One of Nigel Lawson's great mistakes was the timing of the abolition of what was called Mortgage Interest Relief at Source for multiple owners of one property in, as I recall it, 1988. Lawson's plan was economically logical. It even had a supposed moral compass to it: it prevented an iniquity suffered by married couples compared to those who were cohabiting. But it had an unintended consequence. There was a massive rush by younger people to buy one and two bedded properties on which they might get relief for a little longer, with prices rising so rapidly that many believed that if they did not buy immediately they never would.
By 1989 the bubble was over. As the Nationwide house price index shows, prices fell from 1989 and did not fully recover until 1998. The withdrawal of MIRAS relief did not create the recession of that era, but sure as heck helped create the housing bubble that burst during its course.
Lawson was right to get rid of mortgage interest relief. There is no doubt about that. But there is also little doubt that the timing was, at best, unfortunate.
I do wonder whether George Osborne might have made mistakes of not dissimilar style in recent changes to tax on let property. There are several of these.
At the top end of the market changes to stamp duty, holding property in offshore companies and rules to make sure capital gains tax are all in themselves welcome and to he applauded.
Likewise increasing the stamp duty rate on buy to let property from April this year to dampen speculative activity makes sense.
And reducing tax relief on interest paid on buy to let property loans to the basic rate of income tax also makes a lot of sense: there is an iniquity that owner buyers get no such relief.
So each measure is welcome. It's just the timing. The buy-to-let market was already overheated. And now there is feverish activity to close deals before the new stamp duty deadline comes in. Will that be a market peak? The Nationwide data suggests it might be. That current peak looks unstable to me.
And will the interest deduction rules then give rise to an off loading of propery? They might.
And there is at the very least a recessionary environment in the UK right now. In which case these tax law changes, right as they are, look like they will go down as a contributory factor if the housing bubble bursts.
One to watch.
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Given that the housing market is the one thing sustaining growth in the UK economy and has been for some time, is Osborne not shooting himself in the foot by ending his housing boom – welcome though that may be for ordinary mortals?
We are right to have no faith in his economic competence, but he has so far managed to show shrewd cunning with his politicking.
I’m left wondering what his strategy is, in biting the hand that feeds him, so to speak..
Reducing tax relief on interest paid on buy to let property loans to the basic rate of income tax makes no sense at all. It creates a turnover tax rather than an income tax, so the tax charge becomes unrelated to the economic result. It is entirely iniquitous.
Looking at the way the tax changes are structured, I suspect that the impact will be to shift property away from small landlords with a few properties each, and concentrate it in the hands of larger corporate landlords with large portfolios. I am not convinced that this will be a good thing for renters.
The detail of the SDLT proposals is slightly reassuring, as it looks as though even large corporate landlords might suffer the additional rate on individual properties; however, it may encourage en-masse acquisitions of new-builds by large landlords, which is not going to help homeowners at all.
It is absurd that only small landlords suffer the restriction
But the move does make sense – economically it is about deleveraging the economy
That is vital
Accountants ignore such things, unfortunately
The move does not make sense in terms of deleveraging the economy. For one thing you have presented no case for why deleveraging is a good thing; secondly, given that larger companies have perfectly good access to finance (especially when backed by property), it will simply shift the debt from small entities to large along with the houses and so not actually achieve any deleveraging anyway; and finally, to tax amounts which do not exist is never a good idea. You might as well tax the number of windows.
I think you will find ample sources on why the leveraging of the economy is so risky
I despair, as ever, of you Andrew
There are also ample sources suggesting that the level of leverage in an economy is a complex matter, and that it is hard to say what constitutes “too much” and what the impact is. So it would be nice to know why you think that getting small landlords out of the property business would be beneficial.
Also, what have you to say about the facts this won’t be deleveraging anyway, and that taxing non-existent profit is an inappropriate method of influencing behavior?
Three things
First, your reading on leverage is obviously very selective
Second, I did not say getting rid of small landlords was beneficial. I firm;ly believe ending property speculation is massively beneficial
Third, how quaint that you think we tax profit. I bet you can’t define it
As we’ve discussed before, when I say we tax profit I merely follow Parliament’s intention, legislation, and case law.
I know you define tax base differently, albeit in a way which is indistinguishable from profit. So you’ll forgive me if I follow the authorities, rather than accepting your splitting of non-existent hairs 🙂
Absolutely wrong Andrew
I define tax base that way too
And I am saying that this is a wrong interpretation by HMRC
I want change, I agree. But let’s be clear, it’s you defending the impossible
I think you’re commenting in the wrong thread, Richard 🙂 This was about buy to let taxation – no HMRC interpretations involved.
OK
Apologies
Lawson gave 6 months’ notice of the change, which caused a huge surge in house prices during that time. But the bubble had been building for years and, just like today, was heading for a bust anyway.
