As the FT has reported:
The world must act to contain the risk of another devastating housing crash, the International Monetary Fund warned on Wednesday, as it published new data showing house prices are well above their historical average in many countries.
There does appear to be one key question for the UK. Will this particular asset bubble bust before or after May 2015?
This, for the record, is not a party political comment. This is an observation of significance for all parties, and most especially those that have a hope of being in government. Each of them needs to have a plan for this downside risk, which is very big indeed.
Admittedly, it seems like the contagion risk of this boom may be less than last time, but the threat to bank stability, a fragile recovery, employment and any chance of delivering stated economic plans is enormous.
We need to know Plan B this time well in advance of a crash happening.
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“Min Zhu, the IMF’s deputy managing director, said the tools for containing housing booms were “still being developed” ….WHAT! We’ve already got the tools:
LVT!
End to Fractional reserve banking
Houses to be bought ONLY by people who are going to live in the damned things
A revolution in social housing
“still being developed….” If this isn’t evidence of the complete lack of social purpose in World banking i don’t know what is!
I am not sure houses being brought by people who live in them is a good strategy. What about students and people on short term contracts. What about people trying to escape relationships and don’t want to get a mortgage. One of the main key problems of the past few years has been people who cant afford mortgages, getting mortgages.
Once you get land prices down there won’t be any incentive to use houses as ‘assets’-we know it is socially destructive yet we are addicted to the now, for many, ‘rungless ladder.’ Good stocks of social housing (I’m in this maligned sector) can answer most of your points, I think. We don’t want a Rachmanistic, Dickensian rented sector-why should people reap an unearned, rentier windfall which takes money out of the real economy? What do think caused the last four housing bubbles-the beneficent effect of the wealth spreading free market whose tide raises all boats?
How about 100% capital gains tax on all housing?
It seems to me that the problem is that housing is no longer somewhere to live, and that was deliberate. I remember debates before 2008 about the desirability of replacing “welfare” as income with “asset” based provision. This was proposed in all seriousness, so far as I could tell. But if housing is an “asset” then it should be subject to asset taxes: for those who still just want somewhere to live it will not affect them adversely to impose such a tax. Indeed it will benefit the majority because it will kill housing bubbles
The slogan “property owning democracy” was popular, I think, because people did not anticipate the effects of this: the “right to buy” was the single worst policy of the Thatcher years, not least because of its popularity. The outcomes were largely predictable, and were worse because of other policies which accompanied it. The effect was to align the interests of the majority with those of the elite: but with this difference; the majority do not “make markets” nor have they any choice or control over their only “asset”. The veneer of aligned interests is just that: the fact is otherwise
The focus on controlling inflation superseded a policy of full employment. So people could not rely on wages to ensure a decent standard of living. Nor could they borrow to make up the shortfall unless they had an asset on which to secure their loans. State pensions and social security have been systematically eroded so that people have no option but to try to replace the safety net with an asset: but that is only a plausible solution if you believe that house price inflation is different from other types of inflation: yet there is no reason to believe that at all. A house does not really have a value: it has a price which bears no relation to any notion of “value” and so it can fall precipitately any time at all. That is not security: it is a millstone.
Inflation is a tax on wealth, primarily: that is why neoliberals are so obsessed by it. For most people their only wealth is their house: but it is not really wealth. It is somewhere to live. Pretending that ordinary people can take the benefits of asset wealth in the way the very wealthy can is absurd: yet that is what we have bought into.
It is not easy to get from where we are to where we should be. But 100% capital gains on the sale of houses seems to me the least painful way to do it: because few people actually lose anything and that is rare when considering tax changes. There is no reason at all why people should make a profit on the sale of a house and it damages us all through its effect on house prices.
I assume there is something wrong with this idea: I await information about those aspects I have not considered. But in taking those on board it seems to me that there has to be some direct action on this question and I am very happy to hear about better solutions. I do not think we can do nothing if we are to solve this problem and I am not seeing any other propositions which amount to more than handwringing
London property is an asset class now for the wealthy, somewhere to park their money as a store of value while there’s a lack of hard metals and big art available. This consequent over-valuation is rippling out over the UK making prices far higher than they should be and unaffordable for those unfortunates who wish merely to put a roof over their heads. We should take steps to stop accommodating the rich in this, and in other matters too.
