Real house prices to fall until 2015: and this is bad news?
This story from the Guardian tells of a report from PwC suggesting that real house prices are unlikely to recover to 2007 levels until 2015.
It is, of course, bad news; but the bad news is not that it will take until 2015 until prices “recover” to 2007 levels, but that they are going to “recover” at all. 2007 was the peak of the boom, and houses were seriously overpriced. In Britain we have a particularly bad case of property-obsession; and in the early 2000s we exported it with ill effects to many other countries, particularly the US but also much of continental Europe. Credit, secured against rising house prices, was expanded and used to keep the economy growing; but all that extra credit went on consumption, not investment.
For most of my lifetime, property has been the best possible investment. We’ve all been stitched up on the pension front, but at least our homes are worth rather more than we paid for them. So that’s OK then. But it’s not, it’s not. Not only does the feelgood factor that goes with rising property prices disguise so many other bad things about the economy, it also diverts our savings away from productive investment in enterprise, to unproductive investment in our homes. We think that a new bathroom or a new kitchen is an investment, that it will add to the value of the property: but it is only consumption.
The main problem is that we don’t tax property enough. Naturally – that old thing about them not making any more of it – property will increase in value at, or above, the general growth in the economy. So it attracts investment; but just owning property (as opposed to developing it) isn’t a productive use of capital. But it gets lots of tax benefits, particularly if we live in it. No CGT when it is sold; and we get to live in it tax free. Put our money into enterprises, and we get taxed to the heavens – taxed on the profits, taxed on the capital gains. This is the wrong way round; the tax breaks should apply to productive enterprises, not to unproductive bricks and mortar. Land, compared to any other investment, has a natural advantage, which is distorting, so there should be a tax on land ownership to remove that natural advantage. Then it should be taxed the same as everything else. And tax theory supports all of this: land taxes are much less damaging than capital taxes.
Land tax is complicated, and most implementations are unfair. Building and development is an important part of the economy and shouldn’t be taxed more than it needs to be, but taxing developed land value penalises it. Tax theory has the answer, something that used to be called “site value rating”. It used to be LibDem policy for financing local government, but that’s a whole separate argument. Let’s just say that a land tax, assessed on the value of land alone without the buildings on it, is something we need.