I’ve been very good this past month and have managed to keep schtum about the Liberal Democrat Youth and Students’ decision to reject local income tax in preference to land value taxation until after the elections were out of the way. Now I see that the entire motion is up on the ALTER website, I suppose my self denying ordnance can come to an end.

LDYS has a proud history of leading where the party subsequently follows, and I’m hopeful that this will prove to be another example of this. And it is timely, with the National Institute for Economic and Social Research comparing the rise in property prices to the national debt. Aida Edemariam wrote a good summary of how the problem is affecting the whole of the UK in the Guardian on Friday. We have to do something, and a tax on land values is a lot more economically respectable than a crude property tax.

One of the problems the party faced in the latest round of elections was a failure to stand out from amid the crowd. Taking on intergenerational equity would give us a USP. It isn’t simply an old-versus-young issue as older people who were simply in the wrong place at the wrong time have lost out just as much as the younger generation who are now left with the consequences. The introduction of any new tax could be matched by a cut in other taxes, ranging from existing property taxes such as stamp duty through to income tax. Such a tax shift need not be unpopular.

Fundamentally, we have to tackle this situation whereby people have more incentive to invest in bricks and mortar than in stocks and shares. That is bad for the economy whichever way you look at it. I don’t want to sound all Marxist, but if the political system doesn’t solve this problem, the economic system will do it for us in a way that will be much more painful. I’m amazed that the political class isn’t looking at the emerging picture and isn’t worried. To be fair, some individuals such as Vince Cable and David Willets, have been warning about this for some time, but their views have been falling on deaf ears.

But there is no prospect of Local Income Tax on the horizon. With the combined SNP/Lib Dem seats in the Scottish Parliament 2 short of a majority, it won’t be introduced there. Labour and the Tories have resisted the simple populism of LIT with good reason: they appreciate the danger of scrapping property taxation altogether even if they lack the courage to introduce a proper system that doesn’t have the flaws of council tax. Rather than dismissing this as stupidity, the Lib Dems ought to consider why this is one popular policy our rivals (except for the SNP, which in itself should tell you something) have declined to steal.

I still have high hopes that sooner or later the Lib Dems will realise that this is one issue that we could really make our own. Gordon Brown’s announcement to cut income tax by 2p in the pound has forced us to revisit our taxation policy (it’s amazing how much of the paper we passed last year has been borrowed by the Tories in Labour in such a short space of time). Hopefully, more radical minds will prevail.

Share This

Not much time for blogging at the moment, but I thought I should flag this up now:

The National Institute for Economic and Social Research says in its latest journal that the surge in house prices is one “of the major adverse developments affecting the UK economy over the past 20 years”. The thinktank’s director, Martin Weale, says the rise has a similar effect to rising government debt because it transfers a burden to future generations.

Share This

Surprisingly little discussion in the Lib Dem Blogosphere about Chris Huhne and Andrew Stunell’s proposals for tackling the thorny problem of reducing the carbon impact of British housing. Indeed, the only commentary at all I’ve read thus far is Iain Dale denouncing it as illiberal. Poor show.

Myself, I’ve only skimmed through the policy paper and have yet to fully digest it, but it does seem to be a very sensible policy. In short, it works like this: beef up building standards so that all new build will meet tough efficiency standards by 2011; encourage energy companies to offer people long term loans (which will stay with the house, not the individual) to install a “WarmHome” pack on existing buildings; in the longer term, increase stamp duty on homes which haven’t installed the package.

Using the market in this way to promote energy efficiency is at the heart of the Lib Dem approach to environmental policy. Making utility companies the solution rather than the problem and keeping the use of environmental taxation to a minimum is both pro-business and pro-consumer. Iain Dale’s criticisms are flawed on a number of grounds:

• the policy is not about ‘forcing’ people to take out loans, but encouraging them to do so by spreading the cost over 25 years and thus enabling them to see immediate savings. The emphasis is squarely on carrot, not stick.
• the retrospective stamp duty ‘punishment’ is actually an inducement to encourage people to take steps which would save them money in any case. And they will be given a year’s grace to make the necessary changes.
• he is completely wrong about the system of random spot checks: these are about giving people peace of mind about building standards. They are checks on the industry, not the consumer. Nowhere in the paper does it say that people would be ‘forced’ to undergo inspection. On the other hand, a free spot check to ensure the £10,000 you have just forked out has actually been spent on something which meets minimal standards is something I would have thought most people would welcome.

