Opinion: The FSA’s mortgage credit proposals v. Land Value Tax

Have you heard about the Financial Services Authority’s ideas for restricting mortgage credit? One is to ban 100% Loan To Value mortgages, and clearly in a time of uncertainty that would be prudent – you don’t want to be in negative equity by the time you collect the keys to your new home. The other is to restrict all mortgages to three times earnings.

You may also have seen a report on the housing market in the Daily Telegraph recently where Edmund Conway canvassed the opinions of four leading economists. The most shockingly bearish response in “Do not pass go – or expect house prices to rise soon” was from Citigroup’s UK Chief Economist, Michael Sanders, who argued that

everything depends on the amount people can borrow. At the moment the average loan to value for first time buyers is 76pc, compared with the more recent norm of 90pc. If LTVs stay where they are, or are regulated by the Government, you’re talking about an even more severe fall. If you want to get the deposit and mortgage burden for a first-time buyer back to the average of the last 35 years with the current level of LTVs, then house prices need to fall another 65pc from their current level.”

So, the act of restricting mortgage credit could provoke a massive write-down in the value of property in order to enable buyers to afford anything. And if there’s no “new blood” coming into the housing market at the bottom end in the form of first time buyers there can be little turnover further up the market.

Now, one of the biggest objections to a significant Land Value Tax has always been the predictable (and intentional) effect it would have of removing the land value from existing property values. Yet the government is now suggesting just such a massive write-down with no compensation to the households that lose out.

With LVT, however, replacing pound for pound as many as possible of the other taxes people currently pay, they would at least be seeing some benefit from their capital loss in the form of abolishing, say, NI, Council Tax, Inheritance Tax, Capital Gains Tax and some at least of their Income Tax.

Further, those of us who campaign for LVT say that switching the tax base away from incomes and trade and onto land values will encourage enterprise, will encourage people to maximize their incomes from work. Just at a time when anyone and everyone actually creating wealth in this country needs every encouragement to continue doing so to help the economy recover.

Longer term it will also prevent the sort of speculative land value bubble we have seen over the last decade from happening again, leading to more economic stability – a much better way of doing so than trying to regulate bubbles out of existence.

There’s one additional, timely, benefit. Our own Matthew Taylor
recently produced a critically acclaimed report on rural communities and affordable housing. One of the big concerns in areas like the South West is people with second homes, and Matthew investigated ways of discouraging the sort of blight that having a significant proportion of a community’s housing stock lying empty for most of the year can cause.

If the tax base were switched predominantly to land, and a household has two plots of land – the town house and the rural getaway – to finance, it would be a little bit like doubling their current tax bill. People would have to think very hard whether they could justify paying such a tax burden, and many would decide it’s not worth it for a house they hardly use, releasing much of these second homes back into use by members of local communities currently completely priced out of their home market. Village school rolls would again start to rise and councils would find their costs of keeping them open proportionally reduced. There would need to be far less state subsidy for affordable house-building too.

This looks like a true “win-win” opportunity – to get the very significant benefits of Land Value Tax implemented at far less cost to existing home owners than the FSA’s proposed regulations. We must urgently revisit our tax policies to include a greater and more urgent commitment to LVT.

* Jock Coats is Secretary of Lib Dems’ ALTER (Action for Land-value Taxation and Economic Reform).

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  • The problem with land value taxation is that there’s no direct link to the ability to pay. We have almost exactly the same discussion with Council Tax – indeed, Council Tax could also be used to bring down house prices by raising the top levels.

    What you seem to be suggesting is that a 65% reduction in house prices now is acceptable – I’m not sure that many would agree, although I think it’s accepted that the rate of growth has to slow. Remember that in order for there to be properties to buy, people have to be prepared to sell – and if you suddenly find that your property is worth less than half what you paid for it, do you crystallise the loss now or do you hang on to it either in the hope of the price recovering or being able to pass it on to heirs? Again, I think most would go for the latter.

