Thursday 28 July 2011

Killer Arguments Against LVT, Not (149)

Let's chop that Daily Telegraph propaganda down into manageable chunks, starting with the headline:

House prices would be hit by 'revolutionary' property tax proposed by OECD

The use of the word "hit" panders to the notion that "High house prices are good for us", which is patently not true:

1) Best case, the older generation's loss is the younger generation's gain, so it's zero-sum.

2) Most people have children, and nearly all children have parents. Unless parents actually hate their own children, don't they want their children to be able to afford a house?

3) Apparently, a lot of parents try to "help their children onto the housing ladder" by dipping into their savings or even re-mortgaging to be able to give or lend to their adult children a deposit for an over-priced house. No doubt there are some couples somewhere who say "Luckily, our house had gone up in value, so we could remortgage to raise the money for our children to buy a house" but there's no helping people as stupid as that.

4) While the parents might be sitting on a paper capital gain, that's not real money. But the additional money which their children have to borrow to pay the higher prices is real money; it has to be repaid with interest, month in, month out.

5) Excel tells me that the total amount of repayments on a 25-year mortgage at 6.2% APR is double the amount of the initial loan [=PMT(0.062,25,100)*25]. So for every £1 of the parent's paper capital gain, there's a real £2 cost on the children.

6) One man's expense is another man's income, of course, so who are the real beneficiaries of this - the people getting the big bonuses at banks? The taxpayer who then has to bail out the banks when it all goes wrong? Who?

12 comments:

Bolivia Newton-John said...

The comments on that Telegraph article. I know you have debunked all of them over and over again, and I spotted 10 errors in understanding in the first five comments, but surely every single person would need every error debunked for them individually, one by one, which would make the policy a non-starter. There seems to be almost no-one who actually understands the simple idea that is being explained to them. It's making me feel pretty pessimistic, which when you consider how critical these reforms are is a pretty bleak scenario.

Bolivia Newton-John said...

*"The comments on that Telegraph article are so depressing."

Onus Probandy said...

Your point (4) raising the capital gains issue makes me wonder if the reason Average Joe uses his house as an investment fund is that it is (a) easily understood; but more importantly (b) capital gains free.

I am better off (tax wise) buying a £400,000 house and living in it than buying one £200,000 house and investing £200,000 because the gains on the house I live in are tax free.

The same is true for the £200,000 versus 2x£100,000 people, and the £100,000 vesus 2x£50,000, etc, etc. Therefore everyone wants a more expensive house. Houses, through tax-system distortions, are better "investments" than wealth creating investments of an equivalent risk level.

As Darwin taught us: create an environment where a particular behaviour is rewarded and that behaviour will emerge. It doesn't even have to be done consciously. Those who choose strategy (a) will be richer than those who choose strategy (b) and will thus have more money to invest in strategy (a).

(Feel free at this point to say "LVT would correct this distortion", which it would)

Deniro said...

Who Benefits, the Chancellor for one - beacause of inheritance tax 4. "parents sitting on paper gains"

A K Haart said...

"revolutionary" is also what Sir Humphrey would have said.

You should write a book on these issues, or maybe you have?

Bayard said...

I'm amazed that they can say "House prices will be hit..." and people still not twig. No-one with an ounce of sense should think high house prices are a good thing, because only buyers consider the price of something, sellers are concerned with its value.

OP, it's not much of a risk-free investment when prices start to fall.

Onus Probandy said...

@Bayard

it's not much of a risk-free investment when prices start to fall.

House prices have, over a typical long-term investment period, never fallen.

Even now, in the worst housing market we've seen for decades, the lunatics that are selling houses refuse to sell at lower prices. The result: no house sales, not cheaper houses.

"House prices collapse by 10%" is a banner scare-monger headline. 10% is a disaster? What a joke; house prices have gone up by hundreds of percent over the last thirty years. A 30% drop wouldn't be a disaster, but would be sold as being the end of the world.

For the good of the country, policies that simply feed money home owners should be stopped.

For the good of your own wealth: recognise that that will never happen and buy the biggest, most expensive, house you can afford, because I (with heavy heart) guarantee it will outperform any other investment an Average Joe can make over their working life.

I'm in favour of LVT; I'm in favour of low inflation. I would be a fool to organise my affairs as if those things are in place or are ever likely to be though.

Derek said...

You have to laugh:

JULY 21ST, 2011 8:05 - "House prices would be hit by 'revolutionary' property tax proposed by OECD" in which our hero, Ian Cowie, moans that evil foreigners are scheming to reduce the price of UK housing (which is a Bad Thing).

Followed by:
JULY 22ND, 2011 7:47
"Never mind the euro crisis; weak sterling pushes house prices out of reach for many Brits" in which our hero, Ian Cowie, moans that evil foreigners are scheming to increase the price of UK housing (which is a Bad Thing).

Does he want prices to go up? Or down? Make your mind up, Ian!

Electro-Kevin said...

Good post.

Sadly our economic growth strategy is based on private property.

Robin Smith said...

Points 2-6 excellent thank you!

Best case, the older generation's loss is the younger generation's gain

Read my lips:

No one will lose with an LVT

How many times?

Furthermore, though taxes on land will be higher, she will be free from taxes on the house and improvements, on furniture and personal property, and on all she and her family eat, drink, and wear. Her only loss would be if she wants to sell her lot without getting another. This is a small loss compared with a great gain.

Robin Smith said...

Electro-Kelvin

Can you state what exactly is wrong with private property? AS compared to common property?

Think about this very carefully:

There IS something, that by natural right, you can own, as private property. Can you guess what it is? And what would you call it if that thing became the property of others?

Bayard said...

"House prices have, over a typical long-term investment period, never fallen."

House prices tend to follow an 18 year cycle about a mean that is a fixed amount of average earnings, which have, yes, consistently risen, but not by very much. If you buy at one of the peaks, you would have to wait almost 18 years just to get your money back, which is not much of an investment. Sell in any less time and you could lose out dramatically. That doesn't sound very risk-free to me.