My one complaint about the paper is that the use of the word mortgage is a little intimidating. Once I read the detail, I was happy, but the ‘m’ word suggests expensive loans hanging over peoples heads for decades when in fact the paper is proposing savings. I prefer another analogy used in the paper: hire purchase.

Overall though, this is a valuable contribution to Lib Dem policy (not that it will be party policy for another 5 months) and something I suspect the Tories will be ‘borrowing’ very soon, regardless of Mr Dale’s reservations.

Share This

Critic of Nick Cohen that I tend to be, his contribution this week outlining the problems with the UK housing market is well worth a read.

Share This

I must learn to curb my enthusiasm about the Conservative Party. Contrary to my post earlier today, it would appear that the Bow Group’s proposals today (which can be found in full here) are not in fact a land value tax at all, merely a property tax and that going by the comments on ConservativeHome, the Tories are not likely to embrace the system any time soon (hat tip: Jock Coats).

I think we should still welcome the fact that these proposals have been published and added to the public debate on the issue however. There is indeed a very real difference between a tax on property values and a tax on land values, but the fact remains that regardless of the flaws, we would have significantly less of a problem with housing in this country if we had higher property taxes.

Taken as a straight proportion of property value however, taxes of this kind can have a pernicious effect. While it encourages people to want to maximise the use of their property, discouraging empty properties by forcing the landlord to pay an annual rate, it discourages actual investment. Double glazing, insulation, even (at least in theory) a lick of paint would increase the property value and thus the tax. This has a pernicious effect when surely there is a social good in encouraging such investment.

Land value taxation is different in that it is not levied at all on the capital value of a property, just its land.

What’s the difference? Well, without getting drowned in the economics, the simplest way of drawing the distinction is to imagine two houses, exactly the same, one of which is built in Newcastle and the other is in London. Let’s, for argument’s sake, say that the Newcastle house has a market value of £100,000 and the London house has a market value of £300,000. What’s the difference? Relative land values (or, as Kirsty and smug bloke put it “location, location, location“).

London bricks are not made of gold and Newcastle doors are not made of balsa. The reason the values vary so widely are because of a number of external factors such as:

• the wealth of the surrounding area, including employment prospects
• public services such as transport links, schools and hospitals
• speculation

Speculation is a problem all markets face, but it is particularly problematic in the property game because demand is pretty much constant and supply is finite. What’s more, buyers stand to gain by getting in on the game as well. As a result, prices can escalate to quite absurd levels before a correction comes crashing down around people’s ears, and anyone playing the long game can afford to wait a few years knowing that the speculator bubble is bound to begin again soon.

Look again at the graph on housepricecrash: there may well be peaks and troughs, but the overall trend is up. Small time operators may have to be wary, but the large operators can only win in the long term. Why else do you think so much of London is still owned by just a few families? And why else do you think so much of London is now being bought up by Hong Kong conglomerates?

As well as simple speculation however, landowners also cash in because the taxpayer hands it to them on a plate. Property investor Don Riley has calculated that the Jubilee Line Extension earned landowners a grand total of £13bn - the cost of the JLE was £3.5bn, every penny of which was paid for by the taxpayer.

Not all land values are tied to government investment in this way to be sure, but they certainly are generated by wider society.  By definition, anything that the landowner does do to generate value is capital investment.

So, in essence, the case for land value tax is quite simple: it encourages use, discourages speculation and simply recaptures our own common wealth.  It doesn’t have the same problems associated with taxes on labour (including income taxes) and capital.

The downside is, if you tried introducing full land value taxation overnight, you would almost certainly cause huge problems as the housing market plunged and individuals found themselves trapped in negative equity through no fault of their own.  Ultimately, we have to recognise that people have been making the most of the existing system, however flawed, and that imposing any economically “perfect” system is bound to cause problems.

But there are ways around this.  Firstly, and obviously, don’t introduce full LVT overnight.  If instead you simply used it to replace existing property taxes (stamp duty, council tax, business rates and, arguably, IHT), the impact would be minimal.  Secondly, protect the smallholder by introducing a homestead allowance up to a certain value: this means the people at the bottom end of the scale are protected.  Thirdly, allow people under certain circumstances (e.g. the elderly) to defer payment until after the value of the property is realised.  That way, no-one will be forced out of their homes (although there would still be an advantage in moving).