  • “will encourage people to maximize their incomes from work”

    Why is this necessary or a good thing? People already like money – why do they need encouragement?

  • passing tory 30th Mar '09 - 3:05pm

    So, Jock, what do you say to the pensioner in a biggish house but not much income? That she has to move??

    LVT as you describe it sounds like a sink-or-swim tax. I was chatting to some friends in the US a while back (where a similar system is common) and it seemed to me as though it had promoted segregation over there (essentially, anyone who is poor can quickly get pushed out of an improving neighbourhood as their property taxes rocket). Are you really sure that is what you want?

  • In answer to a couple of points from my (limited) understanding – I’d appreciate Jock making a more cogent point…

    KL – The whole point about LVT is that you do not ‘hang on in the hope of prices recovering’ because to do so you will be taxed more than you need to. This comes onto the point that passing Tory makes about a pensioner in a biggish house. LVT aims (as I understand it) to prevent ‘blockage’ of property in this way and so enable the land / houseing stock to be used more efficiently. If that pensioner in a large house next to a good school is taxed for being next to the school (ie for the location of the house) then they are incentivised to move out and allow a family to move in who are prepared to pay the tax to be in that location, because it has value to them.

    I might have misunderstood it, but I think that in the States (California in particular I am thinking of) – the property tax is only on the purchase price of the house which is meaningless and encourages people not to move.

  • passing tory 30th Mar '09 - 3:33pm

    Joe, ??

    OK, then. What is your estimate for LVT on a 2 up, 2 down in my town (prices here are a bit silly, so that is probably 250k in most areas, the majority of which is land value) and how does that relate to the state pension? Is this plan costed at all? If so, show me the numbers.

    Or, do you think that an OAP living in such circumstances is “living it up” and should downsize immediately (which in practice would mean moving out of town?).

  • passing tory 30th Mar '09 - 3:42pm

    Lennon, in the states I have talked to people about this (MI, PA) it is definitely an annual tax based on property prices. This can be quite high (in Pittsburgh it was about 10% when I was there). 3-5% is more typical for a metropolitan area. Outside city limits it tends to drop very significantly.

    It will be interesting to see whether Joe or Jock can actually provide any hard estimates for the UK.

    If they do, it would also be interesting to see what the impact on locals is when house prices go up because of incommers buying. I suspect there is a very real danger that locals get priced out (though LVT) far more effectively than the second home owners.

  • passing tory 30th Mar '09 - 3:46pm

    Lennon, so you are saying that this pensioner effectively has to move (sorry – “is incentivised to move”). Very nice. Can I quote you on that? I might stick that on a leaflet round some of the areas here with a high proportion of elderly voters and see what they think of the scheme you propose.

  • PT – I’m not saying they have to move, I am saying they should pay if they want to continue living there. I would also point out that I, like you, merely come to this site for education and elucidation and am not, nor have I ever been a Lib Dem member – I am just pro-LVT – so feel free to quote me but I’m not sure what use it’ll have… 😉

  • passing tory 30th Mar '09 - 4:05pm

    Lennon, the arguments for LVT sound reasonable at first scan, but there appear to be very significant problems on deeper analysis. For instance, the bottom line with the pensioner above is that if she (it is all too often a she) doesn’t have the cash she is going to have to move (or get involved in equity-release or something like that). This is rarely a good thing.

    What I have seen in the US is that LVT essentially means that if luck goes against you then you have to move out of the area (and away from any established social network etc). There is, by its very design, no neutral position. you either sink or swim. This can be a VERY harsh tax.

    I have lost count of the number of times I have heard ministers moan about “unintended consequences”, which for me just means that they have been too lazy to think through the consequences of their decisions. Before rushing to release LVT, be very sure you are happy with what you would be letting loose.