The paper I have co-written is very careful to describe an initial implementation of LVT which would minimise the effects on house prices. http://www.labourland.org/wp-content/uploads/2015/09/JonesWilcoxLVTpaperFinal-V2.pdf
Carol- you are right, the bubble can be traced back to around 1975 (as can real wage stagnation!) but why do we want to minimise the effect on house prices? Why protect the ‘unearned increment.’ In a sane society this nonsense shouldn’t have happened any way -and someone has to take a hit, it’s unavoidable. We need mortgage repayments to be around 25% of salary if economic life is to return rather than the buzzard pecked corpse we have at the moment. At present, the young/poor/non-inheritors of wealth transfer are taking the hit so ‘minimising the effect’ is going to leave the hit on that group UNLESS there is a quadrupling to a sextupling of wages, which hardly seems likely.
I’ll read the paper, thanks!
AS regards housing, there is no strategy. In his interesting book ‘The End of Normal’, James Galbraith traces the increasing use of housing as a ‘sweated’ asset goes back to 1975 which the above graph (presumably ‘Y’ axis is an index) seems to corroborate. Any sane Government that was not in tow to the financial sector would have nipped this in the bud with mortgage lending controls (but all that is history). As I am wont to do, I’ll requote (sorry Richard!)
Gordon Brown in 1997 as support:
‘I will not allow house prices to get out of control and put at risk the sustainability of the recovery.’
The graph brings back a personal memory. I bought a house in 1987 in Wolverhampton (my first teaching job on £8.000 a year!) for 12,000. Due to a job move I sold it a year later for £24,000. After putting it up for sale I had a busy time with strings of people offering cash and competing over the phone including callers from London-this was my first awakening to the madness of ‘unearned increment’ as I tripped the light fantastic out of the solicitors office with a cheque for £12,000. I’ve never owned property since and now live in a Housing Association home (until the Tories start selling the properties off in expensive areas).
The point I’m trying to make is that the ghastly genie is well out of the bottle and we need a VERY courageous government to stuff it back in which will mean fury from many of those to whom the ‘unearned increment’has been transferred. Houses, are places to live in FROM where you are economically active. Why LVT isn’t back on the agenda with Labour I just don’t get but the culture of the sweated housing asset has to be brought to an end if the roots of neo-feudalism are to be hacked away.
Oh, but LVT is back on the LP agenda, Simon. John McDonnell is a long-term member of the Labour Land Campaign. He reassured me at the LP conference last year that we will get LVT.
That sounds good-let’s hope they have the ‘cojones’ to follow it through!
I am disappointed you did not mention the following.
The stamp duty only effects those with less than 15 properties or corporates (so someone with less will pay noticeably more than those with more(build in inequality?. In my view the left continuing the mantra of the tories are pro ‘private landlord should cease now. It doesnt take a genius with the tories going after social housing and private landlords the objective is super marketization of the private rented sector. So folks who thought their private landlord was hard to get hold of just wait for that. Rents will go higher still and no doubt if things go wrong it will just slap on the wrist fines compared to banning orders etc that private landlords will get.
Those that buy via companies are effected by the interest relief. As are foreign buyers.
All the level the playing field mumbo jumbo is selective. Afterall owner occupiers have the rent a room scheme. No CGT. The regulations surrounding let properties do not apply to lodgers.
Ian Gow’s son certainly owns more than 15 properties! see:http://www.mirror.co.uk/news/uk-news/right-to-buy-housing-shame-third-ex-council-1743338
SDLT is a stupid tax which discourages mobility in the market. It’s Council Tax which needs to be dealt with – scrapping and replacing with a proper progressive ad valorem tax, preferably on land value only. There would be neglible capital gain on houses if LVT were implemented at a high rate.
I have a problem with LVT because it is not based on someones ability to pay, I worry about the poor hill farmer or elderly person on low income who happens to have bought in the 70s. I think we should regard housing as a right rather than an asset. It only becomes an asset if you sell which is why we should tax capital gain or inheritance the same as other income.
Now let me think, is there an historical example of a relatively small island with a relatively large population, a large industrial and financial base sitting next to a huge continent that has experienced hundreds of years of imperial battles with its neighbours (and others). An island that has recently experienced massive housing and asset price bubbles which has left its economy in stagnation for decades?
Replace Japan with UK in the article below and you have some scary predictions of what is to come and the foolishness of our politicians (not to mention bankers) for not looking more carefully at historical precedent!
https://en.wikipedia.org/wiki/Japanese_asset_price_bubble
We were looking to buy our first house this spring (~50% deposit, I’ve been saving for 10 years) but now I’m starting to think that the summer may be better timing.
I have a nasty habit of buying at the peak of the market — but being what I’d call prudent and holding off buying with a bigger mortgage any time in the last 10 years has cost dearly.