Home—Blog—The core aim of UK economic policy – to stop house prices from falling
Dec 14, 2010, 04:22
Posted byMerryn Somerset Webb
Comments (24)
Wondering where your government's priorities lie? Then consider the interim report out from the Office of Tax Simplification on how they might go about changing the hundreds of tax reliefs on offer at the moment.
Some are listed as "potentially retain", others as "potentially simplify" and more as "potentially abolish". Look under the first category, and the two that jump out are a) income tax relief for players in the UEFA Champions League Final 2011 and b) capital gains tax relief on disposal of private residence.
The first of these is beyond me – I can't understand why footballers should be exempt from taxes that other sports people have to pay. But the second is equally baffling, to me at least.
I've written here before about how I think primary homes should be taxed. If we take as a base view that it would be a good thing for house prices to remain relatively stable in real terms (to make sure that speculative money flowed into more productive investment) it surely makes sense to tax gains on houses rather than, as we do now, the transaction costs of buying and selling them.
The latter hurts mobility by making it impossible for most people to move house unless house prices are rising fast (which isn't good) while the former would dampen house prices without hurting anyone. You'd only pay tax on any gains you made above inflation, which in a rational market, would mean you wouldn't pay any.
However, as much as most of us would like to see flat house prices, the authorities would not. The OTS notes that were the capital gains tax relief on houses to be removed, prices would flatten. But in a hint as to how the authorities feel about that, they don't use the word flatten. They say "stagnate" instead.
Today's economic policy is almost entirely aimed at stopping house prices from falling – if it wasn't, having the RPI at nearly 5% would have prompted a rate rise by now. So the fact that there isn't going to be a change to the way in which houses are taxed isn't a surprise. However that doesn't mean it isn't a mistake.
Published in Blog More articles by Merryn Somerset Webb
May 18, 2012
By David Stevenson, May 16, 2012
By Merryn Somerset Webb, May 10, 2012
By John Stepek, May 03, 2012
Leave a comment
(14 December 2010, 05:03PM) Complain about this comment
This is an excellent article. Surely this is politics being put before economics. The baby boomers have most of their wealth tied up in housing, and as they remain the major political voting block, it would be suicidal for any political party to not try and support house prices, especially as those boomers look to draw on that wealth as they retire.However, keep an eye on Labour, who seem to be positioning themselves as the party for the young and disenfranchised. That could be a major political voting block in itself, and I wouldn't be surprised to soon hear Ed Miliband attacking house prices as too high.
(14 December 2010, 05:34PM) Complain about this comment
I know they're supposedly independent, but one could possibly add the reluctance of the MPC to raise interest rates when their remit's to control inflation as further evidence of economics v political expediency where the property market's concerned.
(14 December 2010, 06:01PM) Complain about this comment
As a follower of the Austrian school of economics I always laugh when people talk about an "independent central bank". Men like Mervyn King owe their power and position to the politicians who appoint them and they know that their days will be numbered if they act contrary to government policy. Show me an independent central banker I will show you a pig that can fly.
(14 December 2010, 06:26PM) Complain about this comment
The tax exemption for players competing in the 2011 Champion's League final was pretty much a necessity if London wanted to host it. UEFA would never have awarded the finals venue to Wembley if the players were going to be taxed at 50% of any prize money (€9 million for the winning team, €5m for the losers). It might not seem fair to give a tax break to superrich footballers, but the income from being the host city will outweigh the potential tax lost.With regards to these two tax breaks being listed as "government priorities", you are being a bit disingenuous. The two cases were listed purely as theoretical examples of how they work through the cost-benefit analysis for proposed intervention. They've not stated that keeping footballer's tax exemptions or CGT relief is a priority, or even that it is important. They were just randomly picked to provide an example of their methodology, as the interim report you linked to makes clear.
(14 December 2010, 08:50PM) Complain about this comment
Re. this article's title; does anyone consider there are now signs of the powers-that-be losing control?
(15 December 2010, 08:50AM) Complain about this comment
I do have to agree with Bubblemeister, anyone who thinks that the BoE is or ever has at any point been even remotely independant is very naive indeed.
