Tuesday, 29 August 2023
Sunday, 3 July 2022
The Spectator gets it half-right on fixing the broken housing market.
“50-year mortgages won’t fix Britain’s broken housing market” is the headline. This is in response to the Government’s latest wheeze to pretend they are doing something about the Housing Market.
The author of the article rightly pours scorn on
this idea. It is one of a series of gimmicks from this and previous
governments, all of which just push prices up higher.
So far so good, but then comes the utterly conventional,
but wildly wrong explanation:
“The problem
with the British housing market is that there isn’t enough stock relative to
the population, and where there is stock available, it’s in the wrong place.”
It’s all down to supply of new housing being deliberately limited says
the author Sam Ashworth-Hayes (former director of studies at the Henry Jackson
Society):
“British
politicians have created an almighty mess. Restricting housing supply caused
prices to rise, and meant people borrowed increasingly large sums of money to
buy homes.”
(The author seems deeply incurious as to where the ‘increasingly
large sums of money to buy homes’ comes from!)
Governments
are deliberately restricting supply of new builds? That’s nonsense!
If the rate
of housebuilding was in some fairly-tale land doubled, tripled or quadrupled
would that bring down prices? No, because the 80-90% of the houses for sale are
already there!
And the
conclusion:
“And until a
politician is brave enough to grab the nettle and risk a drop in property
prices, we will be stuck with a housing market that ruins the lives of young
people before – eventually – turning them into lobbyists for its maintenance.”
The author
thinks that the ‘nettle’ it is the power of the Nimbys that must be ‘grabbed’,
but the real force that is pushing up house prices is the ability of the
financial system to create unlimited amounts of mortgage funds.
‘Rein in the
power of the banks!’ Now that would be a brave new slogan for the
freedom-loving Henry Jackson Society!
- - - - - - -
50-year
mortgages won’t fix Britain’s broken housing market
2 July 2022, 8:30am
2
July 2022, 8:30am
Downing Street has come up with another cunning plan to fix the housing
crisis: 50-year mortgages, passed from parent to child. No longer will your
ability to afford a home be dependent on your earnings. Once the scheme is in
place, you will be able to borrow against the incomes of your future children,
in a heart-warming recreation of the age-old tradition of indentured labour.
The reasoning goes something like this: young people can’t afford to buy
homes. Not only can they not afford to buy homes, they can’t afford to save for
deposits. While accommodation has grown ever more cramped – with space per
person dropping a quarter between
1996 and 2012 – rents have continued to
eat into incomes. Record numbers have are stuck living
with their parents, unable to start their lives as adults, let alone start
families.
In order to help them, the government is going to make it easier to borrow money. This could mean
smaller deposit requirements, or it could mean very long repayment periods. The
latter would be enabled through mortgages that parents could pass onto their
children, replicating policies introduced in Japan in the 1980s. It’s a simple
idea, and one with no chance of working.
Mortgages let you borrow against your future earnings. The longer the
period of earnings, the more you can borrow. At some point, it is somewhat
optimistically assumed that you will retire, stop working, and stop earning.
This caps the amount a lender will offer you. Making mortgages transferable
allows you to borrow against the earnings of your children: you make payments
until you die, and they inherit both the house and the remaining debt.
The
main effect of 50-year mortgages will be to drive prices higher
Longer mortgages won’t do a thing to help young people onto the housing
ladder. As with Help to Buy, Lifetime ISAs, and every other policy the
government has trotted out over the past decade, No. 10 seems to think the
fundamental problem with the British housing market is one of demand: people
just aren’t spending enough.
This is wrong. The problem with the British housing market is that there
isn’t enough stock relative to the population, and where there is stock
available, it’s in the wrong place. It’s like a game of musical chairs. You
aren’t going to get five people onto three seats, no matter how much financial
engineering you engage in.
This lack of supply in the places people actually want to live is why
buildings which used to be family homes have been turned into unsatisfactory
house shares. It’s also why prices will continue to rise until people are
actually permitted to build homes.
From this perspective, the main effect of 50-year mortgages will be to
drive prices higher. Red tape in the planning system stops supply responding to
demand. Increasing people’s ability to spend money just results in bidding wars
over the properties already available.
It’s not even particularly true that longer mortgages are more
affordable. Monthly repayments for a given sum work out as practically
identical whether you stretch them over 29 years – the current average duration
– or 50. Borrowing a larger amount would actually drive them higher. If 50-year
mortgages become the standard, people will end up with more debt, the headache
of making mortgage repayments in retirement, and they’ll end up in the house
they would have bought anyway.
