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Friday, 8 January 2021

CREDO FOR FIXING THE HOUSING MARKET

 “To fix the Housing Market, take Plot-Price out of ‘house’-prices using LVT”

Firstly, to be affordable, ‘house’ prices must be driven down. The cost of building a house (and   additional modern built-in features) has added a bit to the purchase price of houses, but the main locus of the force which drives up ‘house’-prices is on the price of the plot on which they stand.

Inherent Plot Value:

Owners can add some value to a plot by drainage, fencing, etcetera. It is axiomatic that owners are entitled to keep (not be taxed on) the fruits of their own labour.

Nature may provide more value to a plot with views, freedom from floods, soil and bedrock conditions. We can claim that the gifts of Nature are God-given and belong to all of humanity, equally. This is one of the motivations for a LVT.

A serviced plot in an affluent city has extra value created by communal effort. This could be called the ‘Jubilee Line’ effect. A major new, publicly-funded Tube line boosted plot prices near local stations, to a far greater extent than the cost of construction of the railway. This is a motivation to levy LVT to capture some of the private landowners’ gain from public expenditure. More generally all of the value created by community efforts could be subject to an LVT.

 

Monopoly rent price

Plot-prices soaring above inherent values are due to a combination of politically designated factors:

               - intentional restrictions on plot supply and usage, due to Planning Laws. This can be traced in the main to the 1947 TCPA. This creates a monopoly premium on all available plots, not just those recently given planning permission. Attempts were made to capture the newly created premiums through Betterment Levies, and latterly by S106 agreements. No attempt to capture the monopoly premium on plots already in use. This could be achieved by an LVT. 

               - full exploitation of the monopoly premium was restricted from 1947 to 1970 by limiting the finance (building society and bank) sector’s ability to lend on mortgages. After that date successive financial de-regulation has led to a lending frenzy on the collateralized value of housing plots (plus a small amount for the value of the building). This business could expand continuously in the confidence that government bail-outs will always be available however reckless the lending.

The proximate cause of soaring house prices is the incontinent lending by banks using the security of plot-prices. This enables buyers of houses new and old to bid up the plot-price to the maximum they can afford.

House-plots have become an asset, and anticipation of future capital gains adds to the price. Costs of holding this asset are minimal so there is little incentive to sell, either. One could argue that the banks have acted like ‘the canary in the mine’ in discovering the maximum amount of monopoly rent that can be extracted from a mortgaged property.

One obvious way to fix this situation is to constrain bank lending, but failing that (and we can be confident that trying to control banks will fail), there is only one solution. Take away house-plots as a form of collateral. Remove the price of the plot from the price of a house. This can be done in one of two ways:

Take land, in particular all plots used for housing into public ownership (as in Singapore or Hong Kong). Socially responsible entities can then decide what price to charge for plot use. By definition social charging will be lower than bank profit-maximising mortgage cost. Thus ‘house prices’ will be driven down.

or

House plots could be devalued as a collateral asset by levying a charge equivalent to its value. Since this levy operates continuously and evenly throughout the home-buyers tenure then initially they will pay much less than today’s front-loaded mortgaged house+plot-payer. Over the lifetime of the tenure the total paid should be less than the bankers’ maximizing monopoly rent amount. By this means ‘house-prices’ would be driven down, and total lifetime payments probably less than currently.

Of these three options, only Plot Value Charge seems like a potentially practicable idea. Even so it made need further adaption if it is to survive practical politics.

So.

The best way to fix the Housing Market Crisis is by Plot Value Charging. The closer the charge approaches to the full value of each plot the more the housing market will be fixed.

We will know that the housing market is fixed when there is an abundance of good quality homes available at prices most can afford (as in 1930s England) .

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