I was speaking at #OccupyNorwich yesterday. One person who joined the audience, with his wife, graphically explained what is wrong with the economy.
A youngish man, in his late 20's I'd guess, he was angry. He'd done everything society had asked of him. He'd got good GCSE and A levels, done a practical degree (pharmacy) and was now working as a chemist - the sort of skill society undoubtedly needs. his wide was working too. But despite that they cannot buy a house and so feel unable to start a family because of the uncertainty rented accommodation provides. And he had no idea when he might do that: the level of deposit demanded was so high that after paying rent the obstacle to purchase seemed insurmountable.
Why was it that this was so? he demanded of me.
And I had to agree he was right to make the demand, although it was not in my gift to put things right. And yet we can put things right.
There is no doubt at all that current house prices are massively over-inflated. That is because banks lent too much on the security of land. And yet to restrict lending now does not of course help this man and his wife.
It's also because we did not tax housing enough, either through land value taxation, stamp duty, capital gains taxation and most especially inheritance tax, which is absurdly low. All have contributed to the over-pricing of land.
Giving tax relief for those buying property to let when it is denied t those borrowing g to ht has also over-inflated prices at the low end of the market, enormously. Buy to let interest releif has to go.
Being too lax with overseas landlords, and landlords holding property through offshore companies has also mean a major error of judgment. HMRC has failed in its duties here.
And as I have argued, giving tax relief to let 500,000 properties (at least) sit vacant is crazy: empty properties should be taxed at up to five times normal rates (having allowed for absence for sickness) to raise revenue and force property into the market.
But most of all, the simple fact is that wages are too low and property prices are too high. We can't deflate without failed banks and recession. So we have to reflate, and that means we positively need wage inflation in this country whilst we do at the same time ensure house prices don't rise by building significantly more homes to meet demand, so holding donw prices by meeting demand.
Inflation frightens people, I know, and someone always raises the spectre of Zimbabwe when it is mentioned, but that's ludicrous. The economic environment created by a despot intenmt on destroying his economy is hardly a basis for rational comparison. And the fact is that right now the debt that banks and governments have created cannot be repaid: it's pointless pretending that might be possible. In that case there are, as I've suggested five ways of tackling this issue. They are:
1) Inflate our way out of this situation, with the debt being devalued into a manageable sum (historically this is how most debt has ever been repaid)
2) Default - which has unknown consequences;
3) Forgiveness - which is planned default;
4) Enforced saving (which is not the same as austerity) but which directs much saving into government debt to ensure funding remains possible;
5) Closing the tax gap - i.e. collecting the money due to government to help manage debt;
6) Social breakdown - which many now see as a very high risk indeed.
I'm going to comment separately today on why collecting tax is a Keynesian solution - because it is. But right now I'll concentrate on the first three.
Default or forgiveness is likely in some cases - such as Greece and Italy. Ireland and Portugal will eventually follow suit. But for the UK that is unlikely. Here inflation is the answer. So long as wages are allowed to rise with prices and land supply is increased by public building and enforced purchase of land banks from property companies refusing to use them if need be so that house prices are kept down then inflation firstly writes off debt and secondly restores order to markets corrupted by excessive money creation. This is a powerful social advnatage.
But yes, it's true that some people's savings will suffer in the process. I agree that's true. And it is a price well worth paying to avoid social mayhem or war. We can survive iinlfation, quite easily. We cannot survive war.
So let's be realistic about the choices we make now. Savings savers may not be possible is we save society - and yes, decent state pensions may be required as a result. But that we can afford.
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You make some very valid points, I would add restricting property ownershp by non-residents and allowing more easy redevelopment and rezoning. Another problem is that housing benefits undoubtedly distorts the market and keeps rents and hence house prices high. It is not a benefit to poor people but to rich landlords. There is something wrong with your housing market if 5m people receieve housing benefit, and that poor quality housing rented for social housing achieves similar rents to private rented housing. How you fix it, I don’t know.
Well you have gone quite far here Richard, perhaps too far for the general public to follow..
Housing is a problem but taxing it further is a non starter, SDLT is already at 5% on some properties how will increasing it help the market by stopping people moving?
Capital gains on primary houses is a suicide note for any policital party, forget that one and as for IHT it is the transfer through gifts and Trusts that reduce the tax collected, how are you going to tackle that?