  • Seems to be a problem with the ALTER web site. I tried to access the FAQs and got “webpage cannot be found”

  • Andrew Duffield 30th Mar '09 - 9:23pm

    I know Jock responded to some of these points earlier today ‘cos I saw his posting (4 or 5 comments down I believe it was). Unfortunately his words have now mysteriously disappeared, so I’ll have a go…

    LVT very definitely DOES link with ability to pay; we agreed as much in “Fairer, Simpler, Greener” when we confirmed that “‘Ability to pay’ can
    relate to income or wealth or both”.

    The old chestnut of the pensioner occupying the ‘large house’ (c.f. ‘valuable site’) was similarly dealt with as follows: “there could be an arrangement to allow pensioners to postpone payment of the property tax, with the unpaid tax becoming a charge upon the owner-occupier’s estate. This could be recouped by the Revenue when the house was sold. A zero real interest rate would apply to such unpaid tax.”

    In addition we agreed that “there could be a ‘homestead allowance’ below which the property tax would not be payable. The level of this allowance might be variable geographically.”

    Suggestions that LVT would increase house prices are perverse. The whole point of Jock’s article is that prices are going to fall further under the FSA’s loan limiting proposals – with no compensatory mechanism for homeowners. LVT provides that compensation by replacing regressive and economically damaging taxes as land values start to fall. “Locals” are thus better able to afford a home – free of LVT on lower value properties – while “incomers” have no such exemption as there would be no allowance for second homes. This is already Lib Dem policy; second homes will be treated as letting businesses and subject to Site Value Rating (the local version of LVT).

    Shorthold tenants would also be fully exempt, as LVT falls on the owner not the occupier and, as virtually all economists accept, it cannot be passed on – effectively making it unavoidable.

    No jurisdiction anywhere in the world that has experienced the benefits of LVT has ever voted it out. Where it has been abandoned, it has been done at the insistence of speculative, rent-seeking vested interests working on compliant and complicit politicians. It has never been rejected by plebiscite.

  • passing tory 31st Mar '09 - 8:03am

    OK, Andrew, maybe you can provide some estimated figures to work around, then. What would be your estimate for LVT in the UK (both % and “homested allowance” threshold).

  • Passing Tory – it would depend on how many other taxes LVT would replace. You can come up with a figure that represents just a replacement of Council Tax, or one which also replaces some income tax, also VAT, also whatever, etc.

  • Matthew Huntbach 31st Mar '09 - 9:22am

    I’m a long-term supporter of LVT, but we should not underestimate the difficulty of getting the argument for it across to the public. Many years ago I had a letter published in a local newspaper arguing the point that it would encourage people living in houses bigger than their needs to move out, and I remember the furore this led to. The lead letter in the local newspaper in reply had the headline “This sounds like Moscow’s housing policy”. I had phone calls from previous supporters of the party who told me “After what you wrote about forcing old people from their homes, I’m never going to vote for you again”.

    The argument that postponement of payment until death would resolve the issue falls down on the “I’ve paid for this house, and I should have the right to leave it fully to my children” sentiment.

    We should recall that the nearest we have to LVT, the council tax, is very unpopular and our own party has been in the forefront of campaigning against it claiming it’s “unfair” because it isn’t base on “ability to pay” i.e. income.

    For me, the logic of LVT is clear, but the sentimental argument against is strong, and with any tax changes we are always going to hear from those disadvantaged by them while those advantaged remain silent. We can be sure that the usual crowd who say “middle England”, mean the richest 5% or so, but make it sound as if they mean those who really are in the middle, would be up in arms about it. The winners, those who would find property they need for their families more affordable when they need it, would probably not even realise it was to their benefit.

  • Andrew Duffield 31st Mar '09 - 9:49am

    Matthew – you say:
    “The argument that postponement of payment until death would resolve the issue falls down on the “I’ve paid for this house, and I should have the right to leave it fully to my children” sentiment.”

    LVT does not affect anyone’s ‘right’ to own or inherit property. It merely requires payment for a particular privilege – i.e. the exclusive benefit of owning a specific location at the exclusion of the rest of society. The house itself in your example would, of course, be entirely free of tax under an LVT regime.

