Feeding the property addiction

A couple of scathing pieces on George Osborne’s plan to cut inheritance tax.

Janan Ganesh in the FT (my emphasis):

A Briton sets up a business, risking her savings and employing people on the way. If she makes a profit, it is taxed. If she sells the company, she is taxed on the capital gain.

Another Briton buys a home. Through chronic undersupply in the market, or travesty of a market, the price goes up by half in a few years. The only tax on the property is paid to the local council, at bands set a quarter of a century ago. If the homeowner sells, and it is his only house, he incurs no tax.

Yet another Briton inherits a house worth, say, £600,000, three times the national average. She pays no tax.

One of these capital-rich individuals built their asset from nothing, one bought theirs and watched passively as it grew and the other’s principal talent was the dumb luck to be born into the right family. It takes an obtuse theory of justice to tax them in anything other than ascending order. The British state does the opposite.

And Chris Dillow:

For every pound UK banks lend to manufacturers, they lend almost £36 to home-buyers: £35.3bn vs £1264.8bn (pdf).

If people are looking to get rich merely from rising house prices, they’ll be diverted from productive activity.

“Our rich are job-creating innovators,” said Chris Blackhurst after the Sunday Times Rich List was published. Some of them are but, unless you count investing in an ever-rising property market as innovation, most are not.

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Even those great British entrepreneurs who started with next to nothing usually invest in property as soon as they have made enough money. Even the leftie ones do it. And who can blame them? They’d be daft not to. Building a business is hard. Parking your cash in the UK property market is a much easier way of making money than developing new products or services.

But, as that comment in the Mirror’s graphic says, to invest in property you need a lot of money to begin with. You can’t start up with a few hundred quid and make your fortune. Property investment doesn’t take you from rags to riches, it takes you from riches to a lot more riches.

The distribution of property wealth is much more uneven than that of income. The Gini coefficient for household income after tax in the UK is around 0.35. For annual pre-tax income it is up at 0.5. (See previous post.) For property wealth, though, it is 0.64.

That’s not just because of the super rich though. As Janan Ganesh points out, much of the property wealth is the fossilised income of older middle earners based on houses bought when middle incomes were relatively high and which have shot up in value since.

Compared to other G7 and EU countries, the UK has one of the highest levels of property wealth per adult.

Non Financial wealth

Source: Credit Suisse Global Wealth Databook 2014

ONS data shows that property forms the largest single component of wealth in the fourth to eighth deciles of the distribution. The rich have their wealth spread across a range of assets but for those in the middle, most of it is tied up in their houses.

Screen Shot 2015-07-07 at 17.48.25

 

Which is why, as both Chris and Janan say, taxing it is unpopular and reducing taxes on it gets votes.

For the economy as a whole, this is bonkers. Our tax system penalises those who generate wealth while going easy on those who just sit and watch it grow. If, or more likely when, taxes rise, it would make sense to tax property. A land value tax, for example, would be more progressive than income tax, would collect tax from some people who currently don’t pay it and would help to redistribute income to younger generations. It would also discourage land-banking and encourage investment away from property and into more productive activity.

It is unlikely to happen though. Too many people are too wedded to the idea of watching their property value increase. Our tax system is perverse. It reinforces Britain’s preference for property speculation and rental income over business investment. With his inheritance tax proposal, George Osborne will make it that bit more so.

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12 Responses to Feeding the property addiction

  1. sdbast says:

    Reblogged this on sdbast.

  2. P Hearn says:

    Property is under supplied because the state controls the building land market through the planning system, ergo the state is the reason we don’t have enough houses.

    Highly paid civil servants do a census every 10 years to allow them to plan the infrastructure we need to support the population, but the result is what we have now. We clearly need to build several more cities to provide the necessary homes for the people who want one. Milton Keynes writ large, if you will. There’s also a heap of land in London which could be recycled into housing, so why isn’t the planning system making it easy for owners of that land to turn it into homes?

    It wouldn’t be beyond the wit of man to require that those owning homes in areas of severe shortage, such as London, have a UK National Insurance number before their name goes on the deeds. That’ll sort out a few overseas investors who must be laughing all the way to the bank, whilst we humbly sell off the world’s greatest city in parcels to them for their apartment blocks.

