Friday, 25 May 2007

A house-price crash will save the Government from finding a policy solution

I’m sure Henry George was spinning in his communally-owned grave last night (though having seen this, I wonder if he’s been spinning for some time!).

Newsnight devoted most of their programme last night to housing. (Not that you’d guess by reading the first comment on the Newsnight blog, which drips anti-Semitic bile). Gavin Estler chaired a debate between Housing Minister Yvette Cooper, a Tory shadow less aristocratic than Michael Gove, the owner of a chain of estate agents and somebody from pricedout.org. It was interspersed with a few reports.

In the first instance, just about everybody agreed that more housing was needed. The Government recognised that 220,000 new houses were needed each year, but blamed Tory councils for blocking planning permission. One commentator then noted that it had taken the Government ten years to raise house-building from 100,000 to 110,000, whereas in the 1950s the Tories managed to raise house-building from 200,000 to 300,000 in a couple of years. The lady from pricedout.org agreed that more housing was needed. Everybody agreed that there was a supply problem, but nobody explained how it was to be solved, or why we are tearing down houses in the North of England while building new ones in the South.

There followed a series of truly bizarre proposals, including the usual anti-capitalist assault on second-homers and those buying to let (in an example of economic illiteracy, Ms. pricedout argued that more supply would merely be mopped up by wealthy buy-to-let landlords and so would not benefit first time buyers, which showed a total ignorance of the most basic principle of economics). Poor hippies could no longer afford to buy houses in the bohemian paradise of Totnes, lamented one Newsnight reporter, who seemed to wilfully ignore the fact that those selling their houses to property magnates and .com millionaires were the very hippies and artists who had given the place its character, and were now happily cashing in on the very material windfall that they had enjoyed.

It’s all the fault of the money-lenders, went up a cry that would not have been out of place in twelfth century York. House prices are over inflated because people are now able to borrow vast sums of money (up to ten times their salaries!). The words “credit control” appeared on the screen. The panellists happily discussed whether there should be a cap on the amount one is allowed to lend. Apparently, it is the job of the lender to lend responsibly. I had always though that it was the job of the borrower to borrow responsibly – it is they, after all, who must meet the repayments or lose their house – but nobody spoke up for the freedom of the individual to borrow whatever sum they deem necessary (or desirable) to make whatever arrangements they see fit.

At one point the Newsnight team mentioned property taxes. Apparently, they solve the whole problem. But Middle England wouldn’t like it, so it was brushed aside with a politically expedient waive. There was only one thing for it, they concluded. A nice house price crash will sort it out; but lets hope its not too hard, added the politicians.

It is a shame that Dan Rogerson was not available, as a Lib Dem might have tried to keep the discussion about property taxes alive for just a little longer. Like the issue of road user pricing (which is a Lib Dem manifesto pledge, though we have cooled to it since two million people signed a petition objecting to it), it is the right policy and one that needs to be defended, explained and pursued.

Land is a finite resource that owes nothing to the ingenuity or effort of mankind. It has more in common with fossil fuels or spectrum band-width than labour or capital. Because it is both limited and essential (unless one is a pirate radio station), it’s value constantly rises as society grows richer: money chases more and better goods, so prices actually fall in real terms (imagine how much a brand new ZX Spectrum would be worth now – kitsch value aside); wealth outstrips population growth, so real incomes slowly rise; but land is static, so rising wealth and demand must push prices up. Land value inflation is inevitable.

The most efficient way to prevent land becoming the preserve of the wealthy few (which George argues must inevitably lead to the impoverishment of those who do not own land, as any extra wealth they produce will be taken in rent) is for the state to capture rent and distribute it among the populous. The Lib Dem proposals are rather more modest; they would tax property values at 1 per cent per annum, with a view in the long-run to taxing only land values and not the value of improvements.

The result would be to calm house price fluctuation. It would discourage hoarding; it would be costly to own land that was not in use. It also rewards improvement: a field would have the same land tax whether or not a block of flats were built on it, so the owner’s interest would be in developing his land. It would capture a proportion of the wealth (as opposed to income) that would otherwise entrench privilege in families, and would capture unearned income (that deriving just from owning a rising asset). From an economic perspective, it would have a far more benign effect than taxation of labour or capital, both of which we should encourage. And it is devilishly hard to evade.