(15 December 2010, 09:36AM) Complain about this comment
Sorry Merryn, but there is no evidence that taxation reduces asset speculation. All that happens is that instead of gains accruing to the speculator, they instead get diverted to the treasury. In fact, I cannot see what moral case there is for taxation of capital gains at all and think it should be abolished. I must say I find it shocking to see a fellow investor calling for tax hikes on capital. The UK government is going for growth and moderate inflation ie Reaganomics as a solution to the situation. This policy has given support to house prices as an aside, but house prices are not the main priority. As we see GDP continue to grow over the next year as house prices fall, this assertion will be vindicated by fact. If the government was really prioritising house prices, it would have made mortgage interest on PPRs tax deductible against other forms of income.
(15 December 2010, 09:48AM) Complain about this comment
Of course the government don't want house prices to fall. That would endanger the whole economic outlook for the entire UK.Personally I now feel that there will never be a drop in house prices for at least another 15 years. Get in now while you can and interest rates are at record lows. I bought a few months ago and am currently looking to get some buy to let properties to pay down while rent is still way over the loan repayment amount. Well done Merryn, you called it right when you decided to buy. I feel sorry for all the poor suckers still waiting for a crash. They missed the boat a long time ago.
(15 December 2010, 11:21AM) Complain about this comment
@The Masked TulipI can't help but feel you haven't read many other articles from Moneyweek or that, if you have, you've been rather selective in what you've digested.Either that or you don't understand what happens when interest rates inevitably rise.
(15 December 2010, 12:46PM) Complain about this comment
@ JimmyInterest rate rises will have zero impact. Anyone who was paying 6 or 7% before rates dropped will be fine. Anyone who has taken out a mortgage since rates were rock bottom has to have had 40% equity and have not been allowed to stretch themselves. Base rate will have to increase at least 20x by 0.25% before it has any impact. That is a very, very, very long way off.
(15 December 2010, 12:48PM) Complain about this comment
(15 December 2010, 02:15PM) Complain about this comment
The Masked TulipAre you named after another bubble-investment mania that bankrupted a nation?Dr BobOn evidence of tax hitting house prices, see Germany! And for evidence of Merryn's assertion that such a tax would lead to more product use of capital, see Germany!
(15 December 2010, 02:21PM) Complain about this comment
Stephen BHowever, keep an eye on Labour, who seem to be positioning themselves as the party for the young and disenfranchised. ---------The problem for politicians remains that the young don't vote, so get royally sh*fted (re bubble house prices and tuition fees), and the old do vote (high house price support, quite high state pensions - newly income linked, maintained spending by an anti-state party on the NHS): also note that Labour's education maintenace grants abolished, its winter fuel allowance maintained.However, the Labour policy review is at least considering radical shifts that would help the young, including a land value tax. Good news for the young, excellent news for the economy, but an awful stink to come from Middle England blue rinse set and the Express. Will the policy idea survive?
(15 December 2010, 02:34PM) Complain about this comment
It would be both just and efficient to switch the burden of tax away from income and spending and onto excessive capital gains and asset-hogging. A good step would be to introduce a tax on landowners based on the amount of land held and the location's postcode. Those who have lots of expensive land benefit most from the essential role of government in protecting property rights, and they should pay accordingly. Also, the tax system in this country should reward those who do not take up more than their fair share of scarce land (this type of tax would reward those who live in flats, as they would share the tax burden with those who jointly occupy the land with them).
(15 December 2010, 03:22PM) Complain about this comment
Madjay. Land taxes are an excellent way of ensuring that just as the world grows scarce of agricultural food stuffs we destroy what's left of our previously world beating agricultural industry in order to ensure that the population goes hungry. It's just about stupid enough as a policy for me to believe people might actually support it. As for German property.....Roberto the reason German property is lower priced than here is two fold, 50% mortgages and roughly 1/2 the population density of the UK.