And finally on empty homes, how would you know they are empty for 5x tax, more snoopers ringing doorbells? As for the BLT interest relief, how would you remove that while leaving it for companies in general business or is there no need for investment through lending?
That’s fine then
Shall we deny young people the chance to get their own home instead then?
Candidly – your comments are pure smug self interest
But perhaps your kids will be alright – and you don’t care about anyone else?
My comments represent democracy in that 68% of people in the UK own their own property and will not vote for it to fall in price!…..If you want to help people you will have to find a way that does not attack the interests of the majority…..Or like the EU can such issues be put aside when it suits you..
Inflation does that – it pays off the mortgages of most of the 68% painlessly
Don’t you know that’s how mortgages were always repaid, historically?
Are you going to answer Richard’s points or just resort to insult?
It is also amusing to note the positions which people swing to and from. One day we hear that we should be like Germany where most people rent and isn’t that wonderful because it means we won’t be living in a materialist society (which, ironically, would would create a landlord/tenant distinction far sharper than in this country at the moment). The next day someone says that actually we need young people to own their own homes and this is essential if they are to start a family and thus home ownership should be celebrated and encouraged.
I wish people would make their minds up.
I have answered Richard’s points, completely
Largely because all he said was people’s greed will block young people having houses and to be candid – as Helen shows – that’s the position of a tiny minority of greedy people
Most aren’t
And that is a complete answer
14.5 million home owners in England. 8 million have a mortgage.
So only just over half of home owners have a mortgage to inflate away.
But most of the rest have children – and read what Helen has written here
Why do so many people in the UK fall in to the trap of believing that home ownership is essential? Plenty of Europeans raise families in rented housing, so perhaps this chemist should re-consider.
Because we do not have security of tenure in the UK
So nop stability in communities, education for children, friendship, etc
You know the things that matter in life, which the right have but want to deny to everyone else
Most professional or institutional landlords would be happy to have long term secured tenants. What’s good for the tenants also provides long term security of income to the landlord. Most landlords would even charge less if they could guarantee a five year fixed tenancy and avoid void periods.
But what about the hundreds of thousands of people who want to rent out their houses whilst they work overseas for a couple of years ? If you legislated for total security of tenure what would happen to this source of rental property.
Most people I know in their pre-housing buying/starting a family life actually enjoyed the fact that they could move rented apartment a few months and try out new areas of town and different flats. Work out whether they actually want a garden or not, or whether being close to park compensates for longer journey to work.
I’ll repeat a comment just made:
I’m saying all of them
“Do you play golf with one club?
If not, why do you demand we run the economy with just one policy?
Is more than one policy at one time too hard to handle, or is it the chance a combination might work that you don’t like?”
What’s wrong with having more than one rental option? Why do you seem to think only one option is possible?
Quite apart from the current crisis – a big intergenerational tension is going to emerge over house prices.
I’m a 26 year old Cambridge graduate who has worked hard and has always expected a nice job and to get onto the housing ladder as we’re all brought up to expect. With house prices as they are, this is very unlikely. And as pointed out, there is a huge vested interest among those who own property and want to see prices inflate. I mean, whenever it looks like house prices are rising it makes it onto the front page of the Express! Aren’t they aware of the damage a burst house price bubble has just inflicted on the world economy?! And they’re cheering on the process happening over again!
At some point though those who rely on high house prices are going to have to face up to the fact that they are making it very difficult for the next generation.
I’d like my own place; but we can’t hurt the rentier lobby! I’d love to see a tax shift onto land values so I can keep more of my income; but we can’t hurt the rentier lobby! I’d like to think I could fund a dignified old age (which some of my elderly relatives are not getting in care), which could be funded by encouraging people to sell off their property; but we can’t hurt the rentier lobby! I wish so many businesses and families weren’t threatened by high rents; but we can’t hurt the rentier lobby! I’d like a more stable economic cycle not prone to housing bubbles building and bursting; but we can’t hurt the rentier lobby!
I sometimes think that this mindset that a segment of the population has a God-given right to inflated house prices is one of the most pernicious influences in this country; more dangerous in it’s way than the bankers and all the other bogeymen.
Agreed!
Well said
Richard –
“[i]68% of people in the UK own their own property and will not vote for it to fall in price![/i]”
I own my own home and, honestly, I’d be quite happy for it to fall in price so long as there was inflation to cover the debt. I never looked at the equity building up in my house as any kind of a usable asset – it could only ever be a paper figure unless I wanted to stop being a home-owner altogether.
