WILL THIS TINY TAX OF ½% OF LAND VALUE REALLY GIVE US LOWER HOUSE PRICES? HOW?
First of all, Stamp Duty (SDLT)
will have been got rid of, totally. According to a report[i]
from the Centre for Economics and Business Research, this alone will encourage
45,000 new peoperty-owners to put their houses on the market.
Another report[ii] says
it is even more. Stamp Duty they say is squeezing between 8 and 20% of vendors
out of the market. When about 1 million houses are bought and sold in the UK
(that’s how many in recent years) abolition of Stamp Duty should result in between
80,000 and 200,000 more houses on the market! That’s the first payoff. More timid sellers,
often last-time sellers, will be encouraged to put their houses on the market.
This should help prices down a bit.
The spec housebuilders with their
landbanks should get a one-off nudge too. Of course this new ½ % LVT should
apply to their land with planning permission. It’s a small addition to the
pressure for them to get on and build.
Having removed a bad tax which
discourages market activity, let’s turn to the positive push factor of the new
LVT. So Secondly with the
introduction of (or even prospect of) a partial LVT, long-standing o-o's will
be given a bit of a (financial) nudge to get a move on. Downsizing will
definitely be encouraged.
LVT even at this small amount may energise the market a bit, but will house
prices come down? Would such a switch from the hated one-off lump of Stamp Duty
on house sales to a yearly levy of ½% on the Land Value have much effect on house
prices?
Not at first If you believe the economists, the rational reaction
of the house-buyer should be to calculate that 10% of the Land Value has
been taxed away in perpetuity, so the "House Price" (in reality the
building value + 90% of the Land Value) should be marked down.
But the economists are not just
wrong, they are dangerously wrong (as HM the Queen realised back in 2008!).
Real people amongst whom we can confidently include house-buyers) see things
'irrationally'. A long-term commitment to pay LVT is seen as irrelevant, something
that can be dealt with later by rising salaries or even wins on the lottery.
What matters is the here and now: how much more money can I bid for the house
of my dreams/a bigger house than I first thought I could afford?
—So I'd say the paradoxical next effect of abolishing
Stamp Duty (and sneaking in a ½ % LVT) would be to push house prices UP.
But quite soon (a year or two) the penny will drop The mortgage
lenders, who should act ‘rationally’ will be well aware of the reduced 'equity'
caused by partial LVT. If they don’t then maybe the regulators will enforce
more prudence, and require the lenders to offer less by way of mortgage. Banks
and building societies would be reckless not to do so, but has that ever acted
as a restraint on their incontinent lending in the past?
Just like the
way the leasehold market operates, the value of a percentage of the land has
now to be paid over. In the case of this first LVT it 10% of the value of the
land, and instead of the ground-landlord extracting it, LVT is paid over to the
State to put to good use.
I’ve produced
the evidence from the leasehold market that this really will reduce the selling
price, right in line with the calculations of present value. LVT will cut
prices, permanently.
[i] Centre
for Economics and Business Research
[ii] BEYOND
THE CALL OF DUTY Why we should abolish Stamp Duty Land Tax By Ben
Southwood. Adam
Smith Institute Oct 2017 https://www.adamsmith.org/research/beyond-the-call-of-duty
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