(15 December 2010, 03:44PM) Complain about this comment
Madjay. Land taxes are an excellent way of ensuring that just as the world grows scarce of agricultural food stuffs we destroy what's left of our previously world beating agricultural industry in order to ensure that the population goes hungry.Land taxes can be designed to avoid that problem. you tax land that is not econimcally improved.Germany's density of population has nothing to do with prices. Demand is increased through access to credit, not scarcity of land. That is why prices in Ireland (low density population) rose in 90s and noughties with access to credit, and fell in Japan (high density) due to low availability to credit. Of course now, prices in iremand are bombing. Nothing to do with land availabilut, but massive contraction of credit.
(15 December 2010, 03:57PM) Complain about this comment
sorry about the poor spelling, just had a liquid lunch.land tax:http://en.wikipedia.org/wiki/Land_value_tax#Economic_effectsLVT is often said to be justified for economic reasons because if it is implemented properly, it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.
(15 December 2010, 08:35PM) Complain about this comment
Taxation of the sale of primary homes is a thoroughly flawed idea.Even adjusting for inflation, in practice it will mean that no one selling a house would be able to buy a house of the same price and quality. When you move house, unless you put in some more capital to make up for the tax the State has stolen, you will have to buy a less expensive house, you will have to trade down. A disincentive to mobility.Such a tax fails to take into account any costly improvements made. It would be a disincentive for people to improve their houses. It fails to realize the fact that a house is a diminishing asset from the moment it is built, requiring expensive works to maintain its condition... all such maintenance work would be swallowed in the tax.A tax to stabilize property prices? Absolutely no chance. It is supply and demand... let people build what they like on their own land. That measure alone will bring prices down towards affordability by the masses.
(16 December 2010, 02:12PM) Complain about this comment
Wealthy people own the most expensive properties.The people who own the most expensive properties have the most to lose if house prices are allowed to correct to sensible levels.The small niche of society that own the largest part of the wealth also own our politicians. "Democracy"? LOL "Giant trough" is more approapriate IMO.
(16 December 2010, 02:44PM) Complain about this comment
High wages with low house prices/rents favour working people.Low wages with high house prices/rents favour the asset owners.
(16 December 2010, 03:40PM) Complain about this comment
Has the (short-sighted, some would say) policy of not disallowing rampant house price gains been good for the economy? Surely a better policy would have been to moderate house price gains via suitable measures including 'old' banking practices. If so, then rather than now applying a policy of stopping house prices falling, it would seem more appropriate to allow them to moderate; but this may be considered politically unpopular to say the least; it may be considered better to fail whilst seen to be fighting. Or, maybe the powers-that-be (meddlers some say, playing field distorters others say) consider they can 'pull it off'.' Ultimately, market forces will prove more powerful!
(18 December 2010, 10:50AM) Complain about this comment
Labour politicians encouraged unrealistic house price growth for political ends, el rey did nothing to stop this. Conservative politicians cant afford politically to bankrupt the electorate, and el rey cant own up to his past ineptitude by raising rates and bankrupting the country. Interest rates wont rise until its politically expedient, and housing demand will contine to be controlled by restrictions on credit; so prices will rise and fall on confidence (political machinations allowing).
(18 December 2010, 06:37PM) Complain about this comment
I agree the core aim of UK economic policy may well partly be to stop house prices from falling, and I understand why that policy be mostly desirable.But, as some envisage, a policy which does not discourage inflation and a policy which may well lead to many redundancies (both foregoing or regardless of a policy to increase interest rates) may well (to say the least) ultimately undermine the ability of many house owners to honour their financial commitments. An increase in interest rates is not the only agent capable of undermining house prices. 'Damned if they do and damned if they don't' (increase interest rates) is an expression which comes to mind.My regrettable conclusion: if the core aim of UK economic policy is to stop housing prices from falling then that policy may well be out of control.
(20 December 2010, 01:48PM) Complain about this comment
Um, this is the real Masked Tulip. Posters on housepricecrash have pointed me towards some comments posted by a doppleganger on here.No, I have no bought a house nor do I have plans to buy lots of buy-to-lets.I am flattered by the imitation. I must be getting under the skin of some property bulls?
Name This will be the name displayed with your comment.
Email This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Comment Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.Sign up FREE to Money Morning here.
22 May 12
21 May 12
Become a smarter investor in just 3 minutes a day.
MoneyWeek is not responsible for the content of external internet sites.