Even land value taxation at modest rates would lead to a more rational property market however. This leads to the most obvious question - if it’s so wonderful, how come we don’t have it already?  The answer is, the people with the most to lose are the people with the most power.  This was certainly true in 1908 when Lloyd George attempted to introduce a modest land tax.  Back then, his enemy was the landed political class, squatting in the House of Lords.  And there’s no getting away from the fact that the people who stand to lose from this proposal now - specifically wealthy landowners - will mount a spirited defence.  But it cannot be emphasised enough that they will ultimately be defending a system that rewards speculation and discourages hard work.  That is not a sound basis for a strong economy.

Share This

Just under 100 years ago the Conservative Party, from its position of strength in the House of Lords, went to war with a reforming Liberal Government on the issue of land value taxation.  Now it is the latest thing in Tory fiscal reforms.

I’ll blog about this later, but all in all this is something we ought to welcome.

Share This

A poll by the Hansard Society to coincide with the local elections in May had the Liberal Democrats winning the Youth Vote: 30% of 100,000 pupils in over 200 schools voted Lib Dem, with Labour and Greens tying on 25% and the Tories on 15%. National policies such as free tuition fees and opposition to the Iraq War probably account for it, but the Lib Dems could be about to squander this support. The reason is an unlikely one for the Party that still sings “The Land” at its annual conference: the virtual abandonment of any domestic property tax. (more…)

Share This

Having just given HousePriceCrash a plug, it would be churlish of me not to mention that the Royal Institute for Chartered Surveyors are predicting a little price boom at the moment. The story can be followed on Reuters and the Daily Express website (the latter I understand is claiming prices will boom by 50% over the next six years).

Surely HPC and RICS can’t both be right? Worryingly, they could be, but we’d better hope that HPC is closer.

Despite the rosy coverage in both Reuters and the Daily Express, a rise in house prices essentially means that demand is outstripping supply. Yes, your economics A-level was right - unlike the magical fairy land where Express journalists live, prices go up and down depending on how much there is of a thing and how many people want it.

What your economics A-level might not have explained very well (mine certainly didn’t) was that if demand is perceived to be outstripping supply, price can escalate even higher as people ramp up prices in an attempt to cash in. People will tend to stockpile - sit on perfectly good housing believing that if they delay their sale, they will make a killing. And in turn, people will buy at escalated prices on the assumption that they will be able to sell on for even more. It’s called a bubble.

The problem is, the invisible hand of the market is such that sooner or later it will drag the price down - hence that rather mountainous looking graph on the front of HPC. If you stay ahead of the curve, you stand to make a fortune. If you stay in the market too long, you’ll get burned.

And if you’re a young adult trying to buy a first home? You’re utterly screwed.

The good news for property owners is however that unlike 17th century tulips, late 20th century dot-com shares and, periodically, American comics (I worked in a comic shop in the early 90s when the comics industry went through a little bubble of its own), in the long term housing tends to keep its value. That isn’t to say it doesn’t peak and trough, but the other thing to notice about the graph on the HPC website is that the overall trend is an increase. That’s because people always need land and there is only a finite amount of it to go round. Land is not capital, and it behaves differently.

The implications for this explain why I said on Saturday that I didn’t think PricedOut goes far enough. The government can’t simply legislate itself more homes if the market knows it is onto a winner with the number of homes currently being built; if we attempt to build more homes than the market wants, then developers will simply put the breaks on, as they have been doing for the past 20 years. Raising interest rates will probably cool down the market, but the potential gains are still huge - speculative pressure will remain.

The problem, I suggest, is the market itself, and specifically the fact that it treats land just like any other commodity, despite the fact that it is sui generis. But I will continue this another time as it’s getting late.

Share This

A couple of websites have caught my attention today:

• HousePriceCrash - is dedicated to highlighting that we are due for a corrective house price crash soon. Prediction is a mugs game, but they are almost certainly correct - any speculative market is subject to boom and bust no matter how much Gordon Brown protests. This flash animation is quite entertaining as well.
• PricedOut is a campaign I would almost certainly support, although I might quibble about whether their proposed policy changes go far enough.

Share This

Can I just say how important it is that sites such as HandsOffOurFuture are here to remind everyone that there is a huge population of people who will be driving the economy over the next three decades but as far as I can see they will be suffering taxation without representation.

My business is in helping young people on to the housing ladder and from what the hundreds of young people we advise each month are telling me they don’t have a stake in our homeowning democracy.

The first thing to realise is how important it is to make housing affordable. (more…)

Share This