Thursday, 17 January 2013

L. LVT would make people live where they don't want to

• If you increase the tax on inner city/urban/suburban/rural land, that will force land owners to over-develop
• If you increase the tax on urban etc land, that will price people out and force them away (skip to article covering both points)
• Poor Widows will be forced to move away from their family and friends (skip to article)
• Millions of households will be uprooted and the country will descend into chaos (skip to article
• Greedy developers will get planning permission for my land, forcing me to pay more (skip to article)
• The disappearing homes conundrum (skip to article)

There are infinite variations to these arguments of course. It's traditional to say "If farmers had to pay LVT, they would be forced to abandon/sell off all their fields to [greedy] developers and the countryside would be concreted over" (clearly this is not true, it all depends on how high you set the rate and whether you grant planning permission).

The argument has also been advanced that if the tax on inner city land is very high (and it would be), then land owners would be "forced" to build sky-high skyscrapers to try and collect enough rent to cover the tax, so we would all end up living in a giant tower block. Does that not contradict the first argument?

1. "If you increase the tax on inner city/urban/suburban/rural land, that will force land owners to over-develop" and "If you increase the tax on urban etc. land, that will price people out and force them away"

a) The arguments are starting at the wrong end. It is markets, i.e. tenants, owners and potential owners who decide what rental values in different areas are, taking all factors into account. And LVT is based on market rents. A tax not based on market rents is not LVT.

b) So if people are living somewhere paying rent (and in economic terms, an owner-occupier is paying rent, he's just paying it to himself) then clearly the rent is not high enough to drive them away; the LVT does not increase the rent and so LVT cannot possibly drive people away en masse any more than rents do (although clearly it will tend to speed up the process whereby lower income people live in some areas and higher income people in others).

c) We have established that LVT would have little impact on the amount of new construction, it would neither increase nor reduce it to any significant degree, and planning and zoning laws will always trump LVT/market forces.

d) LVT will only have an impact on sites which are chronically underdeveloped compared to neighbouring sites, so derelict and vacant sites will be brought back into use, and if that means building a new building, so be it. As long as a site is developed to something approaching its optimum permitted use then the owner thereof will be making a nice little profit. There is no pressure on him to do anything except keep his building well maintained.

e) So there's no question of either of these nightmare scenarios happening.

f) As we established in an earlier footnote, in any typical town, there is a close relationship between site rental values and build density. They are highest in the centre and fall, the further away from the centre you go. Therefore, the actual site rental value per home as you move outwards changes relatively little; for the same amount of money, you can live in a small flat in the centre; a small terraced house in the inner suburbs or a semi-detached in the outer suburbs.

g) So the LVT for most homes in any particular town would also be surprisingly similar. Of course, there are big houses in inner suburbs, which would be very expensive, and small flat in the outer suburbs which would be very cheap; and of course there are "nice" and "grotty" areas and so on, that's a separate issue. So if the LVT per home is fairly similar, it wouldn't really change people's decisions on where to live very much. The same old trade off between convenience/no garden and less convenience/big back garden remains the same.

2. "Poor Widows will be forced to move away from their family and friends"

Of course it's always the Poor Widows, isn't it?

Fact is they wouldn't be forced to move, they can choose to defer and roll up the tax to be repaid on death, even if house prices were to halve, we'd still be collecting 60% plus of the tax. So they only move if they decide that they want to pass on more of the value of their homes to their children rather than consuming that value themselves. To what extent the Poor Widows' heirs put pressure on them to trade down remains to be seen.

Further, cases where the only home they will be able to find within their budget is far away from family and friends would only apply in a small minority of cases in the short or medium term:

- if both they and their "family and friends" live in low tax areas, it doesn't apply. There'd no pressure to trade down and nowhere to trade down to.

- if they live in a low tax area and their adult children live in a high tax area, then LVT wouldn't make any difference.

- if they live in a high tax area and their adult children live in a low tax area, not a problem. They win on both sides of the equation.

- if both they and their adult children live in a high tax area, then the Poor Widow can either move into a smaller home, cutting her tax bill in half, and/or she can ask her high earner adult children (who would be saving most tax under a flat income tax system) to pay her tax for her (which is much the same as allowing her to defer and roll up the tax).

In the long term, the whole issue would melt away:

Planning for LVT payments during retirement would just be part of normal retirement planning and people would get used to the fact that "their home is their pension" in a literal sense; it is the asset which is used to fund LVT expenditure during retirement.

And with a more balanced and stable economy (i.e. not one fuelled by credit bubbles, land speculation and over-consumption) and low and stable house prices, far fewer children would move away from their parents. There are two main reasons why this has happened:
- if the parents live in an area where house prices have rocketed (London, south east and south west) then children can't afford to live anywhere near their parents;
- if the parents live in an area where house prices are low, this is mainly because of the lack of job opportunities, so their children move elsewhere where they can find a job.
These factors would be greatly reduced by an LVT/flat income tax system.