What’s deeply frustrating is that the government almost certainly knows
it won’t work. The reason Downing Street keeps tinkering with demand is very
simple: it thinks doing anything to fix supply will lose it the next election.
British politicians have created an almighty mess. Restricting housing
supply caused prices to rise, and meant people borrowed increasingly large sums
of money to buy homes. As prices continued to rise, each new group of
homeowners was increasingly locked into the system: with their net worth tied
up in a single asset. A market correction would see their savings wiped out and
trap them in the misery of negative equity.
Combine this
with Britain’s ageing population, and you have a perfectly self-perpetuating
form of political dysfunction. Any attempt to liberalise planning mobilises masses of Nimby voters
concerned about falling property values. And until a politician is brave enough
to grab the nettle and risk a drop in property prices, we will be stuck with a
housing market that ruins the lives of young people before – eventually –
turning them into lobbyists for its maintenance.
WRITTEN BYSam Ashworth-Hayes
Sam Ashworth-Hayes is a former director of studies at the Henry Jackson
Society.
CommentsShare
Wednesday, 6 April 2022
BANKING ON PROPERTY -- A NEW REPORT FROM POSITIVE MONEY
What is driving the housing affordability crisis and how to solve it
is an important new report (31Mar2022) from Positive
Money, a research and campaigning group, which advocates a form of MMT —
Modern Monetary Theory.
[disclosure: I have been involved from its founding in , and
also made large (for me) contributions to them in the early days]
You can read the Report in full here:
https://positivemoney.org/publications/banking-on-property/
‘Banking on Property’
is the punning, obscure title of the report. Even the subtitle doesn’t explain much!
Still, PM are keen to be seen as respectable and credible in any academic
forum, hence the obscurity!
A better title?
‘Incontinent Mortgage Lending by Banks Driving Up House Prices’
How financial liberalisation lets banks create unlimited money for house purchasing. The result? Houses far too expensive for many of the rising generation to afford.’
It’s all explained in our book[1]
To return to Positive Money’s Report:
—Banks (financial institutions) provide the ‘purchasing
power’ for home-buyers.
After a brief history of banking liberalisation in the UK, starting
in 1971 (bingo! They’ve spotted it, as I tried to explain), that
“The [virtually unlimited] power of credit creation [by the
banks] means that households are able to purchase property even as house prices
increase significantly faster than their incomes.” (p25), and
“A major driving force in the increase of UK house prices
over the last thirty [shouldn’t that be fifty?] years has therefore been a
relatively elastic supply of credit meeting a relatively fixed supply of
housing, combined with increased speculative demand for homeownership and BTL
landlordism. Such a rapid growth in house prices would not have been possible
without a credit-creating banking system, given the much slower growth of
household incomes.” (p27)
So, yes, full agreement and support for my explanation:
The proximate cause for house prices rising so fast is freely available
credit-mortgage lending.
(Although PM ignores what happened before 1970, when
house prices were NOT a problem. IMHO what they did then gives us pointers for
what we might do today.)
So far, so impressive. Sadly the Positive Money Report then becomes
very dull, heavy going overloaded with analysis of what is frankly peripheral
to the main argument. I suppose the felt they had to protect themselves from
the conventional thinking of the majority of self-styled ‘experts’!
The Report wanders off into more irrelevance by discussing
social themes in the housing of Londoners (OK need to satisfy the sponsor)
Additionally, and these are very expensive, they commissioned a large public opinion survey. I’ve dealt with this in my previous blog. Tricking people to accept the
unacceptable (welcome a house-price freeze) will soon fall apart on first
encounter with reality! Casual answers to loaded questions prove nothing.
BUT WHAT ABOUT THE CONCLUSIONS? DO THEY RESCUE THIS REPORT?
“Stabilise house prices” they say, but hedged in by
lots of waffle:
“The primary recommendation of this report is that the UK
Government launches a new longterm housing affordability strategy focused on
tackling the root causes of the affordability crisis. The overarching goal of
the strategy should be to embark on a long-term transition to stabilise
house prices and allow wages and inflation to catch up, bringing real house
prices and the house-price-toincome ratio down to more affordable levels over
time.”
Hear! Hear! That’s exactly what we advocate in Stop House
Prices Rising!
But can I hear Dr Deming’s oft repeated mantra “By What
Means?” ringing in my ears.
What ‘means’ does this Positive Money Report suggest to
stabilise prices?
1. Update the Bank of England’s Mandate to include stabilising
house prices.