Middle England’s objection comes primarily from the fear that it will lead to a net increase in taxation. This is – or at least, ought to be – misguided. If land value taxation were the preserve of local authorities, it could replace the hated Council Tax. If it yielded higher returns than the Council Tax, the Government should respond by reducing the grant it gives local authorities and tax labour and capital correspondingly less (that is to say, reduce income, capital gains and business taxes). This would additionally hand much more fiscal authority to councils and so promote the devolution agenda. Tax changes should be at worst neutral, but would be altogether fairer, simpler, greener, more local and more efficient. Sound familiar?

10 comments:

Kit said...

"The Lib Dem proposals are rather more modest; they would tax property values at 1 per cent per annum, with a view in the long-run to taxing only land values and not the value of improvements."

If land value tax is the best solution (which most economists would agree) why propose to tax property values (which most economists would say is bad)?

Tom Papworth said...

A good question, and one to which I do not have an adequate explanation.

The policy papers states "...although it might be necessary to introduce a property tax on the basis of existing property prices initially, in the longer run it would be advantageous to base a property tax on the unimproved land value of the site. Eventually the system for valuation of domestic land cold be integrated with that for Site Value Rating..."

I've no idea why it is felt necessary to impose a property (including improvements) tax in the first instance. I agree with the thrust of your question, which is that we should move straight to land value taxation and never tax improvements.

James Graham said...

Is road user pricing the right policy? It depends on what you are trying to achieve. It is certainly the right policy to resolve more efficient use of roads and to reduce congestion, but it is constantly being cited as the solution to encourage fuel efficiency and discourage road use, which it manifestly is not.

Lib Dem policy is to cut environmental taxes and replace them with road user pricing. Until this commitment is rescinded, I can't support this policy.

Tom Papworth said...

James,

There is (or should be) two strands to this.

1) Road-user pricing to deal with congestion

2) A carbon tax that makes the polluter pay via. the cost of petrol.

I do not agree that Lib Dems should discourage road use. What we should be doing is ensuring that road-use accurately reflects the costs, and does not pass the costs onto others through dumping it into the atmosphere and letting others pay to clean it up (or reduce emissions elsewhere, or whatever).

The effect will be that driving is more expensive so less people will do it, which is fine. But the aim will be to leave people free to decide how they will travel but require them to pay the full costs resulting from their choice.

agentmancuso said...

I agree that skipping the feeble intermediate measure of taxing property by 1% and moving swiftly on to taxing land value thoroughly would be much preferable. It would also give us a clear and distinctive policy edge.
I also agree that LVT should be paid directly to the Local Authority, as the proportion of LA income generated from local taxation is thereby increased considerably.
This would not only lower the amount of income tax collected by central government, but would also facilitate the simplification of central tax structures by the introduction of, say, a higher contribution threshold and the flattening of tax bands.
The rational for road pricing still evades me; I'll have to give it some thought.

Julian H said...

I must confess that I don't fully understand LVT, especially how it's possible to tax something so illiquid.

For example: suppose I have owned the land my house is on since 1990 - in which time its value has increased from £100k to £1m. Yet I am a school teacher and my income during that period has merely risen from £18k to £28k per annum; enough to live off but no more. I have no money investments beyond my pension. How do I pay a LVT on the £900k that my land's value has increased by? I have not seen that £900k cash and never will do because my lazy kids are still living at home and anyway I am sentimentally attached to the house so I'll live in it until I die.

Tom Papworth said...

Julian,

Your question is too important to answer in a simply reply, so I have explained it in length in a separate post .

Jock Coats said...

A great write-up and very welcome, since I missed the program (I guess it's probably on watch again for another day or so).

incidentally, it seems to me that we have all but dropped any residential property tax, including the 1% on homes over a million, now, and some of us are very frustrated with that.

If you don't mind, I think I'll link to these two posts (this one and the explanation to Julian) on the new 1909 Group website.

Anonymous said...

A more obvious way to improve the availability of land and housing is to reduce the population of an already ridiculously crowded country.

Simply put, the immigration rate needs to be set to slightly less than the emigration rate. The falling birth rate in the UK will combine with this to give us all the breathing space we need, and perhaps we can all hope to be able to affor dhouses with gardens!

Tom Papworth said...

Ah, the Lebensraum argument.

Actually, the UK isn’t particularly densely populated. We’re about on a par with Germany and Vietnam and far more roomy than Belgium or the Netherlands, let alone South Korea or Taiwan.

What is more, we need immigration to make up for our poor birth rate. We’re not currently sustaining the population on our own, so unless we either breed more or welcome more immigrants, we’re going to have real trouble paying for pensions and public services in twenty or thirty years time.

As a solution for the price of housing, setting “the immigration rate …to slightly less than the emigration rate” is a rather long-term approach. It would take decades to have an effect. Surely it would be easier just to build the houses we need.