3. "Millions of households will be uprooted and the country will descend into chaos"

Having made three unrealistic assumptions on the basis of no information whatsoever, the extreme view is that there will be some sort of destructive internal migration, a game of musical chairs where millions end up on the wrong chair or on the floor.

Yes, there will be some households who end up down-sizing and an equal number who end up up-sizing, which adds up to a general "right-sizing" which must be a good thing, it's like a man with size nine feet and a pair of size ten shoes swapping shoes with a man with size ten feet and size nine shoes, but never mind, the real question is, how many such households will there be?

The answer is "not that many". The Joseph Rowntree Foundation did some research and came up with the following table, showing the correlation between households by income and households by Council Tax band, which we can use as a rough and ready proxy for value of home and hence likely Domestic Rates bill:

Assuming two adults (and hence two personal allowances) per household...

* eighty-one per cent of households, those above the horizontal black line, will be paying less in Domestic Rates than they did in Council Tax, as well as paying less in income tax. Nothing to worry about there.

* ten per cent of households, those in the top right-hand corner, will be paying less in Domestic Rates than they did in Council Tax and saving thousands or tens of thousands of pounds in income tax. Absolutely nothing to worry about there.

* nine per cent of households, those in the bottom right-hand quadrant, will be saving thousands or tens of thousands in income tax and paying thousands or tens of thousands more in Domestic Rates, most of them will end up better off and only a very few will be forced into penury, so not much to worry about there either.

* the whole debate seems to be focused on the ten per cent of households in the bottom right-hand corner, who will be paying more in Domestic Rates but not saving much in income tax. We can sub-divide these relatively few households into the following groups:
- a third of them are pensioners, who can go for the deferment/roll-up/pay on death option.
- some of them will break even anyway (income tax saving = Domestic Rates bill)
- some will be able to take evasive action, like getting a better paid job, taking in a lodger, having their adult children live with them for longer etc.
- some will be living in a house which is far too large for them, so they can halve their Domestic Rates bill by moving to a smaller home in the same area.
- some are unemployed and claiming Housing + Council Tax Benefit. I'm all in favour of a welfare system that pays for the basic essentials, but I don't see any rationale for paying "private" landlords to house people in swanky areas, they can shape up or ship out.

So realistically, how many people will be "cruelly forced to down-size"? Maybe three or four per cent of all households?

And how many households will be chomping at the bit and ready and able to up-size? A third of those in the top right-hand corner, perhaps? So that's three or four per cent of households ready to trade up.

For sure, three or four per cent of all households is a million households, which sounds like a lot but that is normal annual turnover in the UK housing market, a million households move home every year anyway, the two categories largely overlap, so the net extra number of movements is barely a blip in the overall scheme of things.

Or are we really going to allow the vested interests to impose a tax system using three or four per cent of households as a human shield to impose a heinous and wicked tax system on the eighty per cent "above the line"?

4. "Greedy developers will get planning permission for my land, forcing me to pay more"

Developers are always "greedy", that's one of the rules.

It is a quirk of English planning law that you can apply for planning permission for somebody else's land, and one of the basic rules of LVT is that the tax is based on the site premium of the land assuming optimum permitted use, so in theory, this could happen and the Home-Owner-Ists fall over themselves to use this as a killer argument.

Funnily enough, I have only ever seen this as a hypothetical case. I have never actually heard of it happening to anybody, that they wake up to find a fat envelope on the door mat, full of blueprints and terms and conditions from the planning department explaining what the new building could be.

It would of course be a simple matter to restrict LVT up-ratings to cases where the owner himself has applied for more generous planning, but in reality, how often do developers apply for planning on somebody else's land without their knowledge or permission, and would it really be more common with LVT?

It could only happen in two basic scenarios:

SCENARIO 1: There is a smallish bungalow on a single very large plot (which has a correspondingly low-ish tax bill, assuming this was the optimum permitted use so far), which is crying out to be replaced with a few houses or a small block of flats. In which case, why is this so terrible? For sure, one bungalow owner has the inconvenience of moving, but a few families get to live somewhere convenient, and the construction people get to make some money and create new wealth (buildings).

And how many such plots are there? Even if the developer gets the planning permission, the owner of the bungalow can still hold out for a ransom price for his bungalow, and he would (by definition) end up with plenty enough money to buy a different bungalow on a maybe slightly smaller plot, with a lower tax bill and a bit of spare cash for his time and trouble.

