House prices - An obsession with failure

Stephanie Flanders recently commented on the Nationwide saying house prices are the same as they were a year ago (i.e. no longer dropping), but asked if this is 'too good to be true' ... take a look at a few of the key issues raised below for instance:

"... house prices are rising in a market where very few properties are changing hands. As the Nationwide points out in today's report, the housing turnover rate - the percentage of the private sector housing stock changing hands on an annualised basis - is still only 4%. That's not much higher than it was at the end of last year, when literally no-one in the market wanted to do anything. Before the crash, turnover was 7-8% ...

... you might expect prices to carry on falling in a market with such little activity - because usually low turnover reflects the fact that everyone expects prices to fall. But the relationship breaks down if there's only a tiny number of houses up for sale. That seems to have been true for most of this year and it's still true ...

... if prices stagnate, or fall further, there'll be plenty who worry about the knock-on effects for confidence and the economic recovery. But it would be good news for young people who are otherwise bearing the brunt of this economic bust ...

... from an economic standpoint, the rise in house prices since the early 1990s has been a massive transfer of wealth from young wannabe home-owners to the older generations who bought when the going was good. It's worked like a tax on young people -and a windfall to large numbers of the middle-aged and old ...

... One way or another - whether through higher lifetime taxes or unemployment at a crucial time in the career - young people are going to be paying for this crisis for a long time to come. It would be no bad thing if they could at least come out of it able to afford a home".

To which I added the comments below:

A good article ... I've haven't read this blog for a while (partly due to poor journalism and partly due to blog spamming from a small minority) ... but having done so today it's good to see the quality of journalism appears to be improving slightly ... IMHO for economic recovery to resume in a sustainable way we need the folly/obsession with house prices to stop, we need to introduce a 'land value tax' into the economic system and challenge planning regulations / restrictions imposed to serve the interests of just a few (i.e. the landowners - e.g. Duke of Westminster et al).

More houses will then be built and young people will then be able to afford a roof over their head, without having to give most of their hard-earned money away each month to bankers in the way of interest. Some of revenues raised from a land value tax could also be re-invested into real value adding activities that create jobs and wealth (instead of manipulating wealth) which would create a more sustainable economy and reduce our debts, balance of payments and trade deficits.

A few areas your report does not refer to however are when interest rates start to rise again from their historic low (e.g. due to inflation from import costs rising with the increasing demise of the pound), continued job losses (and the impact/cost of this to the taxpayer and public debt), as well as lack of opportunities available to young people and the debt we are asking them to take on to go to University.

They will not forgive us, or the leaders who forced this upon them. We must also remember that hard-working people can choose where to live (ie. work and pay their taxes) and can move freely in the EU now too, and as more of them leave the tax burden placed on those remaining will start to spiral upward until they also decide to leave too ... the outcomes are entirely predictable, but an effective intervention strategy from this Government to deal with the problems we face is not.

University education - who 'pays' ?

The Confederation of British Industry (CBI) today stepped forward to say University students in the UK should pay more for their loans and accept higher tuition fees as "inevitable".

The National Union of Students attacked their report as "gross hypocrisy" from the "fat cats at the CBI". The Association of Teachers and Lecturers attacked the proposals as "arrogant and elitist".

In my view the CBI is once again promoting the wrong strategy, and Robert Peston has today done a fantastic job in challenging this position in his blog ... and points to the issue of inter-generational social justice the CBI ignores ... I've included a few of his comments below:

'... More by luck than desert, the generation of Lambert, Balls, Laidlaw and even Peston have had it pretty good ... we had free university education ... we have saved for a pension over the many years of a bull market and when companies and the public sector felt obliged to offer gold-standard final salary pension schemes ... we managed to get on the property ladder before house prices became ludicrously inflated...

... It was our generation which royally messed up the economy with the inadequate governance that led to the credit crunch and the worst global recession since the 1930s ... but we're - on the whole - alright Jack, thanks to the accident of when we happen to have been born ...

... but those leaving school and university today face an altogether bleaker future: a drought of jobs; a bewildering and unappealing set of options for saving and investing; over-priced residential property (even after the "correction"); relentless fearsome competition from India, China, and so on ...

.. and there's the costs of providing a health service and welfare state to sustain an older generation ...

... so some may well argue that as and when a new government decides to make cuts or increase taxes - to fill the hole in the public finances created by the current generation - its first instinct should probably not be to penalise students ... shouldn't the older generation bequeath them something other than debt?'

and in response to his blog I added:

'Well put - an excellent article again ... and many great comments from bloggers too. IMHO setting a target of 50% of people going to university is a joke, the CBI comments are a disgrace and the Government need to think very carefully about what they choose to do in this area ...