So, if I’m typical of the 68% you speak of, perhaps they [i]would[/i] vote for a fall in price. Lemme put it this way…
“Hey, voter… howsabout we drop the value of your house by 25% whilst (using the same vehicle of inflation) we reduce your debt in real terms? OK, the numbers aren’t so big anymore, but there’s no real cost to you and you have some options open to you if you choose to move house… PLUS when your kids grow up, they won’t haunt your attic bedroom until they’re 50 cos they can afford their own place too! How’s that for a slice of fried gold?”
I’d vote for that guy. Why wouldn’t anyone?
I agree
Almost every parent I know who owns a house that is their ‘asset’ is worried sick about how their children will ever do the same
I am quite sure most people would vote for moves designed to ensure young people can get housing
Most under 35 have not a hope now – and that’s a lot of the population…..
You may well vote for a housing price fall but some who rent may vote for the market to stay solid, if they were due to inherit property or work in the industry. All polling shows that a policy such as Capital Gains on primary houses is VERY unpopular.
Apart from this what about the collapse in economic confidence through a housing price fall, cancelled building projects and repossessions!
In the final analysis why would cutting prices on purpose encourage young people to buy, how could you convince them you would not cut prices again later and destroy all their savings and equity?
So we haven;t got a housing crisis and a lack of confidence already?
And who on earth waits to inherit a property? What do they do until they’re well into their fifties or beyond?
Nor am I asking to cut prices. I’m calling for wages to be inflated
So you miss the point completely and then put forward straw men to justify your position
It’s not edifying
Would agree that house prices are too high and you mention a number of sensible suggestions to deal with this.
However, I don’t think any government would willingly trade significantly higher inflation in order to deal with the housing situation.
There are 20 million house owners with a vested interest in keeping house prices at least at current levels. And there are millions of retired folk who don’t want to see their savings inflated away at 10% pa.
Whereas the number of young people who can’t afford a deposit is substantially smaller.
Build more houses certainly. Ease deposit restrictions on mortgages (possibly). Legislate to make long term renting more attractive.
Though must say I don’t what the “uncertainty” of renting is for this couple. Norwich must have a large rental market. And they don’t seem to need to be near a certain school as yet.
They’ll allow inflation as it is the only way to repay debt
Without social chaos
It’s a no-brainer
Been going on for years, that young lads probelm… most of my daughter’s friends have horrendous tales of woe to tell – they are, or were, all research scientists withh PhDs. For 15 years, my daughter and her friends have had this society telling them either they didn’t try hard enough (science PhDs are apparently not trying) or they studied the wrong things (well, DNA is rather useless, isn’t it!). A lot of them didn’t get to have kids, not just through long working hours, but because their lives were so precarious, how could they ever take care of kids? My daughter went to university because that was supposed to be the route out of poverty. Instead, she’s never found stable employment, the stability needed for a family.
What’s happening now, is these problems are finally being spoken about. The scientists were probably just the first to be horrendously treated by their own society.
We are shamefully wrecking our own kids lives.
Absolutely!
And we have to change it
Inflation may help with that mortgage debt, the baby boomers did very well out of the 70’s but it will also savage the deposit savings of the young and increase their living costs and rent. So how does inflation, which I agree the government wants, help the young first time buyers?
It would seem neutral for the housing market…
Reduce deposit demands
I put down £250 for my first flat
If that’s your objection you really do need to think a little bit more widely
Hang on, you keep moving the goalposts!
First the answer is taxing people more, I question how it would work….
Then the answer is inflation, I ask how this helps young buyers….
Now you talk about rent deposits as the answer….
Pick a solution and justify it, being morally righteous is admirable but give us a concrete plan and we can get behind it…
Saying everyone who does not agree with you is greedy pushes people away who could be convinced!
I’m saying all of them
Do you play golf with one club?
If not, why do you demand we run the economy with just one policy?
Is more than one policy at one time too hard to handle, or is it the chance a combination might work that you don’t like?
Well, it wasn’t that long ago that banks were offering 110% mortgages. I don’t recall that ending terribly happily.
And I didn’t suggest ghat either
Why is it that a sensible comment has to be answered with a crass one?
Is that what right wingers are taught to do?