    Council Tax is unlike LVT in that it is an impost on residential buildings, penalising people for maintaining and improving their homes. That, plus the lack of bands beyond H and the fact that it is levied on occupiers rather than owners, is why it is unfair and should go.

    You’re right about the difficulties of selling it – but that shouldn’t stop us trying. Right now, Middle England also wants its property bubble back. Unless we seize the best moment in a generation to start introducing LVT, that’s exactly what they will get and the whole cycle of boom-bust, debt and poverty will begin again.

  • Matthew Huntbach 31st Mar '09 - 12:16pm


    I’m well aware of, and support the arguments you use. I am only putting what we will be hit with if we try to sell this.

    “The exclusive benefit of owning a specific location at the exclusion of the rest of society” is what people suppose they have when they have bought a property – and they suppose they have it for infinite time, the benefit being passed to their heirs. The argument that they should pay for this privilege is not a “merely” one – it is one which I find in practice is almost impossible to get people to see. That impossibility is indicated by our own party’s popular line “local income tax, not council tax, because council tax is unfair, while income tax is based on ability to pay”.

    I know council tax is not purely land based, and I know the band system renders it less fair than a purely proportion to value based. Nevertheless, it is similar enough to LVT for us to see how difficult it would be to sell LVT. Particularly after we’ve spent so long selling the idea that income tax is the only fair tax.

  • Mr Duffield

    Are there any web pages laying out the arguments which show that LVT will not result in a rise in rent for tenants?

    I get the feeling that economists can get seduced by fashionable ideas about markets and this can distort their judgement about arguments. So it would be interesting to see the raw arguments presented, backed by data, not an individual economist’s judgement.

  • Voter, I thin the basis is that while LVT will depress land prices (i.e. lowering the cost of buying a property), then if LVT is passed on by landlords (i.e. increasing the cost of renting a property) then the balance of cost between renting and buying will be shifted and tenants will buy property instead, thus decreasing demand for rental and lowering its price.

  • Tenants may move or buy but should we not learn from recent history not to expect markets to behave in a specific fashion?

    Markets can crash.

    Was there a Lib Dem working group formed to examine the robustness of their projections? If Northern Rock had tested the robustness of their business model, disaster might have been averted.

    Sofa policy is easy to generate but surely we should try to plan ahead, part of rational cover-all-the-bases government.

  • passing tory 31st Mar '09 - 4:11pm

    Well, I suspect if you handed the pensioner above a bill of 2.5k-3.5k per year then you are not going to help them feel particularly happy. Sure, you can start taking chunks of their equity off them in lieu, but I don’t think that is going to do much to quell the feeling that the state is just trying to pick their bones dry. Getting old is hard enough without that sort of additional pressure.

  • passing tory 31st Mar '09 - 4:42pm

    Passing Tory, for sure, but where do such pensioners think that their approx £6,000 per year State Pension/Pensions Credit comes from?

    They _should_ have come from the money those same people paid in taxes / NI during their working lives.

    And what about the pensioner who is delighted that his LVT bill is lower than all the other bits and pieces? I’ve done the maths, there are only about ten or twenty boroughs in the whole of the UK in which the LVT on an average house would be significantly (i.e. more than a hundred quid) more than Council Tax/TV licence etc, everywhere else it wouldn’t make that much difference.

    Sounds way off the mark for round here. Maybe you would be so good as to post your spreadsheet for analysis?

  • I looked at landvaluetax.org and it seemed to want to put the burden of proof on the objectors in one section (“No reply came”).

    I think the burden on proof should rest on the policy makers. If you think that a certain result will come from a policy, then demonstrate it.

    It seems plausible that, if you increase the money spent to maintain land in a redistributive way, then the retail prices will rise in a corresponding fashion. Just as when crude oil goes up so does the price at the pumps.

    Maybe this analysis is wrong but what economist can you cite who says it is? What happened to other countries when they used LVT? Were people actually better off or was one cost (tax) simply transformed into another (price of goods)?

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