How would a capital gain be calculated? With reference to the cost of your new abode or the nominal (non inflation adjusted) value of fiat?
How would that effect people moving houses where the tax of inflation is permanently baked in?
After 5-10 years surely it would be impossible to repurchase unless the new abode had fallen equally?
CGT is calculated, as I understand it, on the difference between the price you paid and the price you get on sale, adjusted for inflation. So it is the profit which is taxed. It follows that the house you seek to purchase, treated in the same way, might not be affordable for you if it was purchased more recently than your own, at an inflated price. That is why it has to be coupled with a very large house building programme, as others have said.
It is a good point, you make: but I do not think it is possible to solve this problem without anyone losing out at all. At present many cannot afford to buy a house and they cannot get social housing either. The costs you identify would fall on a smaller number, would not be insurmountable because many people do not retain their “asset” for long periods precisely because they see it as an “asset” and therefore trade up or buy to let, so the house to be bought would have fallen equally, I think, and would fall more if there were more houses.
Getting out of a mess tends to be messy: my proposal is intended to change our mess in the least disruptive way and without having to wait for a consensus on radically new approaches such as LVT. LVT might well be a good idea but we are far from agreement on it: CGT already exists and the rule change would be simple.
That CGT approach does not apply now except for companies
It had merit
End the quite baffling snobbery regarding council housing and build social housing. This gives people a place to live at a nominal rent and is an asset that gains money or local councils.
Up to 5 million are needed. Think how much work that could provide over the next decade.
You solve the housing crisis, create many jobs and have and income producing asset at the same time. It’s a win-win-win! 🙂
Plus we help get rid of a rising house price bubble owing to too few houses.
There is some snobbery,no doubt, but I do not think it is widespread. In Scotland, at least, there was a tradition of very widespread occupation of social housing and in many estates there were all sorts of people living there: it was very mixed and it worked well. There were also disastrous housing schemes, and those seem to be all we hear about now. I think this is because there is a very different tradition in England: there, so far as I can gather, social housing was always a last resort, and so “sink estates” were the norm and not the catastrophic exception. That is now the situation in Scotland too, following the “right to buy” and all its attendant evils.
I agree we need a big programme of social housing of good quality. It will certainly bring employment and it will certainly improve quality of life: private landlords in this country are not very nice people and the madness of paying them from the public purse to make big profit from substandard accommodation is one of astonishing features of the the current situation.
We solved this problem before, and from a much worse base after the devastation of war: we can solve it again. All it takes is political will and for the people to recognise that home ownership is no substitute for social security
“There is some snobbery,no doubt, but I do not think it is widespread.”
I’m afraid it is in England, particularly amongst the middle classes. That is where the “chav’s” and other undesirables come from. you see. True, there were some bad one’s built, particularly the tower blocks. However, many of the first post-war council houses were well built, are still standing and are still sought after today. There is no good reason why they can not be as well planned and as well built today.
People are desperate for housing and this is one of the best ways of providing it. The tories do not like social housing and have (and are) doing everything they can to destroy it. In fact, their right to buy policy is one of the direct reasons for the housing shortage we have now.
Council housing has worked perfectly well before and can do so again.
Build, build, build! 😀
Plus there are up to a million of perfectly good houses standing empty in the UK. They could be bought up and rented out as well!
5 million… that’s a lot of golf courses even in Surrey – where are they all to go? Time to disenfranchise the descendants of those who invaded centuries ago and appropriated the majority of the land and get their country estates back. There’s where we can build our new houses, spread usefully out so each has a large and leafy carbon-absorbing garden too.
As Simon says (ooh, there’s a kids game like that) it’s land price inflation, not bricks and mortar price inflation – most second-hand homes are not worth very much and we have some of smallest dwellings in the EU. Location, location, location. Once you get the analysis correct the solution is obvious. CGT does not do the trick. It relies on transations – all it will do is hobble the market, even more than Stamp Duty Land Tax does now, so that those who need to move will stay put longer than is good for the economy. Council Tax is the most regressive tax. It urgently requires an expensive and unpopular revaluation exercise, which is why the politicians continually kick it into the long grass. Council Tax is not fit for purpose and needs to be replaced with LVT
CGT does indeed depend on transactions but I do not understand the conclusions you reach on the basis of that fact.