But you do suggest the banks lend more, with your argument that deposits should be less.
Yet in your post above you state “That is because banks lent too much on the security of land.” Surely if they lend more then that too is secured on land?
If the relative value of land has fallen so will the relative value of loans
Residential property can only be owned by the state or by an individual, limited to one title deed per person. This allows for second homes, retirement investment, etc, but it gets the supply side sorted.
I notice you propose wage inflation as a primary cure to the housing crisis. Sounds very nice and all (the fact that no else seems to be proposing it, and that if it was seriously credible it would have been tried years ago, but leave that aside).
But how the hell do we get wage inflation in the current circumstances?
We print money
Rase minimum wage
And distribute the cash through the tax benefit system to stimulate demand
“We print money”
You referred to Zimbabwe earlier and said that UK comparisons with the hyperflation in that country were absurd. That is probably true (though the idea that the British government should print money was, I seem to recall, only a few years ago decried as equally absurd, yet that it what happened).
But I fail to see how printing money without commensurate increases in productive capacity and production can lead to anything other than runaway inflation. Note that increasing productive capacity is not the same as boosting demand by printing money, raising minimum wage and tax benefits. If you want to look at examples of monetising debt leading to soaring inflation then Latin America and Eastern Europe is a pretty good example.
Just because someone wants a drink doesn’t mean they have to get drunk
Same with printing money
“And I didn’t suggest (110% mortgages) either”
What you suggested was a “reduction in deposit demands”
God knows how you achieve that, but anyway, that will make things worse, cause another bubble. You complain at the top that the banks were giving too much credit on the security of land. Now you’re wanting them to give even more credit by relaxing LTV. Make your mind up.
You seem to have made a career out of coming up with these idea. Well, anyone can come up ideas, but they need to be realistic. This post is you in a nutshell: a hodge podge of random ideas chucked in the pot together and when people start pointing out the obvious contradictions and impossibilities you start throwing toys out of the pram.
There is no contradiction, at all
110% is not the same as 95%, or even 97%
And if land prices inflate more slowly then wages relatively banks lend less
The logics are utterly and completely consistent thoughout
You don’t buy a car and expect to sell it for the same price after ten years’ of use, let alone for double the price. A 2 bed flat in London bought for £6k in 1970 is now worth 100 times that. Apart from maintenance to the building fabric, the owner has done absolutely nothing to earn the increase in value. The reason for the discrepancy is land – which is in fixed supply. Since banks have been freed from the constraints of lending house prices have risen by the amount credit available and banks have been, er, all the way to the bank. The interest on mortgages for hugely inflated house prices have been feeding their coffers since the 80s.
There is a simple solution. Collect all the ‘land rent’ for public benefit (land value tax – replacing council tax, business rates and stamp duty for a start) and houses could be purchased for the building cost alone.
Richard Murray, The tax on land value is a great idea, but it should be applied on land value at purchase date. this would be great since inflated land values are the best indication of a bubble in housing. Also have you looked at the huge returns to by to let investors, perhaps a special tax on buy to let, I know two people who own 60+ flats each, if we can bring down the cost of flats this will provide a stepping stone onto buying a house for young people. The tory government in a recent budget gave stamp duty reduction for property investors buying in bulk
Larry, you don’t understand land value taxation. It is an annual tax on land value as assessed on current permitted use (not current use or non-use – very applicable to developers’ land banks). It is perfectly possible to value land on an annual basis – they do it in Australia and Denmark for instance.
Hi Carol, my uncle bought a house 20 years ago for £9,000 its worth £850,000 today, but he is retired factory worker, he could not afford the house today, why not tax a person who can afford the land tax, the person buying his house for £850,000.
Larry, if you’re talking fairness surely it is your uncle who should bear the tax rather than the one who is buying – he’s receiving a huge unearned bonus. It is common practice where there are more progressive property taxes to allow rollover for pensioners. Anyway, interesting to hear of the male counterpart of the Devon pensioner (a woman). The same sort of concern was expressed when they debated the abolition of slavery. ‘What about the poor widow with only two slaves?’ But she was fine after all because the slave owners were compensated.
Stamp duty does depress house prices to some extent but it doesn’t help the buyer at all. A tax on transactions puts a break on people making rational choices about buying. An annual tax on land values is unavoidable, has huge revenue raising potential (leaving plenty over for transitional reliefs), would direct savings to productive activity rather than speculative churning, would release land for development (as land hoarders realise the game’s up) and would make significant inroads into the gross inequality of wealth in this country, which is far more extreme than income inequality.
