The Fat Bigot delivers another dollop of self-contradictory Home-Owner-Ist propaganda in the previous instalment, the crux of which appears to be this:
Let's set the bubble aside and assume there isn't one. On that hypothesis your proposal is to impose a capital tax on one form of savings.
Bollocks. He knows perfectly well that LVT is not really a "tax" but a user charge on private consumption of publicly (not necessarily government-provided) benefits. And the rental value of land is not "one form of savings" chosen by the purchaser of land, the rental value is dictated by everything that happens around it (remember the slogan: Location, location, location!). LVT is the opposite of the damaging taxes like income tax, VAT etc which it should replace.
But he reminds us that the Home-Owner-Ists have managed to turn the whole concepts of 'consumption' and 'saving' upside down; in their world, ownership of land (i.e. consumption) is a kind of saving - I don't see how this amounts to an argument against LVT and in favour of income tax, VAT etc - but others have come up with similar nonsense, so let's deal with it:
Putting your money into a house (the value of which on this hypothesis includes no bubble element) rather than into the pocket of a landlord results in you owning a piece of real property after 25 or so years.
After the property is fully paid-for you have no on-going capital housing costs unlike those who have chosen to rent... the net result is that you are considerably better off each month than you were when repaying the mortgage or that the renters next door are.
I don't see anything objectionable about people arranging their affairs in that way. In fact I think it is a very sensible arrangement because later in life earning capacity is often reduced and having lower overheads makes it much easier to cope with any downward turn on income. It also allows pensions to be lower and still provide enough for people to live on.
In effect the purchase of a house is a savings policy. It provides a lump sum that gradually increases as the mortgage is paid-down (let's not quibble about repayment against interest-only because any sensible interest-only plan includes a capital repayment vehicle). Once it is paid-off it provides a substantial monthly reduction in the cost of living.
It's a typical diagonal comparison - the implication is that the only alternative to buying a house is renting and/or squandering your money. The fairest comparison is between buying a bigger house and buying a smaller house and saving up the difference in cash.
If we work through the steps logically and compare like-with-like at each stage, it is pretty obvious to all except the dimmest Express or Telegraph reader that land ownership is NOT saving (in the narrow sense of 'deferring consumption'), not at the level of an individual and certainly not at a macro-economic level:
i. A and B start off their working lives with similar incomes, they still live with their parents and both have £1,000 a month left over paying for essential living costs. A spends all his spare money on 'stuff' and B spends £500 and saves up £500 a month in the building society. Clearly, B is saving more and A is consuming more.
ii. They both decide to move out. A rents the biggest and nicest flat he can afford for £1,000 a month, and B rents a smaller flat for £500 and saves the other £500. Clearly, B is saving more and A is consuming more, as A is consuming more land rental value.
iii. After a few years they both think that renting is a mug's game and decide to buy. A buys the biggest and nicest house he can afford for £200,000 and pays £1,000 a month mortgage; B buys the smallest house he can happily live in, pays £500 a month mortgage and saves up £500 a month cash (B would obviously be better off paying off his mortgage quicker, but let's stick to like-with-like). The relative consumption/saving between the two is the same; B is saving more and A is still consuming more.
iv. Fast forward to when they've both paid off the mortgage and are coming up to retirement; A has a £200,000 house and B has a £100,000 house and £100,000 savings in the bank (plus accumulated interest*). B has built up more assets because he has saved more; and A has consumed more, having lived in a nicer and bigger house and consumed more land rental value for the past twenty or thirty years. In retirement, B can unwind the position and spend his savings in retirement, buy an annuity or whatever.
v. * How much accumulated interest? Assuming all things being equal, that the rental values = the mortgage repayments and reasonably efficient banks, the interest that all the Bs earn on their savings will be roughly equal to the additional interest which all the As have paid. So B's additional interest paid is the sum total of all the additional housing services which all the As have consumed, so again, we see that A has consumed more in the past and B has saved more (deferred more consumption into the future).
vi. Therefore, if we assume that two people spend the same amount of their spare income on 'other stuff' (non-housing services), then buying a smaller house means more saving than buying a bigger house. Therefore, the more house you buy, the less you are saving. Taking out a large mortgage and buying a house is therefore the opposite of saving money, quite clearly, because borrowing money is the opposite of depositing money; paying off a mortgage is a good type of saving, but taking out a smaller mortgage to start with is an even better form of saving.
vii. Now, go back to TFB's closing arguments and rephrase them in like-for-like terms:
After the properties are fully paid-for, neither A nor B has on-going capital housing costs... but because B has cash savings, the net result is that B is considerably better off each month than A.