... for instance young people also have a choice where they live (n.b. they can move anywhere in the EU without restriction), and if hard-working young people move out of the UK to work elsewhere then there will be few value/wealth creators at all here in the future and no-one to pay the taxes necessary to subsidise any public services at all (or to pay off any of the debts) ... and the whole system will continue a downward spiral ... until widespread protest/social unrest hits the streets ...

Instead of passing more debt on to future generations, what about introducing a new tax - a 'Land Value Tax'* (which a number of other countries currently have) ... as it's known to be particularly effective at targeting rich landowners who own most of the land, assets & wealth ... as this group can more than afford it, it can't easily be 'passed on' and they also can't avoid it - unlike most/all of the other taxes aimed at them**! ...

... It would raise large amounts of tax and would allow other taxes to reduce as a result. It would also push landowners to make more land available for housing - which would partly tackle the over-priced residential property market we still have too. A small fraction of this tax revenue could be used to subsidise free tuition fees and provide maintenance grants (e.g. more 'means-tested' grants) for future generations of value/wealth creators (e.g. so long as they are UK residents and continue to stay in the country) ...

... Let's also reduce the number of students going to University from the stupidly high target of 50%, support proper vocational apprenticeships and scrap/replace all the poor quality courses we see today e.g. most of the very expensive, and yet completely flawed, MBA programmes ... which teach students 19th century management practices instead of 21st century management practices (i.e. outdated courses, which partly got us in this mess, and which are often referred to as 'Maybe Best Avoided' - even without all the debt)!

* take a look at http://poweromics.blogspot.com/2009/08/land-of-free-but-whos-paying-for-it.html for instance.

** NB the Government have allowed 'land' to be one of the very few things exempt from inheritance tax too!

'Land' of the 'Free' ... but who's 'paying' for it ?

I've often referred to the folly of wishing for (and relying upon) house prices to rise again, as for most people this simply equates to 'paper wealth', not 'real wealth' (as everyone still needs a roof over their head), and it creates a huge (and totally unnecessary) financial burden on our children, and our children's children (e.g. because every month a huge proportion of their hard earned money has to go straight to the banks in interest).

Whilst this clearly starves people of their own money, it also constrains their standard of living, their freedom and choices, as well as their natural creativity & ability to innovate too - which could otherwise have been put to good use in creating 'real value' for others ... for their community, as well as creating products & services that are tradable all around the world (which creates more 'value' and 'prosperity' for a nation).

At present most people do not realise what's going on and they simply join the 'treadmill of life', looking to buy a house, taking on huge debt and having to desperately look for ways to pay it back (e.g. through any 'money for nothing' scheme they can see themselves, such as more property speculation, using buy-to-let-schemes, for instance). The problem with this (besides all the ethical ones) is that 'wealth manipulation' does not add 'any real value' (or wealth) to an economy / nation, or increase a nation's overall well-being & happiness ... and it doesn't reduce a nation's trade deficit or level of borrowing either (in fact it makes all of them worse) ... and just like any 'pyramid scheme', it's now starting to collapse, big time, and it has the ability to take the 'whole nation' with it ...

So how have we got to this? Well, there are many steps that have taken place, but arguably one step in the wrong direction took place in the UK during the late 80's/90's (under Margaret Thatcher) as she tried to introduce the Poll Tax. Do you remember all the demonstrations that took place as a result, the fact that it led to Margaret Thatcher eventually losing her job, and that it was updated/changed to a Property Tax instead (that's still levied today)? It turns out that the changes Margaret Thatcher made were still highly significant - as a land tax (or Land Value Tax) would have worked entirely differently in 'economic terms' to a property tax - as one taxes land ownership, whilst the other taxes people based on the value of a property (and not the land itself) ... which we need to understand further ...

Land Value Tax is well known and arguably one of the simplest, fairest and best methods of taxation, as it taxes all land ownership based on it's potential value, based on it's natural position/resources and the community/amenities placed around it (e.g. people, jobs, transport, services) ... which are placed their by us - the Community (hence the original, and true definition, of a 'Community Charge'). It deliberately separates the 'value of the land', from the value of a 'property' (i.e. the basic bricks/mortar) on that land so it can tax land, and not the building - which is effectively the opposite of what we have now! By taxing land ownership (not the individual tenants or property) it also drives landowners to seek better 'economic' use of any land they own (instead of simply hoarding it and watching the value of their land grow without doing any work at all) ... and it has numerous more positive aspects too ... for instance when implemented properly the land tax itself cannot simply be passed on to those who live there, or who 'use' the land, because of the overall environment and the natural 'economics' that's created, as it simply taxes land based on it's 'economic value', and if landowners seek to pass on this tax, then people & enterprises are able to adapt and move to where the 'economic' conditions are more favourable (and the landowner has to pay the tax whether they are using it to it's full potential or not !) ...

