Larry Elliott has argued in the Guardian that house prices have nowhere to go but down.
This has to be true.
Most first time buyers cannot enter the market right now. Some have suggested that first time buyers will average age 51 at some point in the near future if trends continue as now. I presume they weren’t serious. If they were they'd have failed to notice that before that happened much property would have to be lying vacant and without owners.
People die!
And unless you’re a high Tory people don’t wait around to move into the parental home.
So the market is always being replenished with property becoming vacant. It is right now. Only so much will be retained for rental — the vagaries of inheritance almost guarantee that. In this case it has to be true that eventually first time buyers determine market prices — what ever credit is available — or even because of whatever credit is available at present. Over supply will eventually push prices down. And there will be over-supply sometime at current pricing.
And that means house prices in the UK (and even more absurdly in Ireland where they remain stratospheric despite 10% being empty) will fall.
All we need to do it begin to force them down.
And yes this will create banking problems, I know. And problems of negative equity, I know. It’s either those or inflation.
Which do you want?
Rotten money has to get out of the system somehow.
There’s a choice to be made. Denying it will not avoid it.
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On a practical level, my mother, who works as a Sales negotiator for a big FTSE 250 housebuilder, has barely seen any footfall at her current site.
Anecdotally, all sites for all builders around here (the South East) are experiencing the same lack of interest (the teams all talk to each other apparently!).
You have previously argued for inflation as a way out of Labour’s mess. The analysis here can be made with the economy as a whole – with rotten money substituted for the melee of quantitative easing.
We would not have a housing crisis if we collected the full ground rent for public benefit. House prices would then come down to the cost of the building. Rental values are the true market value. The capital value is always subject to speculation and boom/bust unless property is correctly taxed. Land designated for residential is only a small percent of total land in UK (<5%). There are vast estates which are in the hands of a very few families. LVT will force them to sell up and we could all spread out a bit.
Housing is such an illiquid market that there can be a large disconnect between fundamentals (such as affordability) and pricing. There will only be a significant fall in house prices when and if developers and individual owners start to sell houses at a (real or paper) loss.
Whilst interest rates remain low most will not be required to sell, and will choose to retain even if that means they remain empty. So a slight real terms fall is the most we will see.
If the Tories repeat John Major’s experience and lose control of inflation, the resultant interest rate hike could cause a house price crash and wave of repossessions that (given where prices now stand) would make the 90s look like a picnic.
From the point of view of the long term health of the economy, such a price correction could be regarded as a good thing, it’s not something we should wish for – the human cost would be terrible. A very gradual correction over time is the best outcome we can reasonably expect.
@Carol Wilcox
Carol, when you say “collect the full ground rent for public benefit”, are you suggesting a 100% land value tax?
@Marc Daniels
“are you suggesting a 100% land value tax?”
Yes.
The main point here is most of the wealth in the uk is held in the form of housing and both parties in the past have gone out of their way to levy no taxes at all on this wealth, while putting a heavy burden on income , this means that social mobility is much harder as to aquire wealth is taxed heavily but to keep it is not taxed,
The only taxes that apply to housing are council tax, a tax to pay for local services, but the bulk of the cost of those services is actually borne by central government so even this tax is vastly subsidized. There are no capital gains taxes on houses and the income benefit from living in a house that you own outright is tax free.
By using the vehicle as the Blairs have recently done where parents put their child’s name on the deeds all inheritance tax is avoided after 7 years so in short housing avoids every type of tax possible .
California charges 1% per year on the last transacted price of the property, this would be a good start I think and use it to reduce income tax , also a capital gains tax on all housing would be a good replacement for stamp duty in that it would help the young at the expense of the wealthy.
@Marc Daniels
The point is a price correction is inevitable
It is how it is managed in what way that matters
One way is to force existing property back into the market – and I will have ideas out on that soon
Another is to tax land – and LVT has a role here – clearly
And there will need to be a tolerance of property deflation which is only manageable if there is inflation elsewhere
None of this is pretty
Sitting with our heads in the sand won’t make it prettier though
Is that true? I was under the impression that they used assessed values.
I could see some problems with that, especially in the UK, where property will have, in some cases, been held by the same family for generations. It could end up with the bulk of the cost falling on lower cost homes owned by new entrants to the property market, with larger homes which change hands less frequently attracting less of the costs due to their last sale price being very outdated.
Personally I prefer the self-assessment method, where each title holder lodges their own valuation and pays a percentage of that, with the understanding that the valuation would be visible on the land register and they would be required to sell to anybody prepared to offer them an amount greater than their valuation. However, I suspect that may be a bit radical as a first step.
Well, California uses an assessment but once it’s been made no re-assessment is made until the property is sold to a new owner. This has led to the situation where one house may have its taxes based on its 1978 value whereas the one next door has its tax based on its 2007 value. Big difference!
Even worse is that the law has been crafted in such a way that its possible to transfer commercial property without triggering a re-assessment. Thus residential owners end up paying a far larger share of the tax reveue than they should.