I don't see anything objectionable about B arranging his affairs in that way. In fact I think it is a very sensible arrangement because later in life earning capacity is often reduced and having lower overheads makes it much easier for B to cope with any downward turn on income, unlike A who will be claiming Support For Mortgage Interest if he loses his job. It also allows pensions paid to B to be lower and still provide enough for people to live on - but A, having no cash saved up will have to be bailed out by the taxpayer.
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And yes, the example is simplified, but t'was TFB who said "Let's set the bubble aside and assume there isn't one" so that's where I started.
We can introduce all these real life complexities - rental values grow as the economy grows; land price and credit bubbles and the ensuing recessions; interest payable on mortgages is at a higher rate than on savings; price inflation erodes the value of cash savings; there is tax on earned income and savings income but not on non-cash rental income from housing or capital gains on your main residence - but these are all dictated by the government. All these complexities are only there because the government i.e. weak politicians under the influence of the the banks, the large landowners etc, wants things that way.
But as long as we introduce these complexities one-by-one on a like-for-like basis, and at each stage in the logic compare the outcome with alternative that we abolish income tax etc and replace the whole lot with LVT (or Domestic Rates or more Council Tax bands, or whatever), we will still see that buying a big house is consumption.
Even if people believe that rising house prices make them richer (as individuals) then this is only because future generations are becoming poorer; and at a macro-economic level, rising house prices make us all collectively poorer. They must do, because the massive gains to the "one per cent" are a drop in the ocean compared to the damage this causes to the economy as a whole, i.e. to the "ninety nine per cent" who do not live off land rents.
Nothing
4 hours ago
13 comments:
so that when you stop paying out on your mortgage, then your monthly payments go into savings......really? Except that, if you stayed in the same house for 25 years, then your monthly payments as a percentage of income go from 30% to 3%. And you still do not save enough because you enjoy the unearned wealth in a higher lifestyle.
Its quite true that rising house prices make society overall poorer. It also causes people to take on more risk, to take out a bigger mortgage because society tells them they must own. And then what happens when the bubble deflates - as it must because all assets eventually go back to their mean value - owners are left "underwater" and either default and/or keep paying the mortgage but are chained to an asset that will never have real value for them.
farmland investment
Graeme wrote:... if you stayed in the same house for 25 years, then your monthly payments as a percentage of income go from 30% to 3%. And you still do not save enough because you enjoy the unearned wealth in a higher lifestyle.
Good points. But even sadder is that all those savings are now locked up in the house and land instead of being invested and earning interest or dividends.
Your house falls in value constantly unless it is maintained and renovated, so you lose money constantly on it. Even if your land rises slowly in price, you might as well be keeping your "savings" in a no-interest account with withdrawal fees that requires 90 days notice to get the money out.
So not exactly the best savings plan known to man.
G, your assumption might or might not be correct - it is quite likely that Mr A has done mortgage-equity-withdrawal, but I'm trying to do straight like-for-like comparisons, let's beat the Homeys fair and square rather than stoop to their level.
D: "all those savings are now locked up in the house and land instead of being invested and earning interest or dividends."
People often talk about 'money locked up in land' which is nonsense actually. The money is locked up in the pockets of the vendor and of the banks, the true value of the land has nothing to do with the current price or how much you spent on it.
I’m a lifelong Mr B and I agree with you – a house is a form of consumption. Living in a cheap area I suppose I’m aware of it because expensive houses round here are just too big – at least to my eye.
AKH, thanks, exactly, but the government engineers house price rises so that the As still end up [feeling] richer than the Bs (who are being stiffed by low interest, high inflation).
As it happens, I tend more towards A. I like living in a big house, but I'm not claiming that this is 'saving', it's 'consumption' and in exchange, I make do with a cheap car, no expensive holidays etc.
You don't see CBI clashing with this? How would the two work in?
JH, the CBI is like a personal allowance or an LVT rebate.
By definition and even without doing the workings, it must be pretty clear that the median household would get a total CBI that is approx. equal to the LVT on a median home, give or take a few hundred quid a year.
If people really don't want to take advantage of all the job opportunities which will arise once income tax etc are phased out, then they still get their CBI but will have to live in the smallest cheapest homes in the cheapest areas.
JH, to clarify, I would net off the CBI and LVT at source as far as possible, each household gets one LVT bill with the personal CBI amounts already deducted. People in very small homes get a modest rebate overall.
