I was fascinated by this comment in The Guardian, published this morning:
Warnings by landlords that taxes on buy-to-let would cripple the property market, driving down supply and pushing up rents, have turned out to be entirely hollow, according to research by campaign group Generation Rent.
It found that since the “bombshell” introduction of taxes on buy-to-let landlords in George Osborne's 2015 budget, rents have fallen in real terms.
Leave aside all issues regarding rents, inter-generational equality, and so on, and just think tax for a moment. What this comment makes clear is that if there is anything like a competitive environment (and in rents there is) then the incidence of taxes on rents is not on the consumer but on the owners of capital, as of course it should be.
I would suggest that the observation (not set up as an experiment, but by chance offering a large scale observation of actual behaviour as if an experiment was intended) is capable of extrapolation. Whenever suppliers are price takers (as in competitive markets they should be) taxes on suppliers will always be paid by suppliers and the suggestion that they are passed on to others makes no sense at all. This is now seen to be true for rents. I think it will be elsewhere.
So the next time you hear some rightwinger argue that tax is not paid by capital but is passed on to consumers or workers just note that what they are actually saying is that there are non-competitive markets in existence and that this fact should be their real focus of concern. But oddly, it never is. Right wingers are the last people who want competitive markets. They do not permit abuse, after all.
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That is interesting.
Thinking aloud….
If we were committed to rented housing being entirely in the private sector I wonder if there would still be sufficient competition to keep rents down, or whether there would be a flight from buy to let which reduce supply to the extent that it would then favour the hiking of rents (?).
It’s complicated because if landlords were to dump their investment properties (in search of better returns in another asset class) that would bring downward pressure on property prices enabling more owner occupiers. Presumably this sort of thing is very difficult to model(?) …and anyway the crucial factor is probably overall availability of properties.
What is perhaps most significant here is the influence of taxation in changing the market conditions. I can’t help wondering what George Osborne was wanting to achieve. Cynically I think he was maybe trying to get some of the oiks out of the BTL market because he saw a threat to respectable (Tory) property rental interests. Enforced ‘shake-out’ of small players with a cunning plan that the big boys would ride out comfortably, especially with the new lower interest rate regime provided by QE.
The good thing is the houses will still exist
If there is flight from buy to let house prices will fall
The problem with housing is that it combines two markets: buildings and land. Building materials and labour are not supply constrained – and in any case new-builds are only a tiny part of the market, but residential land is ultimately physically fixed. The only way to correct the market is to extract the land rent, which is the archetypal economic rent, i.e. entirely unearned income. We don’t have a supply problem with other landed properties, i.e. for commercial use, because these are adequately taxed. Business Rates collect a high proportion of land rent. But a tax on just the land element would be highly beneficial to businesses as the building is part of working capital and needs constant maintenance and renewal.
When LVT is implemented properly (levied in full on income-generating land, such as in the private residential sector) most rented properties, especially in the high value areas will come onto the market, massively reducing prices. This will help first-time buyers and allow local authorities to pick up on the cheap all the homes needed for social rent, retaining sitting tenants who don’t want to buy. It will also give local authorities the opportunity to buy up land needed for new homes (not the luxury kind), which they can then develop themselves with the necessary infrastructure to be paid for out of the increasing LVT revenues.
Carol Wilcox says:
“The problem with housing is that it combines two markets: buildings and land.”
Not arguing, Carol, but the other compounding problem is the element which is almost pure speculative financial investment market. I think that’s a separate issue. Though the ‘home as an investment’ case lies largely somewhere on the spectrum between bogus and fraudulent. Both economically and politically.
Do you have ANY confidence in team Corbyn and McDonnell espousing LVT ? I’m afraid my confidence is very low.
@Andy. It’s the land element which is speculated not the building, that is a depreciating asset.
Both John and Jeremy support LVT. I’m sure they will implement it – and we’ll make sure they do it properly;o)
@Carol Wilcox
” It’s the land element which is speculated not the building, that is a depreciating asset. ”
In the long term I agree, but in the short term what creates house price inflation (at times well in excess of maintaining price against general inflation), is the speculation on rising prices.
Taking the long view, I’m led to believe, that the buildings are entirely dispensable, and the value is all in the land. I find it hard to believe, but there’s much about finance and economics which is counter intuitive.
