Wednesday, 21 July 2021

Killer Arguments Against LVT, Not (488)

Somebody emailed his KLNs to the Labour Land Campaign:

1. A couple of teachers save up for 10 years and buy a flat in London for £400k, with £300k mortgage. They want to live in it for 5 years and then move to a larger £600k property to start a family. LVT is introduced and within a year their flat is now worth £300k.

Although they have lost their deposit it doesn't matter because they are paying down the mortgage by £5k each year and also continue to save £10k per year. So after 5 years they have built up equity of £75k. The house they want to buy is now worth say £450k (rather than £600k).

So now they need a mortgage of £375k, whereas without LVT, they would have £175k equity so would need a mortgage of £425k. They are better off with LVT in place, as long as they can wait 5 years before buying. No need for compensation.

Agreed, but that was just his first example as background, here's the actual KLN:

2. The only people that might lose out significantly are those who bought within a year or two of the LVT coming in, on a 2-year mortgage deal, and get bumped onto a variable rate because they can't remortgage.

They might then no longer be able to save sufficiently to build up much equity at all within 5 years. And would be stuck in housing that is too small through no fault of their own. But most would eventually be able to save their way out of it.

My reply:

The whole negative equity thing is all a red herring.

"The only people that might lose out significantly are those who bought within a year or two of the LVT coming in"

Some points to note:

1. Trading up will still be cheaper and overall mortgage payments will be lower.
2. If LVT just replaces existing taxes on land and buildings (council tax, SDLT, inheritance tax) then their tax bill - and house prices - won't change much. They pay a bit more in LVT than they did Council Tax but save as much again in SDLT when trading up.
3. IF LVT goes further and replaces the really damaging taxes like VAT and National insurance, then they will be better off every year, so they can save up, pay off the mortgage, enjoy life a bit more, whatever.
4. If LVT goes further... then there's no reason to assume that house prices will fall much. The extra net disposable income (VAT and NIC take about one-third of your earnings) will largely go into rent and house prices, so it cancels out.
5. Even assuming house prices fall and some people are in nequity, don't forget that the principal mortgage amount is just a number.
Let's say you have a £100,000 mortgage @ 3% interest, 15 years left to pay.
That means annual payments £8,400 = total payments £126,000 over 15 years.
That's what the bank cares about - the £126,000.
So the bank just replaces the £100,000 @ 3% mortgage with (say) a £75,000 mortgage @ 7.4%. Or a £60,000 mortgage @ 11%.
All those mortgages have the same annual payments of £8,400 for 15 years.
Your payments don't change, you are unaffected (and have more disposable income) and there is no nequity any more.

No problem that I can see.


Andrew Carey said...

By a few % the costs of collection of LVT are less than for the other more complex taxes. And there are no discounts to administer for single occupancy, students, and empties.
Far less need for payment plans, attachment of earnings or benefits - if an LVT payer doesn't respond to a court summons and the later enforcement, then the Billing Authority can put a charging order on the property so they are paid first when it's sold.
That saving benefits everyone, and the liberated human resources can work in sectors crying out for labour - adult social care, hospitality, HGVs etc.
That's another benefit.

Mark Wadsworth said...

AC, thanks, we could make LVT complicated if we want, but I also prefer simple.

L fairfax said...

Surely negative equity is a problem if you have a mortgage which goes to SVR after 5 years and have to pay a lot more because you can't re mortgage?

Lola said...

What's more, fixed mortgage rates are insurance, not money saving. You never ever 'save money' on a fixed rate (unless madnesses like ZIRP) because fees etc. Best way is to take the lowest spread tracker you can find, preferably full term, but if not as long as you can get and make sure there are as little fees as possible. and that it is a portable deal.

In your scenario above they might be able to port said tracker and top up with another similar - excepting crafty lenders forcing you to abandon original tracker.

So that is another argument pro LVT.

Mark Wadsworth said...

LF and L, the point is, nobody should really care about the nominal amount of the mortgage. All the banks care about is the amount of the actual repayments, as does the borrower.

If we went mad and did full-on LVT overnight with no other taxes, then yes, house prices might fall short term.

In which case the government just tacks on a law that says anybody in nequity can swap his mortgage for a lower nominal amount at a higher interest rate.

But if LVT is introduced gradually (and I have never recommended anything else), any price falls (to the extent there are any) would only be gradual as well, and nequity would not be an issue - people are paying off mortgages quicker than prices are falling (to the extent that they even are falling).

Lola said...

MW. Of course. I was simply pointing out the nature of discounted fixed rate deals.

Mark Wadsworth said...

L, your mortgage advice is as sound as ever. Fool that I am, back in 1998 I bought a house with a mortgage fixed at 6.89% for ten years as 'insurance'. I spent most of the next ten years kicking myself.

Robin Smith said...

Have they considered Location Value Covenants, where they volunteer their land value in exchange for mortgage interest.

This is what we put to you in St Pancras station in 2008 and you rejected out of hand like a KLN without even asking for clarification.

Very much a religious position

mombers said...

The whole fixed vs floating rate mortgage dilemma would be moot if mortgages were on building value only and LVT a much less volatile amount that can be covered by enhanced private property rights on labour and capital.

That said 5 year fixed rates are a good idea under the current dreadful tax system. You don't need affordability checks under FCA mortgage affordability rules to be stress tested for higher rates, if they ever materialise...

Mark Wadsworth said...

M, exactly. People would be able to pay off their mortgages in ten years or so, maybe 10 year fixed would become the norm?

Lola said...

M and MW. yep. And you would not need the 'insurance' of a fixed rate if there was sound money and banking. rates would be stable and the lender would likely be quite happy to lend on a fixed rate - that is fixed rates would be the norm - as they would not need to hedge out Central Bank failure.