And that’s more or less, it. This it seems, is the best that
this fine organisation (Positive Money) that I supported to the hilt at
inception can come up. Tell the BoE to do it! Waffle about ‘credit guidance’
and ‘improved frameworks’ won’t cut it. Do they think the BoE can re-impose The
Corset of the 1960s? No chance!
This really is a case of ‘kicking the ball into the long
grass’
Instead the Report should have specific targets for taxing
the banks, like Osborne’s Permanent Bank Levy. Make the banks pay more when
house prices start climbing.
2. Reform property taxes (yawn, yawn)
This is just filler, and beyond the remit of this Report,
which is about the Banks contribution to house price rises. So, out come the
usual suspects:
Make Council Tax
fairer, PM says. Have they any clue what political turmoil lies around
Rates/Poll Tax/Council Tax? Dammit the system can’t even organise an updating
of property values. All the commentators go for this, little realising how
toxic (politically) it is. Changing tax regimes requires much more subtlety
than this!
There are a few other suggestions on CGT and IHR, but no
explanation of how they would work to stop house prices rising, why politicians
would want to implement them, or how soon they would work.
3. Rent controls and security of tenure like they have in
Germany
Good point, would have all sorts of knock-on effects, but
really has little to do with stabilising house prices.
This Report had a very high profile launch with at least two
MPs in attendance on Zoom. It generated zero press coverage, apart from a puff
piece in the New Statesman about their survey. “Oh look! Homeowners have
changed, the really don’t care about building unearned wealth from their home.
Fairness and equity is now their thing” [My Ar*e, says I]
[1] Stop House Prices Rising!: The
Essential First Fix For the Broken Housing Market
by
Conall Boyle & Steve McCabe Bitesized Books Feb 2022
https://www.amazon.co.uk/Stop-House-Prices-Rising-Essential/dp/1739726103/ref=sr_1_1?crid=AN9A6VAKQY6S&keywords=conall+boyle&qid=1646144465&s=books&sprefix=%2Cstripbooks%2C108&sr=1-1
Sunday, 3 April 2022
“MOST HOMEOWNERS HAPPY FOR HOUSE PRICES NOT TO RISE" says a new survey
So I’m right!? The majority of voters (two-thirds) who own their home will accept it if somebody (the government usually) does what it takes to
STOP HOUSE PRICES RISING! (that’s the title of my new book)
Here’s how Positive Money, the organisation that commissioned the survey
explains it:
-
- - -
Positive Money’s YouGov polling indicates that the majority of the
British public – including a majority of homeowners — being happy for house
prices not to increase:
- Nearly
two-thirds (62%) of the public also believe that the “purpose of a house
should be mainly a home,”as opposed to “mainly a financial investment”
(1%)
There is popular support across all regions of Britain, and among voters
of all the main political parties, indicating a strong appetite for a bold new
approach to tackling the housing affordability crisis.
Notes
·
All figures, unless otherwise stated, are from YouGov Plc. Total
sample size was 1,751 adults. Fieldwork was undertaken between 9th – 10th March
2022. The survey was carried out online. The figures have been weighted
and are representative of all GB adults (aged 18+). “
·
Source https://positivemoney.org/2022/03/most-homeowners-happy-for-house-prices-not-to-rise/
-
- - - end of (edited) Positive Money Press Release. More about this in my
next blog
My Comment: The devil, as always, is in the detail.
Threatening home-owners with a price-freeze, let alone a price-crash, has always looked like political suicide.
Any hint of that, and the Daily Mail will go nuts!
And here comes a survey which claims homeowners would be happy with a
house-price freeze, but the question had a rider…
“Would you be
happy or unhappy if your own home didn’t rise in value in the next 10 years,
but it meant houses were more affordable for those who don’t own property?
[Asked to those who own or part-own their home]”.
Only
54% agreed. The rest didn’t care or maybe thought ‘sod making houses affordable
for the youngsters; I want to keep my capital appreciation’.
It
is NOT going to be easy, politically, to get homeowners to sign up to a price-freeze
(as I suggest in the title of my book). This will have to be approached
gingerly, incrementally, and maybe even surreptitiously!
Nice
try by Positive Money, though.
—-
My
book (with co-author)
Stop House Prices Rising!: The Essential First Fix For the
Broken Housing Market
by
Conall Boyle & Steve McCabe Bitesized Books Feb 2022
https://www.amazon.co.uk/Stop-House-Prices-Rising-Essential/dp/1739726103/ref=sr_1_1?crid=AN9A6VAKQY6S&keywords=conall+boyle&qid=1646144465&s=books&sprefix=%2Cstripbooks%2C108&sr=1-1
---EXTRA: NEW STATESMAN PICKS UP ON THIS STORY -- but I think they're over-egging it!