    The state apparatus in this area is disgusting and immoral. Few object to a planning framework, but when the results are this poor and the market is so distorted as a direct result, the response is to call for taxes on anyone with the temerity to have bought a house.

    That’s called treating the symptoms.

    • metatone says:

      For what it’s worth, land banking has been proven to be much more of a problem than planning. There are plenty of plots of land with planning permission sitting idle, while the building company that owns it waits for property prices to go up some more.

      Indeed, in London, you see many existing buildings this way as well. It seems that owners are very happy to leave a property empty for periods of up to 18 months while they wait for someone desperate enough to pay a higher rent. Not to mention that while empty, the tax situation is massively distorted in their favour.

      That’s all part of why some kind of land taxation is crucial.

      • P Hearn says:

        It’s not unreasonable that developers should bank some land – they need a pipeline of work and the lead times on building are significant, so perhaps a three or four year pipeline is reasonable.

        However, a “use it or lose it” approach has to come into play, with forced sales on unused sites as an option. The state is already rigging this market by zoning land – it might as well go the whole hog and act as a backstop in the allocation of it, too.

        The answer isn’t ever more taxation, it’s more supply. Taxation increases the costs of doing business and reduces incentives for companies to be based here. A well-supplied market won’t see landlords sitting it out for 18 months waiting for a desperate tenant, as it simply won’t be an option.

        This all shows how centralised planning doesn’t work, but then the USSR, Cuba, Venezuela et. al. have already proved that.

        • Dave Timoney says:

          “Property is under supplied because the state controls the building land market through the planning system, ergo the state is the reason we don’t have enough houses”.

          This shows how centralised planning does work.

  3. Vince Lammas says:

    In principle, inheritance tax is the one way the commoners get to benefit from the amassed wealth of a small proportion of the population. But people don’t like giving over money at such a stressful time and the tax is ending up hitting those in the middle – in practice those with most at stake can avoid. On balance it’s probably better to get rid of the tax as a whole.

    When I first read about the idea of a site value tax, I thought the case was pretty persuasive … and nothing has changed in my view. Progressively based on a clear measure of current wealth. Simple and cheap to administer … paid by individuals, companies and foreign investors alike … almost impossible to evade (providing land ownership is clear – no problem in the UK).

    It must be possible for someone smart to model a schedule of rates that would be sufficient to reduce taxes on small trading business (boosting business) and low earners without hitting the average property owner while gaining a reasonable return from overseas investors and large landlords. Anyone up for that?

    • Luke says:

      Vince, “without hitting the average property owner”

      No, you should hit the average property owner. Admittedly not that hard, but given that lots of people aren’t property owners, and 50% of owners are below the average owner, if you don’t impose some costs on the “average owner” it’s not worth doing.

      Similarly with IHT, there’s this fantasy that it only hits the “middle”. No, it only hits the top 5-10%. One Scottish solicitor told me that in 20 years of probate, he’d never dealt with IHT. There may be plenty of arguments for abolishing/reforming IHT, but the argument that it “only hits the middle” is not even wrong.

  4. I wonder why France has such high non-financial wealth. Any ideas?

    • Dave Timoney says:

      A property bubble. French housing wealth tripled between 1997 and 2007. This came on the back of a slow but steady rise in prices in the 80s (there was no fall in the early 90s, as in the UK, just a flattening). Gross housing wealth (i.e. property excluding land and commercial) went from euros 1tn in 1983 to 7tn in 2012 (at current prices). According to The Economist, French house prices are the most overvalued in Europe.

      • George Carty says:

        Is the very high aggregate housing value in France almost entirely down to Paris as the UK’s is to London? The UK and France are two of the most centralized major states in the EU.

  5. rogerh says:

    There seems to be an assumption here that developing new products or services is somehow more worthwhile or virtuous than sitting on a pile of bricks. But suppose housing were made less attractive – through more tax or more houses – would the UK or other non-industrial countries actually be able to put the released money to better use? Any fool can develop a new Iphone or motor car or Uber app but somehow the UK would find barriers to screw it up – too small, too slow etc. If you won £1m on the lottery what would you do – set up a factory or buy a string of BTLs?

    A worrying cloud on the horizon – if you did set up a new industry would you use humans – can humans (in bulk) be educated to the point of usefulness to future industries.

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