Land tax is not slavery,
Surely the point about the land tax on purchase price is that the bubble element of a house price can be taxed thereby deterring buyers from buying into a bubble but the tax would negligible during low land prices thereby encouraging people to enter housing at correct time. You talk about a “unearned bonus” but it is unearned and unsought it just happened, if they had to pay the tax they would be forced to sell.
Private property in land is quite similar to land actually. The land belongs to everyone, it was given by nature and its value is created by the activities of the whole community, not by the landowner. It is therefore just that everyone pays for the privilege of use of this commonwealth. That is what land value taxation does, without the necessity to nationalise land, which has wrongly been prescribed by socialists. There was a time, when the Labour and the Liberal parties knew this. It is actually still LibDem policy, as well as the Green Party, the Co-operative Party, the Labour Representation Committee. There’s good reason to be hopeful that the Scot Nats will come on board – that would be a real eye-opener for the rest of the world should they get to enact it.
If you move into an area and the area improves a lot, should you be forced to move because you cannot pay the huge land tax? the answer must be no.
Carol, have you heard of Henry George? I think he pioneered this Land tax.
There is a book called “the corruption of economics” by mason gaffney, it speaks about this whole issue. It was one big con.
Once LVT is introduced (at a high rate) with annual reassessments, you would not experience the situation where your LVT jumps up dramatically.
Yes, of course I know about George, am in communication with Mason and have the book. I am secretary of the Labour Land Campaign http://www.labourland.org. Did you think I’d made it all up myself? Anyway, glad you’ve taken the trouble to do a bit of research, Larry.
I feel a bit of a fool, talking land tax with you. I wonder if you are able to spot economic cycles, can you look at a country and say that a bubble is in place and is likely to lead to economic collapse. Who do you think are the best economists and do you agree mainstream economics is a fraud.
Hi Larry,
I’m also involved in a LVT campaigning organisation, but for a different party than Carol. I don’t think you seem a fool, at least you’re interested in these questions.
I don’t think mainstream economics is a fraud. In fact, if you look at the writings of mainstream economists such as Adam Smith through to Milton Friedman – they see the logic of taxing land values as the least distortionary tax. Similarly there is a lot in Keynes’s arguments that are very relevant to dealing with the current crisis. It’s not so much that mainstream economics doesn’t have answers to our questions; it’s that collectively ‘the ruling classes’, so to speak, have ignored these parts and chased fantasies – like perfectly functioning markets that will never get it wrong. And the public aren’t informed enough to challenge them.
There’s also a degree of self-delusion going on. I think anyone can see dispassionately that house price bubbles are unsustainable and will cause massive economic disruption when they burst. But when you’re benefitting from them rising…you delude yourself that anything will go wrong.
There are plenty of good economic commentators out there. I like reading Richard’s blog, I like Paul Krugman, Joe Stiglitz, Jeffrey Sachs, Ha-Joon Chang, the BBC, Guardian and the Financial Times has some good commentators (some like Martin Wolf and Samuel Brittan are also land-taxers). More LVT specific, check out Fred Harrison – he has several books stating that our inability to curb speculation in land values is a key part of instability and predicted the bust. Hyman Minsky is strong on financial instability.
I echo what Steven has said, Larry, you prove yourself no fool when you can argue coherently like you have and can change your views as a result. This is a rare quality. So far as cycles are concerned I think the writers who proclaim them (and I have to include Harrison here) are working on deductive reasoning – they hold the theory first and then look for evidence. There are so many things going on in this complex economy of ours that it is a vain (in both senses!) activity.
So far as citing good economists is concerned, well I can’t take seriously any who can’t perceive the importance of land in the economy. Unfortunately those that do miss the importance of labour. Passive land and active labour are the basis of economics. The only economist I know who has got it all is still writing his magnus opus.
And I noticed this just now:
http://money.aol.co.uk/2011/11/14/pension-funds-to-invest-in-infrastructure-building/
Hmmmmm…..
I think this may be part of the solution. Pension funds are awash with money.
However, I also think with private pension pots should be allowed to draw on this prior to retirement in order to help their children onto the housing ladder.
Correction: “Private property in land is quite similar to slavery actually”.