Britain has fallen out of love with its housing
market
Long-held assumptions about rising
house prices are being shattered by the affordability crisis.
By Polly
Bindman
When Nigel Lawson described the NHS
as “the closest thing the English people have to a religion”, his party was in
the process of substituting it with another: the housing market. Policy changes
such as tax incentives, the right to buy and the deregulation of the private
rental market had formed the basis of Thatcher’s goal for a “property-owning
democracy”, and for decades the narrative has held that rising house prices
translate into general wealth.
Polling released yesterday (31 March)
indicates that the British public no longer believe this story. Confronted by
low levels of home ownership and an affordability crisis, the British public
would now prefer house price growth to remain low or to stop entirely, and
homeowners are in favour of bold reforms to make housing more affordable at the
expense of their own properties increasing in price.
The polling, carried out by YouGov on
behalf of the research and campaign group Positive Money, found that more than
half (54 per cent) of British homeowners would be happy if their own home did
not rise in value in the next ten years, if that meant houses were more
affordable for those who don’t own property. Since 2000, average wages have
grown by 94 per cent while house prices have grown by 224 per cent.
“I think people realise that the
system is broken when you can’t really own a home just from having a job,” said
Danisha Kazi, senior economist at Positive Money. “Soaring house prices are
locking the younger generation out of home ownership. Most people that own
homes are older, they’ve got children or grandchildren and they recognise there
isn’t an easy way to get them on the ladder other than for them to give them
equity that they have in their own housing.
“At the same time, many homeowners
are also banking on their own house paying for their retirement or care — the
costs of which are also rising — and many are not wealthy enough to pass
housing wealth on to their children.”
The realisation that rising house
prices do not create prosperity even for wealthier homeowners means that
support for reform comes from a broad range of demographics. A majority of
Conservative voters would be happy if their home didn’t rise in value if it
meant others could buy, and would support the Bank of England being given a
target to keep house price inflation low and stable. Similarly, 44 per cent of
Conservative voters (and 51 per cent overall) would support a rise in council
tax for owners of homes above the national average house price, and a decrease
for those with homes that are lower.
The poll found that older voters were
actually more prepared than any other age group to sacrifice rising value on
their homes in favour of affordability, perhaps because they are less exposed
to the risk of falling prices, having built up more equity. The Conservatives
had a 62 per cent share of the over-60 vote in the 2019 general election.
The report also counters the common
assumption that the housing crisis is primarily the result of a shortage of
homes. It reveals that new supply has in fact exceeded the formation of
new households in recent decades. In 2020 there were 7.5 per cent more
dwellings than households in London and 4.8 per cent more in the south-east.
Home ownership in England peaked at
71 per cent in 2003, and has since fallen to 65 per cent. For young adults it
has fallen more sharply, to 47 per cent, while home ownership among ethnic
minorities is lower still, at 35 per cent.
High rents and the change in working
patterns caused by the pandemic have exacerbated the problem: 42 per cent of
private renters say that the pandemic has made home ownership a more important
aspiration for them, while 68 per cent of all renters don’t believe they will
ever be able to afford a home of their own, according to Ipsos
Mori polling.
Years of policies such as help to
buy, changes to stamp duty, the shared ownership scheme and extended mortgage
terms have only served to financialise Britain's housing market, a problem most
voters now apparently recognise: a large majority believes that the purpose of
a house “should be mainly a home, not a financial asset”.
While the UK's housing affordability
crisis is particularly severe, rapidly changing attitudes on housing have
already proved electorally significant in Sweden, where rent control policy led
to a government crisis; in Ireland, where housing has been a key issue in the
resurgence of Sinn Fein; and in Canada and New Zealand, where governments have
taxed or restricted foreign buyers. British voters, too, seem hungry for new
ideas.
Source
https://www.newstatesman.com/business/2022/04/britain-has-fallen-out-of-love-with-its-housing-market
Thursday, 24 March 2022
OBR Forecasts 2022 Housing Market Mayhem — 7.4% rise this year!
Property prices are set to leap 7.4% before cooling dramatically as incomes fall and interest rates rise, watchdog says
- UK
house prices are predicted to continue rising quickly for the rest of this
year
- The
growth however could slow down notably by the end of 2023, to about 1%
- Currently
the average house is set to be worth an extra £20k by the end
of 2022
From the Daily Mail PUBLISHED: 23:16, 23 March 2022 | UPDATED: 23:16, 23 March 2022
House prices will continue to soar for another year
before rapidly slowing down, the Government’s fiscal watchdog has predicted.