If you own a semi-detached house or a terraced house, you are pretty much insured against this happening. A developer can only squeeze out extra income if the existing house is in the top fifth of all houses by value and if it can be replaced at least three flats - and that's in an LVT-free world. We can safely assume that the council will increase the LVT bill accordingly if the development goes ahead; so the council can either turn down the planning application anyway, or it could nod it through but then (whether accidentally or on purpose) make it economically unviable by proposing "too much" additional LVT. In which case the planning application is withdrawn and no harm done.

Try for yourself with the ZohoSheet:

SCENARIO 2: A developer is trying to buy up two or more adjoining plots in order to build something bigger. This is an absolute nightmare position for a developer to be in, as each individual plot owner can hold him to ransom and bump up their prices accordingly so that they bank the planning gain uplift and not the developer.

So let's assume the planning department grants the developer permission to build a new shopping parade and car park covering ten existing plots. By how much does the rental value of any of those plots increase? By not one penny; the rental value of one-tenth of a shopping parade is precisely £nil. So the optimum permitted use, being to leave it as housing, is not changed and the tax would not change.

Furthermore, even if each owner were charged to tax on one-tenth of the rental value of a shopping parade, who's to say that this is significantly higher than the rental value of one single house? It probably will be more, but only twenty or thirty per cent more. If the gain were larger than that, somebody else would have already built a shopping parade somewhere else in the vicinity.

Unlike the Homeys, I've actually looked into this. The car park at the top of my road is about twice as big as a normal residential plot, and the total income they get from parking charges is about the same as they'd get if they built two houses on it instead. If they were earning significantly less, then they'd build two houses on it. And if could earn more from a car park than from housing, then some of the newer houses would never have been built, there'd be another car park instead.

Taking an extreme case, Heathrow airport:

How much does Heathrow earn for BAA? Not quite clear, but it made £110 million in the three months to September 2012 = £440 million a year, with far higher political risks than housing.

The airport covers 4.7 square miles = 3,100 acres, at a density of 10 homes/acre (low by London standards) = 31,000 homes, which you could reasonably rent out for £15,000 each a year = total income £465 million. Or BAA could flog off the land for easily £1 million/acre, they'd get £3.1 billion for it (minus the cost of digging up the tarmac. They can convert the passenger terminals to a shopping centre or something). And that is a stress and hassle free type existence, far simpler than running an airport with 70,000 employees and 70 million passengers and 400,000 aircraft movements etc.

Have you never noticed that when new airports are built, they are built out of town? This is not just a safety thing, it is a land cost thing. Airports make less money per square yard of land than suburban housing, so they are built where the only alternative use is farmland, where the rental value of the land is negligible. Suffice to say, even if the local council went totally mad and granted planning for an airport to replace tens of thousands of houses, the LVT bill would not go up.

And don't forget that planning permission usually expires after three years (another man made law which could easily be changed). If the current owners and the developer haven't sorted things out within three years, the whole topic has died a death.

5. "The disappearing homes conundrum"

This cracked logic comes from the vested interests, and is cheerfully perpetrated by the UK government.

It goes like this: young people need homes; homes are expensive and they can't afford to buy, but they can afford to rent. Therefore they need landlords. So we have to encourage landlords (via tax breaks and subsidies) to invest in housing so that there are more homes for the priced-out young people to rent. If we had LVT (the opposite of a subsidy), then being a landlord will be less profitable, so there will be fewer homes to rent. Worse than that, some homeowners won't be able to afford the tax, so they will have to sell up and rent as well; so there will be more potential tenants chasing fewer homes and this will push up rents.

So with fewer landlords, fewer homeowner and more tenants, homes will simply cease to exist and disappear from the system.

The reality is this: young people need homes; homes are expensive because of all the subsidies to land ownership; so banks demand higher deposits, which only people who have already made nice capital gains on housing they already own can afford. It is physically impossible to "invest" in land, the land is just there. If we spent less money on buying land and more on buildings homes, we could afford to build more homes. If people can afford to rent, they are paying off the landlord's mortgage, so actually they can more than afford to buy. Even with LVT, being a landlord will still be profitable, the absolute cash profit net of tax and without subsidies will go down but the percentage return on capital is fixed, so prices will fall. If prices fall, then young people will be able to afford deposits again and will be able to buy.

There will be the same number of people and the number of homes, or even more homes. If landlords decide to sell up, then they will sell to sitting tenants. If these tenants could afford to pay the income tax to pay for the subsidies and then pay the rent to cover the mortgage repayments on the inflated mortgage, they can easily afford the lower mortgage repayments and the tax on the land will be less than the reduction in tax on their income anyway (they win on both sides). And a homeowner can cease to be a homeowner by selling up and becoming a tenant, but he will either sell to a landlord or to another owner-occupier. The number of homes can't possibly go down, and even if not a single new home is built, the tax will encourage people to bring derelict and empty homes back into use.

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