I share Andy’s lack of understanding of exactly what it was Osborne was trying to achieve with this odd, petty-minded piece of legislation (which is the exact opposite of tax simplification). I say this as an unwilling private landlord (who inherited his late mother’s ex-council flat on a scheme in a post-industrial city, and was unable to sell it).
I would not be surprised if the notion of driving oiks like me out of the market isn’t too far off the mark. Incorporation is of course the most obvious way round the interest cap. My tenant recently did a moonlight and I am presently spending a lot of money and energy (neither of which I am particularly blessed with right now) in restoring the property to a state where I would not be ashamed to be selling it in. I hope the next owners will be a young couple or a family escaping the rental market.
Roy S Grey says:
” I say this as an unwilling private landlord (who inherited his late mother’s ex-council flat on a scheme in a post-industrial city, and was unable to sell it).”
I have some sympathy with your plight, Roy. But it is limited.
I’m guessing your late mother bought the flat for a song under the cockamamie which was the politically motivated right to buy. The logic of the pricing of these properties was deeply flawed, but it seems that since you were unable to sell when you wished to the valuations may have been nearer the mark than the estate agent who advised you of the price to ask when you wished to sell it on.
It is not quite the case that you were unable to sell it. More accurately, I suggest, you were unable to sell it at the price which somebody said was an appropriate asking price. Had you been prepared to take the asking price down you WOULD have sold it……..eventually.
Anyway I wish you luck in disposing of it and hope it does go to someone who wants it as a home rather than a buy-to-let speculation.
@Roy It rather depends where the flat is. If it’s in a hotspot you won’t have any problem selling for a nice sum – even though you don’t get what you think it’s worth. But if it’s not, there’s always a price at which it will sell unless it or its location is severely polluted. This could not be the case if someone was renting it from you recently.
Many many examples where tax is passed onto consumers, fuel tax being an obvious one.,
Because there are oligopolistic practices
The trouble is that it is not just Right or Left or this or that but is more complication. One area lost is that of Welfare Economics. I knew E. J. Mishan quite well. His “The Costs of Economic Growth” still has relevance as do his other works.
Brilliant book
Read it when I was 17
Heavily influenced me
I had to attend Prof. Mishan’s lectures when a student at the LSE and never understood a word he said – probably because I didn’t pay much attention, due to more worldly distractions. Hence I never became an economist 😉
So he was a typical economics prof……
Some interesting ideas in ‘Killer Arguments Against Land Value Tax, NOT’: kaalvtn.blogspot.com
Section G, point 1 addresses the possibility of LVT being passed onto tenants.
In summary, market rents are driven by tenants’ income, not landlords’ expenses, so (reinforcing your points above) LVT would be borne by landlords, not tenants, unless extra money were somehow made available to tenants.
Problem 1: the existence of Housing Benefit
Problem 2: the duty of local authorities to provide accommodation (to the statutorily homeless)
These effectively result in extra money being made available to flow into the Private Rented Sector, in addition to tenants’ income, so rents could well increase due to a mass reaction to LVT without *prior* PRS reforms (eg. longer tenancies and inflation-indexed rent increases).
That could explain why Conservative MPs, many of whom are landlords (not counting those who might benefit financially through property-owning businesses/relatives), appear totally relaxed about the soaring Housing Benefit ‘bill’, and indeed homelessness.
Henry George (Progress and Poverty) got a lot of the property dynamic right. Lots of stuff about a century old remains better than today’s. Deep questions on what use ‘intellectual modelling’ is are begged. The Ancient Greeks had some belting argument but remained a sexist, racist and tribal slave economy. Current rents are generally enslaving, but leave a small elite quids in. What are we missing?
Veblen got more right than many people since him
I have loads of problems with this view of rent and indeed many of the labels of economics. There is no need now to model as we do. Rent, inflation and so on can be modelled in the broad cross-section of daily life, including the squalid and varying effects. The crucial factor is homes people can afford leaving some disposable income. Land can be taken out of this by a land bank owning land. We could develop models that show real effects on people in real time and with real time relief from the misery or windfall blessings.
Most homes are already built. How are you going to bank that land?
I have always been bemused by the argument, rent controls, taxes etc will reduce supply. As Mr Murphy says above they will still exist, what will landlords do burn them down no of course not, leave them empty perhaps in some areas or just reduce the rent and get on with life. They could of course sell them and the present government I am told is about to incentivise this by reducing CG, the rich getting richer.