The average home could be worth £20,000 – or 7.4
per cent – more by the end of 2022 due to high demand and strong household
savings, according to forecasts released yesterday. The Office for Budget
Responsibility said the figures far exceeded its forecasts last October.
However, a fall in incomes and a predicted rise in
interest rates over the next year means that annual price inflation will then
dramatically slow to about 1 per cent by the end of 2023.
More from OBR at
https://obr.uk/forecasts-in-depth/the-economy-forecast/housing-market/
Tuesday, 1 February 2022
The Classical Economists’ Fantasy – BATAW, Build Any Thing Any Where
If you have
been trained in Economics (like me) and still cling to the conventional (neo-classical)
version (I’ve learned better), then you would be one with the many voices proclaiming
“House
prices soaring away? That can only mean
a shortage, so a huge new supply is needed.”
This is the
‘commonsense’ view of many politicians. Cut red tape, speed up the planning
applications, kick the builders into building more, more, more! are the
watchwords. But as Keynes sharply put it, they are no more than echoes of the
ravings of the Defunct Economists (DE) – you know, they ones who didn’t see it
(GFC2008) coming.
Yet some of
these conventional economists are quite prepared to look reality in the face.
In a very interesting paper by Bowman, Myers and Southwood in September 2021 on
the obscure but interesting blog workinprogress. Their intriguing title The
Housing Theory of Everything[1]
has very broad ambitions. The housing problem isn’t just the withering of
the great home-owning democracy and the injustice of staggeringly high prices
faced by the youngsters. No, the broken housing market is responsible for
lowering the birthrate, obesity, and bloating the carbon footprint of suburban
dwellers. It’s a most entertaining read!
The authors
graphically illustrate my point that it’s not the house builders’ fault. House
prices may have tripled since 1970, but the builders have managed to keep build
costs under control. It costs about the same today per square metre[2]
to build as it did 20 or 50 years ago (all figures inflation adjusted
obviously). The authors give a telling
example why this is not good enough, though. As customers we expect more
progress, with cheaper better products becoming available. Take the automobile
– today’s model is quarter the price, more reliable, comfortable and
much better equipped. I loved my old 1970 Ford Cortina, but my 2020 Mazda SUV
is a great comfort in my old age!
So build
cost is not to blame for houses tripling in cost. I’ve tried to explain the
mechanism for the staggering real rises in house prices. For these authors,
neo-classical economist to a man, the explanation is quite simple:
“The
main cause of this is regulations that ban buildings that make better
use of the land.” And
This of
course is even more defunct economics, but of course they have the mathematical
models. Of course, based on their assumptions they can logically, algebraically
prove that remove all ‘restrictions’, their weasel-word for the planning
laws. The Building Regulations (regs) are rules to ensure the houses are strong
and stable, healthy and heat-insulated, fire-resistant and escapable (as
Grenfell Tower clearly wasn’t)(but as generally thought to be a result of the
defunct-economists approval of the ‘bonfire of red tape’). They take the strong
individualistic libertarian nay Ayn-Randian view that all these restraints on
freedom result, in this case, in horribly expensive housing, badly designed and
built and too few of them
So that
explains the curious conclusions above. If the free-market price is above the
cost of production it is ‘evil and mis-guided public regulation’ that must be
causing it. Absent is any notion that the cost of Land, the other pre-eminently
obvious factor of production has something to do with it!
That is not
to say Planning Laws don’t push up the cost of housing, or rather reduce the
exploitation opportunities for a given parcel of land. Mandating maximum
numbers of houses per acre allowed to be built is one obvious rule which pushes
up costs. But the same rule will have vastly different effects in different
parts of the country, and in different parts of a city. Why would any Council
or Government want to avoid cramming the maximum profitable number of houses
onto an estate? Public amenity perhaps? Neighbours in a leafy spacious suburb would wish to
maintain the character of the area. These may be crass motives, but if the
public vote for them, isn’t that democracy?
But let us
take Bowman, Myers and Southwood at their own analysis. The super-pricing of
houses above their construction costs is due to interference in the free market
by Planning Laws and Regulations. This leads to the obvious conclusion that the
more regulations abandoned the more, through the normal workings of the market,
will house prices come down to near their cost of production. The sentiment we
totally agree with, but which regs. To go, and how much difference will it make?
One of the
authors has been active in the YIMBY campaigns, both generally and in London.
Their obvious name Yes-in-my-back-yard is a deliberate contrast to Nimby –
Not-in-my-back-yard. It is a positive message and you cannot but admire their efforts.
Showing examples of mansard additions to tall, but venerable London street
housing is fine. It shows that in special circumstances cramming in more
accommodation need not spoil the neighbourhood.
