's simply true. Look at their published accounts in which they boast about their land banks.

If it weren't true, I wouldn't say it.

Bayard said...

"But none of that alters the fact that a big increase the availability of land with planning permission could cause a collapse in the price of such land (except in big cities)"

Can you cite any evidence of that? Relaxation of the restrictions on building would not cause the price of building land to fall, because the price of building land is the true value of that land, unencumbered by any restrictions on its use. The value of the land is dictated by the money that can be made by putting it to its optimum use. If that use is under houses, then its value is dictated by the value of the houses that can be built on it, which is dictated by its location. The value of its location does not change, however much land is available for building on.

Mark Wadsworth said...

B, ta for back up. We might also think back to the time before planning restrictions. Was all land of equal value? Was it all available for agricultural value only? Was it heck.

benj said...

When I read that article along with https://capx.co/the-housing-crisis-an-act-of-devastating-economic-self-harm/

and https://capx.co/the-moral-bankruptcy-of-pretending-to-rebalance-the-british-economy/

it's all so ungrounded and often contradictory it comes across as a bit unhinged.

I'm surprised Capx give him a mouthpiece, but we live in strange times and the supply-siders have the benefit of a simple, though wrong narrative.

In regards to housing issues, Georgism-lite was dismantled with consequences. But rather than drawing the right conclusions, the supply siders assert it must all be because things just weren't liberalised enough.

The whole thing is bonkers.

@ RM

I believe they are trying to buy up years of cobalt options for their EV cars. Exploitable cobalt deposits being locationally concentrated to few places around the globe.

No doubt Myers would deny that too.





Robin Smith said...

Have you fellas considered the possibility that nobody wants LVT despite the consequences? And then why not?

I did a quick analysis of LVT's popularity over the past 15 years - it's fallen significantly and keeps falling the more intense the economic problems become.

You have all the evidence you need to know this already, why keep going over and over it.

You must realise by now it's a hopeless effort remaining at home on this safe 'ground' of yours.

Why not start using your undoubted talent to look into what's behind the collective psychosis of rent seeking?

What's stopping you?

ThomasBHall said...

Hi Robin,
Nobody wants Income Tax either.
Where is the evidence LVT popularity has fallen in the last 15 years? From my perspective, it seems to be more mainstream than it was whenever I first got interested in it.
I regularly see articles in mainstream press calling for georgism-lite policies, the Labour party has been making LVT noises, and even ConsevativeHome has had a number of LVT friendly articles.
I agree that the idea of paying land rent forever is unpleasant to many- the dream of being independent is strong, and telling people "you don't own your land" tends to go down badly.
That is why we talk about georgism-lite. A few more bands on the top of (a slightly more location based) council tax is going to be popular with everyone outside of central London. People in poorer areas pay less; people in expensive areas pay more. New surplus can be used to lower VAT, and the virtuous cycle can be continued.
I have Fred Harrison's book "as evil does"- although not read it yet.

Robin Smith said...

Hi Robin,

Hi Thomas, see comments in line below:

Nobody wants Income Tax either. --RS you are begging the question you want to hear - my question is why do we prefer income tax etc over LVT


Where is the evidence LVT popularity has fallen in the last 15 years? --RS are you asking for infinite evidence?

From my perspective, it seems to be more mainstream than it was whenever I first got interested in it. --RS Might this world view be because LVT is ideological for you?

I regularly see articles in mainstream press calling for georgism-lite policies, the Labour party has been making LVT noises, and even ConsevativeHome has had a number of LVT friendly articles. --RS and then follows an even deeper resistance than before - this might be the observation you do not want to scrutinise

I agree that the idea of paying land rent forever is unpleasant to many- the dream of being independent is strong, and telling people "you don't own your land" tends to go down badly. -- RS I'm not claiming LVT or whatever is better or worse than the alternative. I'm simply pointing at it scientifically.

That is why we talk about georgism-lite. --RS is this mitigation (compensations and exemptions)? If you were serious about your doctrine would this be seen as inauthentic?

A few more bands on the top of (a slightly more location based) council tax is going to be popular with everyone outside of central London. People in poorer areas pay less; people in expensive areas pay more. New surplus can be used to lower VAT, and the virtuous cycle can be continued.

I have Fred Harrison's book "as evil does"- although not read it yet. --RS with all due respect to the author, he said to me once "Robin, I've been doing this for 40 years, this is my job and what do you know about it?" Well apart from being the most publicly active and Georgist of the time(2007-12) quite a bit. My response to him was "well how come you don't understand its deeper roots already then?". The response was to 'moderate' me.

And so it goes...

My question remains unanswered. I realise looking deep into the collective psyche is very risky and dangerous. I'd say going there is the act of an authentic leader.

Lola said...

One of the great beauties of LVT is that it is an 'in yer face' tax. Anti-stealthy if you like. This is A Very Good Thing as applying it as the principal source of government revenue would make it bloody difficult for government to increase taxes. And the pressure would always be to reduce them. Taxpayers would be mush more exercised about waste and bureaucratic inefficiency.
Seems like a plan to me.

Robin Smith said...

That may well the primary reason its so easily discounted and opposed by the selfish and ignorant democratic majority. I'm not a big fan of democracy per se. So... when the majority of a nation are selfish and ignorant, democracy will deliver selfish and ignorant government. When virtuous, government of purity and thrift. Where do we stand today and would we prefer a King?

ThomasBHall said...

Hi Robin,
I'm not dogmatic- I'm interested in improving the way rents are distributed. I'll take steps in the right direction/ georgism-lite.
I'm not asking for infinite evidence, just some! I find that ideas along georgist lines generally go down quite well with renters who know there is something different today to the time their parents could easily buy their own home.
I agree, I may be suffering from confirmation bias about media coverage- but that is why I ask if you have evidence of lessening support, to show it. I am interested to see it.
Deeper roots are all very well- but we have had tax regimes in the past much better than what we have today, and I don't think the human psyche has changed much in the last ten thousand years.
As far as I see it, there are plenty of very real unpleasant characteristics in man that we try to regulate through rules based on some form of rationality. I don't see why formulation of tax policy should be so different.

MikeW said...

https://www.theguardian.com/society/2018/oct/25/developers-hog-land-for-record-130000-homes-analysis-reveals

Ralph Musgrave. Anyothers? Gold Bugs buying physical?

Re Mark's observation from Land Bank company data above. Same observation from Guv data. I assume the Letwin idiot,last paragraph, has been told by his mates how much will be trickled onto the market.