Indeed it is "very very informational web", that's why I come back every day.
I have to get back to the point I made in the terms I made it, not in the terms you have chosen to distort it.
The proposition I put forward, and that you have chosen not to answer, is that buying a house/flat is a form of saving.
Your position is that historically monthly rental values have generally equated to monthly mortgage interest repayments. From that starting point (which might well be correct when you look at rental costs today and compare them to mortgage interests costs of buying the same property today) I don't accept that as a general principle because it ignores that the real cost of financing a 25-year mortgage loan decreases over time.
Inflation affects houses just as it affects potatoes, over time the cash price increases. The real price might not increase because earnings can increase by more making both houses and potatoes relatively more affordable, nonetheless the cash cost does increase.
Say Mr A bought house for £100,000 on a 25-year interest only mortgage in 1987. He paid interest on £100,000 every year, at no time did he pay interest on more than £100,000. Mr B, his neighbour in an identical house who has rented for the same time, will have faced increases in rent. On your argument that rents and mortgage interest roughly equate at any given time, inflation in the cost of buying the house would increase his rent whereas Mr A's continues to pay interest on only £100,000.
Taking UK RPI as a guide over the last 25 years, the £100,000 Mr A borrowed would be worth about £200,000 today. It follows that in a non-bubble housing market, both Mr A's and Mr B's houses would have an open market value of around £200,000 today. Mr B has to pay rent on a £200,000 property whereas Mr A has to repay a loan on a £100,000 property.
Someone buying the same house today would have to pay £200,000 and, on a 100% mortgage, would have to pay interest on twice the sum Mr A paid interest on, the fact is that Mr A's liability to interest was fixed at £100,000 in 1987. You cannot compare what a purchaser and renter would have to pay today with what a purchaser and renter would have to pay when the purchaser fixed the capital sum of his liability 25 years ago.
What I was addressing was the position at the end of that 25-year term. Both Mr A and Mr B will, if they are prudent chaps, have saved money. Mr A has had to save because he must repay the £100,000 he borrowed 25 years before. Mr B's saving is voluntary. Let's assume they both save £100,000 over that quarter of a century. At the end of the period Mr A redeems his mortgage and has a property worth (with no bubble element) £200,000. Mr B, on the other hand, just has £100,000.
That is the point I was making, as you know but chose not to acknowledge because you are so obsessed by your desire that no one in the future should do what you did in the past and make a cash profit from real property.
More than that, Mr A is then free of monthly housing costs other than maintenance. Mr B can also be free of monthly housing costs by sinking his pot of £100,000 into real property if he can find anything at that price. If he does buy for £100,000 he has an asset worth £100,000 whereas Mr A's asset can be sold, if he is so minded, for £200,000. There is no wicked bubble element involved, he has not defrauded anyone, the nasty banks have nothing to do with it, no conspiracies were carried out and he has not been either unreasonable or greedy. Mr A has saved £100,000 by fixing the capital cost of his home 25 years before he actually has to pay for it. He can, if he is so minded, buy next door to Mr B's new home and stick £100,000 in the bank.
That was and is my argument. It is undeniably true and your attempts at deflection by pretending I was saying something other than what I said don't prevent it being true.
TFB, more lies and distortions from you, unsurprisingly.
"buying a house/flat is a form of saving"
Well no it's not. If buying a smaller flat means you save more than buying a bigger flat, then clearly it isn't.
Your next sleight of hand is to bring inflation into it - inflation is a government dictated theft against the Bs of this world and gift to the As. You can't justify one crime on the basis that another one will happen anyway.
TFb, more lies and distortions from you, as we expect.
" Mr A has had to save because he must repay the £100,000 he borrowed 25 years before. Mr B's saving is voluntary. Let's assume they both save £100,000 over that quarter of a century. At the end of the period Mr A redeems his mortgage and has a property worth (with no bubble element) £200,000. Mr B, on the other hand, just has £100,000."
Bollocks. Mr B has £100,000 CASH and a £100,000 HOUSE.
and using inflation to justify the whole thing just compounds your mistakes.
The Home-Owner-Ist economic model is fundamentally flawed, so the government has to bail out land owners and borrowers (and f- over cash savers) by having inflation, which is a blatant and naked transfer of wealth from savers to borrowers and landowners.
So justifying one crime by saying that another crime is going to happen, when the second crime is perpetrated merely in order to make the first crime look like not a crime is just the usual Home-Owner-Ist double think.
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