The authors
also point to good practice abroad. “Japanese land use regulation is
light touch. At its most restrictive, it allows buildings three floors high
that use up the entirety of their parcel of land.” For
other examples of liveable densely packed cities the authors point to central
Paris and Barcelona, as what might eventuate from a bonfire of the regulations.
So essentially what the authors claim is that
allowing the maximum exploitation of every plot without any local control would
‘fix-it’. This is what you might call BATAW — Build Any Thing Any Where. As a
philosophy is has appeal, especially to those who crave Freedom for everyone. This
is pure economistic fantasy and it is impossible to imagine any regime,
authoritarian or not implementing it. They may point to ancient city centres
which we find so attractive as models to copy. The higgeldy-piggeldy layouts
and tall houses on narrow streets are appealing true (but wasn’t it the fire
risk of jette’ed floors which led to their banning after the Great Fire of
London in 1666?
The authors make a very good case that “By
historical and global standards, today’s most successful cities in America and
other Western countries are astonishingly sparsely populated and sprawling.”
They lay the blame for this, of course, on ‘the regulations’. But where do they
find the consumer appetite for city cramming? Sure, public housing in the form
of tower blocks is a disgrace, and many tenants can’t wait to get out. The
private sector is very good at providing swanky, concierged apartment blocks.
This may be good for the elderly and the footloose young. But overwhelmingly
the demand is for stand-alone houses with your own front door and with a
garden. Hence urban sprawl. We can visualise raising a family here, perhaps the
most fundamental and virtuous instinct of them all.
[1] www.worksinprogress.co/issue/the-housing-theory-of-everything 14Sep2021
[2] Earlier I gave a figure for UK building cost of about £1,350 per sq m. Building costs in the US are about half that at about $90 per sq. ft. say $900 (£666) per sq m according to a heavyweight US reference, ‘The Economic Implications of Housing Supply’ Edward Glaeser, Joseph Gyourko J. Econ Perspectives 32 1,wINTER 2018.
[3] Gaffney, M., Harrison, F., & Feder, K. The Corruption of Economics. (London: Shepheard-Walwyn (Publishers) Ltd., 1994)
Friday, 8 October 2021
HOW IRELAND NEARLY ACHIEVED SITE VALUE RATING (lvt) FOR HOUSING
How Ireland nearly achieved LVT An
Example of a nearly-there policy in Ireland.
There could never have been a better time than 2012 in Ireland for the introduction of LVT or Site Value Tax as they prefer to call it. Back in 1978 there had been the hurried decision to abolish domestic rates following a rash promise during an election (!).
It was soon realized
that this was a mistake and a form of property tax needed to be re-introduced.
The result of the 2007 Irish General Election was a coalition, with the Green
Party as one of the junior partners.
All agreed that there should be a property tax, but it was the Greens who specifically advocated Site Value Taxation (SVT). By 2009 a Commission on Tax had reported which saw merit in SVT, but opted for Property Market Value as the basis for the new tax.
In early 2010 a new coalition government made its proposal in its Renewed Programme for Government. This time, under pressure from all parties, SVT was the preferred option.
Then in late 2010 the Great Financial Crash exploded on
Ireland. The economy shrank by 8%, revenue from property taxes, mostly Stamp
Duty on sales, collapsed. Government finances looked dire.
This is the classic Shock Doctrine territory made famous by Naomi Klein. This is when, in the wake of the crash, the neo-cons move in to pick over the stricken economy, advising governments to privatise utilities, reduce taxes on the rich, crush the power of the trade unions. When, in post-crash Ireland a high powered outside group (which became known as The Troika) started issuing edicts, they included the ill-fated introduction of water charging through a privatized company.
More promising was
the Troika’s requirement to introduce a property tax.
Conditions in 2011 then, could not have been more
promising for SVT/LVT. There was a crisis, and more tax revenue was desperately
needed. The two previous coalition governments had plumped for a property tax
based on SVT. A big bad external group (The Troika) was pressing the government
to introduce some form of property tax, so could be blamed if anything went
wrong.
So what happened next?
Has Ireland adopted LVT? No. Instead in July 2013 a ‘Local Property Tax’ was introduced at 0.18% of the property’s value, payable to central government.
In some ways this is an attractive alternative. Taxing the value of the house plus the land captures the land element. Clearly where land is the major value-factor in highly sought-after locations, most of the tax accrues to the land or plot price.
The fact that, unlike the UK Council Tax it
is charged at the same rate, whatever the house value. That the tax is
collected by central government will appeal to many LVT advocates. Indeed there
is a campaign afoot[1]
to introduce something similar in the UK.
