By Michael Baxter 2 Dec 2009 [2 Comments | 749 views]
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Economic dynamite was delicately placed so as to cause uproar yesterday. It is hard to believe that certain publications won’t be moved to vent their fury when they find the fuse. It concerns the property market, one of the best suggestions revealed by a Bank of England Monetary Policy member in a very long time, and an idea which is likely to be about as appealing to most people as finding an alligator in their bath.
But first, there have been a couple of other important developments in the UK housing market concerning the remarkable recovery gaining traction, and news that even buy-to-let might be coming back.
According to the Nationwide, house prices rose 0.5 per cent in November over the month before and by 2.7 per cent annually. There have now been seven successive monthly rises in house prices, according to Nationwide data.
The building society says part of the reason for the rise is that unemployment has not risen as high as one would have expected in a recession of this severity. To an extent at least, this recession has been characterised by employers asking workers to take wage cuts, or work fewer hours, rather than laying off staff. This has effectively meant the pain of recession has been more evenly spread. The UK housing market is currently seeing both low demand and low supply. In such an environment a rise in repossessions leading to a sharp rise in supply could have a catastrophic effect on price. This is what happened in the 1990s. The fact that unemployment has not been so badly affected this time around has mitigated against this occurring.
It also seems banks have learnt their lesson from the last recession and have been more reluctant to take possession of property. A gun-ho repossession policy from banks in the last recession had the effect of exaggerating the scale of the previous property crash.
Meanwhile, according to the latest Royal Institution of Chartered Surveyors report on the letting market, no less than 22 per cent more surveyors expect rents to rise than fall over the next three months.
You may recall, in the build up to the economic crisis, the buy-to-let industry told us that the credit crunch would mean a higher demand for renting, pushing up rents, making buy-to-let as profitable as ever. What they failed to anticipate was the surge of unwilling landowners, that’s home owners who needed to move, but were unwilling to sell at a time of crashing house prices.
It appears this effect has now gone into reverse. It is now easier to sell, so these unwilling landlords are now cashing in on the recovery. The end result is a shortage of rental properties, sparking surveyors’ optimism on rental prices.
Ironically, these improved conditions could have the opposite effect on property prices, as unwilling landlords put their properties on the market, leading to a rise in supply of houses for sale.
So that’s the surveys, now its time to turn to the dynamite.
Adam Posen, the latest member of Bank of England Monetary Policy Committee has called for a new property tax, charged when house prices start rising so as to avoid the emergence of the next property bubble.
He said: “If we can contemplate a Tobin tax on financial transactions, we should be able to set up something in a similar spirit for real estate transactions which are already taxed and regulated… it would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly.”
It’s a bold idea. If you believe that property bubbles can charge downturns, then such an idea is probably smack on the mark.
It is not an idea which is unique to Mr Posen, either. The economic writer, Fred Harrison, for example, has argued that the economic cycle itself is almost entirely caused by a surging, and then declining, property market. In his books Ricardo’s Law and BOOM BUST House Prices, Banking and the Depression of 2010 he has called for scraping income tax and capital gains tax, and introducing a property tax based on the value of property, instead.
To be honest, although the Fred Harrison idea seems a bit extreme, a property tax designed to stop bubbles does make a lot of sense.
Such a move would be incredibly controversial, however.
In Britain we seem to care more about a rising property market than any other aspect of the economy. In a country where 70 per cent of residents own their own home, any government that presides over a booming property market will be popular with the electorate.
And only when we see a responsible media who try to explain to the public why a booming property market can be damaging, rather than celebrate every price increase, can this dangerous public attitude be corrected.
Perhaps there is no better way to end this article, than with a quote from a certain Adam Smith, from his book The Wealth of Nations, published in 1776:
“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it.”
So Mr Posen wants to introduce a tax whenever supply and demand is not in balance.
Never mind this is more often than not because of politicians ineptitude and their desire to control our lives. Gordon Brown will love him.
Me I say ease up on the over regulation and supply and demand will be in balance which will result in house pricing increasing at a rate more commensurate with inflation. In other words get the politicians out.
This becomes, once again, the argument between control economics as preached by our current PM and a pure laissez faire approach epitomised by the Thatcher government. The fundamental problem with tinkering with the laws of supply and demand is that something will happen to re-balance the market whether by accident or design. In my view it is much better to let the market dictate and in the property market that means sensible LTVs, sensible interest rates and proper financial underwriting.