A Property Tax (i.e. based on the size/value of a property) naturally moves the focus of attention away from adding value and switches it to 'asset speculation' instead. It also arguably avoids one of simplest forms of taxation (e.g. it cannot be avoided, it stops asset speculation/hoarding, and it arguably provides one of the most 'natural', 'ethical' and 'fairest' forms of 'economics' known to mankind). The avoidance of land tax, coupled with the fact that 'land' is one of the very few things left that is still not subject to 'inheritance tax', has made wealthy land owners pay far less for 'owning land', to 'hoard land', and to pass on land/wealth to future generations (without the risk of inheritance tax) ... so they can also continue to make money from it without doing anything at all (yet another example of 'wealth manipulation' instead of 'wealth creation').

One could argue that a Conservative Government would naturally want to do this as the party is well known to be 'sponsored' by the very rich, who are clearly the small minority benefiting greatly from such steps. However, when Blair/Brown took over they did very little about it, in fact they complicitly supported house price inflation, as coupled with banking (nb mainly 'asset speculation' and 'wealth manipulation' again), became their way of 'building' economic 'growth' without apparently having to work hard or creating lots of real value (and by two 'leaders' who preached to us prudence and who were supposedly brought up in the 'ways of the church')! One clear (and arguably callous) example of this was when they deliberately changed the Bank of England inflation target to one which specifically excluded house prices ... to allow house prices to continue to rise unchecked (i.e. as interest rates would no longer have to rise). Hence the 'illusion of wealth' was extended a lot longer, which will make the fall much deeper and greater now.

Real wealth is created by building new homes, not the price of existing homes going up. The bricks and mortar in themselves should arguably normally depreciate as they get older too, though the land value may grow (which is another good reason for separating the two). Yet the current system continues to incentivise landowners to hoard land and benefit from its continual growth in value (at very little cost - nb the low ceiling deliberately put in place with the property tax) and often without using it. Insufficient supply of housing, due a mixture of hoarding, demographic changes and increasing marital breakdowns (nb which are often related to money and stress!), means basic 'economics' (i.e. supply and demand) will make prices of property more than they could/should be, but arguably the main reason for all of this was to raise tax but i) to avoid a 'Land Value Tax' (so as to mostly ignore the real 'economic value' of land), and ii) to favor 'wealth manipulation' over 'wealth creation' ... and until both of these are reversed, things will only get worse ...

Value creation will continue to decline and unemployment will grow, borrowing and trade deficits will continue to get worse too ... all that will continue is wealth being transferred to the landowners, the bankers, and the already rich, whilst everybody else pays for it in their taxes, mortgage interest and their worsening quality of life (and for generations to come) ... so who's 'paying for it' - well it's pretty clear that good and otherwise hard-working people & communities are ... in terms of their well-being & happiness, the 'spare' money they have to spend, and in the 'freedom' they have and the 'choices' they are able to make ...

Solutions do exist, but those currently in 'power' will try to 'fight' any such change. In many ways we face a battle that 'transcends nations', and circumstances will continue to get worse until more people start to take proper notice, realise what's actually going on, and decide that this must change ... in the future we need to reward 'wealth creation' not 'wealth manipulation', and we need to move away from the toxic mix of Poweromics & Ignoromics we currently have today ... to a much wider, much fairer, and far more holistic form of 'economics' ... which I call 'Leanomics' ...

Land Value Tax should arguably be introduced early on (nb places like Hong Kong, Denmark, Singapore, Taiwan and Australia already have it and it works very well), so that it can replace, or at least dramatically reduce, other arguably less fair forms of tax* ... such as taxes on jobs/employment [Income Tax, National Insurance Contributions], taxes levied on enterprise [Corporation Tax] and taxes paid for providing goods/services (i.e. real value!) to others [Value Added Tax] and all the other 'stealth taxes' [e.g. road tax, congestion charging**] for instance too ...

As can be seen here, Leanomics is based on an entirely different 'values system', and one that focuses on (and rewards) ...

"People taking responsibility for adding value and continuously improving the situation for others (e.g. customers, communities, overall environment), based upon fundamental values such as trust, honor, responsibility and respect"

... a system very different to one the UK has right now, but ones that other nations (particularly smaller nations and those in the far east) understand only too well ...

* It is also worth noting that these are all set to rise dramatically in the future (VAT increases etc have already been announced), not reduce, to pay for all the current failure!

** If you're perhaps wondering where 'carbon taxes' fit in, and why I've included road tax and congestion charging as 'stealth taxes' here too, you may also want to read this.