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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:

-      - - -

 “London, 31 March 2022 – A majority (54%) of British homeowners would be happy if their own home did not rise in value in the next ten years if it meant houses were more affordable for those who don’t own property, according to YouGov polling commissioned by research and campaign group Positive Money.

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 wedge, between build costs and house prices, is a rough proxy for how much extra cost is being driven by restrictions on new building.”  
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
 
 
It is commonplace for these economists, often imbued with the Economics of Public Choice Theory (you’ll have to look that one up) to assume ALL public action is corrupt, self-serving vested interests, based on faulty analysis. But behind this conclusion lies a deeper form of deception. It was Mason Gaffney[3] who identified the great failure of economics in the US in Victorian times. At the behest of hugely wealthy industrialist donors, leading economics departments elided Land as a factor of production into Capital. [See Ryan-Collins video on Youtube explain this fraud] One of the main reasons for doing this was to counter the ever-rising influence of Henry George and the Land Taxers.
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?
In the final analysis we would say that the price of the plot of land incorporates both the regulatorily-imposed shortage of effective building plots plus the societally derived value of amenities like transport, good schools but above all the prosperity and earnings potential derived for the efforts of people working together in the local economy.   
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.
(Oh what a tasteless remark when the example of Grenfell Tower is fresh in the memory. Lax inspection or light-touch regulation meant that death-trap cladding was affixed to the outside. This high-rise tower block has been by far the preferred response to cramming more people into the urban environment. Maybe regulation is not such an unmitigated drag on the market after all)
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’?

REVALUATION IS GOING AHEAD! In the Irish Times Jun 2021

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,

 



[1] A report from the Rowntree Foundation made such a proposal in 2014 https://www.jrf.org.uk/report/after-council-tax-impacts-property-tax-reform-people-places-and-house-prices

[2] Design of a local property tax Report of the Inter-Departmental Group  Irish Government 2012