It is of no use to say that “second-hand homes are not worth very much” because they cost a fortune and it really doesn’t matter whether that is because of inflation of land or of bricks and mortar: the effect is the same, functionally.
Nor do I understand why you say CGT will “hobble the market”. It is true that if there is no prospect of huge profit people will not flip houses to make that profit: but if they need to move for a job, or a change in family size, for example, they will move. To me that is a return to a “real” market and can only be a good thing.
At present people who can afford to do it buy and sell houses for profit and they do it by “leverage”. This is the same as those asset stripping hedge funds who make leveraged buy outs in the wider economy: this is what I mean by aligning the interests of the majority with those of the elite: such leverage is not a good thing for most of us: though it is very good for those who can do it and for the surveyors and lawyers and banks etc who all get a slice based on percentage of purchase price rather than a fixed fee: no accident, I contend.
The explosion in private debt is the biggest problem we face, I contend. It has arisen because of the insane attitude to house ownership (though that attitude is not insane in the circumstances we have created, for reasons I gave above)and that is what needs to change. It will not change until those circumstances change, and I think that LVT may be one way of doing that: but I do not see how a house can generate an income which will pay the tax, if what you are doing is living in it. Nor do I see how LVT is superior to income tax, since the wages paid for particular employment are not in any way related to the value of the work done for the wider community. I therefore do not see how LVT is fairer or more redistributive than the at least some of the tax it purports to replace.
LVT is superior to income tax because it is levied on unproductive activity. Whilst some people obviously earn large incomes for doing nothing productive (more on that below) most people work hard and provide value to society in return for their income… and their income is a good thing. Taxing good things might be unavoidable, but the less of it the better.
Returning, briefly, to people who earn large sums for doing nothing useful, an awful lot of those people are connected in some way to banking and finance. The banking system makes a lot of it’s money by lending to us ordinary people so that we can pay inflated land prices. Mortgage interest is just a rent you pay to the bank. LVT is about capturing some of that rent for the benefit of society, instead of the banks.
So right now, you can go out to work, a third of your wage goes in taxation, and maybe another third goes in ‘rent’ to your mortgage lender. If the costs of the state were shifted to LVT then your income tax could fall and you would pay your share of state costs by paying rent on the land that you occupy (and who’s value is given not by your efforts, but by the society that makes it habitable).
Land appreciation is unearned wealth. Why should people who go out and do an honest job be taxed on their earnings, but when that tax is used to (for example) build a new tube station, the huge windfall gains of those owning land nearby are tax free? That’s a direct transfer of the fruits of productive work to people who did nothing but sit idly by whilst the rest of us inadvertently made them much richer.
LVT might not have a huge effect on the overall cost of owning land – because that is governed by scarcity, location, and the availability of capital/credit – but it will encourage more efficient use of the land we have, and it will mean that the government has a tax base that is significantly ‘less bad’ than income, and completely impossible to avoid.. because you can’t declare that your house is self-employed and ordinarily resident in Monaco.
Lastly, so what if a house doesn’t generate an income? Me sitting down with a glass of scotch and a cigar does’t generate an income, but it’s taxed to the max. If you occupy land then you gain a benefit from that, and that’s what’s being taxed by LVT.
I make clear that I support LVT
The above view of LVT is, I am afraid, a fantasy
It was interesting to note how socially extreme and unacceptable to the vast majority members of the Henry George Society appeared at the ICAEW tax assembly yesterday, making the Taxpayers’ Alliance appear to be moderates on the way
A huge housing program is a must, and it has to be energy efficient to passivhaus standards.
http://www.passivhaus.org.uk/standard.jsp?id=122
You get jobs, relief for households on energy prices, meet demand for housing, action on climate change, lessen the chances of another house price bubble – in other words, joined up government.
It’s a no brainer.
Step 1: Reject the premise that a house price crash is a bad thing.
House prices are too high. They take too much money from our productive efforts (both directly as mortgages/rents, and indirectly through the need for taxes to fund housing for those in need) and give it to banks and landowners. A crash would benefit many more people than it would harm.