But what had happened to the Irish coalition government’s enthusiasm for SVT? The design practicalities of the new tax were handed to an ad-hoc Inter-Departmental Group of Civil Servants.
They produced a Report Design of a local property tax for
the Irish Government 2012. They were well aware of the political impetus
behind SVT, yet in their wisdom and experience they produced the following
rebuttal of SVT. I reproduce here in full, because I think every land-taxer and
Georgist should know what hurdles especially administrative must be overcome
before a proper SVT/LVT can be implemented.
Comment: If we cannot overcome these objections at such a propitious time then the project that we hold dear — Land Value Taxation — is a Dead Duck. So why did Ireland flunk the introduction of LVT/SVT and bring in a property-value(price)-based tax instead?
Read how the Administrators
steered the Government onto a flat-rate national Property Tax..
Here verbatim and in full[2]
is the case against SVT (and in favour of a market value/price tax). Read it
and maybe weep; how do we overcome these perfectly rational arguments?
“3.3 Site value versus market value
3.3.1 Both residential market value and SVT meet a
number of important policy criteria. The arguments for SVT are outweighed by
the likely difficulties in ensuring acceptance by taxpayers, i.e., arriving at
values that are evidence based, understandable and acceptable to the public in
addition to complexities and uncertainties in the valuation effort necessary to
put an SVT in place.
3.3.2 In contrast, under a market value approach
applied to housing, the market value of a residential property is related to
the characteristics of the building itself, the site on which it is located and
the characteristics and amenities of the neighbourhood. There will be a
relationship between the market value of a house and benefits to the owners in
terms of enjoyment of the amenity value of the properties. The question – “what
is the value of my or our house or apartment?” - is a relatively simple and
well understood concept.
3.3.3 The 2009 Commission on Taxation considered
both approaches. They concluded that “while seeing the economic rationale for
land value tax...” that “it may not be a pragmatic approach to the
restructuring of our property tax system”. The Commission recommended in favour
of market value of residential properties (housing unit and site) as the basis
of assessment.
Simplicity and transparency
3.3.4 Any tax needs to be kept as simple as
possible for both the taxpayer and the tax administration. Full market value is
a tried and tested basis of assessment that is internationally accepted, and by
implication, readily understood by taxpayers all over the world. At any point
in time, most home owners will have a reasonable sense of the market value of
the home in which they live by reference to recent sales and to officially and
privately published data on house price movements. Where there is doubt in
individual cases, estimates can be obtained from professional auctioneers or
valuers.
3.3.5 In the case of SVT, property owners would
have great difficulty in dealing with a valuation exercise which conceptually
separates the buildings on the site from the site (for tax purposes) in
circumstances where their predominant understanding and interest lies in the
market (or resale) value of their residence. Similar challenges would arise for
auctioneers and valuers. The SVT system would not be as transparent or
meaningful to taxpayers as market value.
3.3.6 It has been suggested to the Group that one
approach to determining site value might be to use information on transactions
in residential property (market value) and, by applying econometric techniques,
identify the implicit value of sites. This approach would fail
the simplicity and transparency test. Site values would be opaque to
taxpayers, leading to high volumes of contested valuations and appeals. This
would undermine significantly the acceptability of the tax. It would also be
somewhat paradoxical to use a basis of assessment (site value) that is
mathematically derived from the alternative basis of assessment (residential
property value).
3.3.7 In terms of administrative simplicity, both
SVT and market value present similar challenges as well as requirements for
comprehensive registers of market/site values. A comprehensive mapped register
of all properties, including details of ownership, precise location, and value
would be required for both. SVT would have the added mapping requirement of
site size. The practical challenges in establishing and populating such a land
register for either SVT or market value purposes would be substantial. However,
it would be much easier and transparent to put in place and update a register
of market values based on the ongoing flows of real time data derived from
house (market value) sales.
Equity
3.3.8 As regards the equity challenges, it is very
clear that the owners of more valuable properties would pay more under a market
value-based assessment scheme for either site values or residential properties.
Taxable values based on market valuations based on either sites or residences
would generally be higher in urban as compared to rural areas. This is
equitable to the extent that market value provides a measure of the value of a
residential property to the owner, particularly in terms of its proximity to
places of work and local amenities and facilities.
3.3.9 SVT does not meet the equity challenge nearly
as well. Taxpayers are likely to have profound difficulty accepting taxation
outcomes where, in directly comparable and neighbouring site situations, tax
liabilities would be identical even though one housing unit was larger and
could have a higher market value than the other.
3.3.10 There would be considerable difficulties in
communicating to home-owners and land-holders that such a situation was fair.
It would undermine the standing of the tax.
Efficiency
3.3.11 An efficient tax system encourages the
allocation of resources so that optimal economic output is achieved. Recurrent
taxes on immovable property are the most “growth friendly” of taxes. As both
bases of assessment deliver this outcome, they are both economically efficient.
3.3.12 According to its proponents, SVT offers many
additional potential economic benefits over and above that of a traditional
market value approach. These include:
• Encouraging the optimal productive use of land
and preventing dereliction;
• Providing for a stable revenue base (housing
prices are more volatile than land prices and land values tend to lag economic
activity);
• Reducing the incentive for premature and
excessive zoning of land, and would in effect be a tax on land hoarding and
speculation, which it is argued by its proponents, would reduce the incentives
for corruption;
• Encouraging the efficient use of existing
properties, including imposing a tax penalty on vacant zoned sites or derelict
properties; and
• Providing a means whereby communities, local
authorities and government can tax the benefits received by private landowners
as a result of local or community investments which enhance the value of their
lands.
3.3.13 While these additional benefits arguably
shade the efficiency argument in favour of SVT as a resource tax, the 2009
Commission on Taxation recommended against it on the basis that in their view
it would be very difficult to gain public acceptance. Despite the economic
arguments advanced by its proponents, SVT systems are not used extensively
internationally.
References for this section
T. Callan, C. Keane, M. Savage, J.R. Walsh, April 2012, Analysis of Property Tax
Options A report to the Interdepartmental Expert Group on Property TaxDublin; Economic
and Social Research Institute https://www.esri.ie/pubs/BKMNEXT229.pdf
Jim O’Leary September
2018 How (Not) To Do Public Policy: Water Charges and Local Property
Tax . Galway, NUI; Whitaker Institute for Innovation &
Societal Change
http://whitakerinstitute.ie/wp-content/uploads/2014/02/NUIG-Whitaker-Report-Water-Charges-LPT-Final.pdf
Ronan Lyons(Identify
Consulting For Smart Taxes Network), December 2011, Residential Site
Value Tax in Ireland An Analysis of Valuation, Implementation &
Fiscal Outcomes
http://smarttaxes.org/wp-content/uploads/2012/01/Site-Value-Tax-in-Ireland-Identify-Consulting-final-report.pdf
See also https://assets.gov.ie/7465/91ccbd3ddc97461898211710e2d7ec55.pdf
2019 Review of the workings of LPT
Afterword: In a Review in 2019 (Review of Local
Property Tax: The report of the Interdepartmental Group) the Irish
Government noted that no revaluations of property had taken place since LPT was
introduced in 2013. The amount collected thus remained almost constant, despite
property prices rising over 80%. At inception in 2014 LPT yielded 1.2% of
all Irish Government’s revenues; this declined to 0.8% by 2018. As for the
‘local’ element LPT amounted to a mere 9% of all revenues.
They did add some warm words about the
beneficial effects of ad-valorem property taxes quoting Blöchliger (2015)
“Property tax also offers a policy
instrument to support asset price stabilisation, through its role in dampening
house price volatility and overall property market boom-bust cycle dynamics.
Analysis by the OECD has found that lower levels of property tax, together with
less frequent property valuation updates tend to be associated with a higher degree
of property price fluctuations”. The ever-soaring Irish house prices are a
testimony to the inability of the stunted LPT to ‘dampen house price
volatility’!
The Irish Times on September 16, 2020
reports “Minister for Finance Paschal Donohoe has
again deferred the revaluation date for the local property tax (LPT), ……
Mr Donohoe has decided to defer the valuation date until November 1st
2021,”
My Comment: Oh
dear! Missed opportunity. How do we ensure that our proposals don’t fall into
the same political trap, putting off unpopular decisions until ‘next year’?
Houses will be revalued in November in line with the increase in property prices since 2013. This averages around 80 per cent plus although it varies from region to region.
To ensure that most homeowners do not face higher bills, the bands used to calculate what homeowners pay are being widened – by 75 per cent – and the rate at which the tax is charged is being cut . If this had not happened, the revaluation would have meant payments would have soared.
As it is, most current bills – about 53 per cent– will remain as they are. About 11 per cent will actually fall but 33 per cent will rise by €90 and three per cent will rise by more. This variation is due to different trends in house prices across the country.
Houses will be revalued later this year on a self-assessed basis and payment amounts will change next year. The impact will vary between regions and within regions because of the different rate of house price increases depending on location, type of property and so on,
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