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naraburns  nihil supernum  1yr ago (text post)   37948 thread views

Culture War Roundup for the week of March 27, 2023

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The UK's lack of a proper percentage based tax on housing has systematically inflated property values during the last decade

People often mention that UK property is severely overpriced relative to the US (actually the whole developed world) in what you get for your dollar. The same house which in the US might go for $500,000 in a medium sized city would be around £1,000,000 here in a similar location. Indeed this discrepancy has only increased with the low interest rate environment of (most of) the last 15 years.

People attribute this to the British's affinity for bricks and mortar over investing in companies and while I agree that plays a part (see the reverse in the US where the exact same Ryanair share trades at a 30% premium in the US over its European counterpart) I think the discrepancy in pricing can be in large part explained by a lack of a proper property tax.

Unlike the US where middle class people living in average houses in NYC pay $10,000+ a year in property tax, in the UK we have a highly regressive "council tax" system which means a £20M+ mansion in London pays just 3x what a one bed hovel in Blackpool does. This means that the costs of holding UK residential property are effectively nil compared to their US counterparts. Indeed (assuming a 1% yearly property tax rate in the US) we can model a UK property (which pays effectively no tax) as being a US property (which pays 1% tax yearly) plus an asset that generates revenue equal to 1% of the property price.

The 50 year yield of UK gilts at the moment is 3.5%. This means for a £1,000,000 property which would pay £10,000 yearly tax at a 1% rate, we would need to invest £285,000 in gilts to raise this money on a yearly basis. Hence the value of the corresponding US property with a 1% tax would be £1,000,000-£285,000 = £715,000 which doesn't explain the full discrepancy in pricing compared to US property values but does halve the difference.

This model of (UK property) = (US property)+(gilt/treasury generating tax on property) also explains why UK properties went up so much more during the low interest rate environments and are struggling more now given that rates have gone up. When interest rates were low the value of the gilt which generated revenue equal to a 1% tax on the property went up through the roof. Hence UK property prices shot up even though there was little difference in the fundamentals of the brick/mortar or even location (UK performed significantly worse as an economy from 2008-now compared to the US).

Equally now that interest rates are going up, the value of the additional gilt is being significantly reduced. With yields at 2% the value of the gilt itself would be £500,000 while at 3.5% the gilt is £285,000 so the gilt loses 40% of its value, which would correspond to a 20% fall in the value of the whole UK property itself. Just this simple financial model would seem to suggest UK properties prices have yet to fall a fair bit back to their new true value.

On the policy front this is an argument for having a property tax. Low interest rate environments allow growth by making money cheap for businesses to open new ventures etc., however one negative side effect of them is that they lead to rising residential property prices (due to more money floating around which raises asset prices) which can make buying a home difficult for ordinary people. Writing (US property) = (UK property)-(gilt generating tax on property) we see that in an environment with property taxes lowering rates doesn't raise prices anywhere near as much: yes people are willing to pay more for the bricks and mortar/location, but the value of the gilt you are subtracting has also gone up substantially. This helps keep home prices cheap for buyers and allows them to achieve economic prosperity more easily.

On the policy front this is an argument for having a property tax. Low interest rate environments allow growth by making money cheap for businesses to open new ventures etc., however one negative side effect of them is that they lead to rising residential property prices (due to more money floating around which raises asset prices) which can make buying a home difficult for ordinary people.

Probably just as important: it should keep housing prices from fluctuating wildly with the interest rate, which is really important if a huge percent of your net-worth is in your home. Variance is worth fighting for its own sake.

Yes, how is it that the US has fixed interest loans as the norm? Is there some sort if regulation enforcing it?

Here in Australia, most people get variable rate. And even a "fixed" rate is fixed only for a small number of years.

Yes, how is it that the US has fixed interest loans as the norm?

As the Fiddler on the Roof said, "tradition". Started by FDR in this case.

There's no regulation requiring loans to be fixed rate, and many are not, but since Fannie Mae came into being during the Depression, they've always been willing to securitize fixed-rate loans with certain characteristics (now called "conventional").

The 5/1 ARM (fixed for 5 years, then variable) became popular prior to the 2007 housing crash, which has probably tainted it quite a bit.

Great post! In my view property taxes are by far the best tax, land tax especially. There’s no deadweight loss, it’s very difficult to game/avoid, and if done right is quite equitable. Clearly the UK does it wrong.

Texas is a great example of property tax done right. Yearly reassessments for most jurisdictions, and property valuations must be with 10% of the market price of the properties, as determined by state ratio studies, or the county will lose millions in local school funding.

Tying taxation/accuracy of valuation to school funding is a brilliant stroke because it cuts through so much of the BS and whinging around taxation to get to the heart of why it’s important. I wish more places would follow that model.

Also, could you explain what a gilt is in your post?

Texas’s property tax is incredibly unpopular and that’s probably something that needs to be noted in any discussion of Texas doing people taxes right.

"Eating vegetables is incredibly unpopular with kids, which should be noted in any discussion of doing childhood nutrition right."

This sort of low-effort comment that doesn't really explicitly state your objection, just draws a sneering equivalence ("people who object to property taxes are like children who don't like eating vegetables") is just what @naraburns was talking about.

We do not want these kinds of comments. We want you to discuss, debate, and elaborate. This place is not for seeing how cleverly you can score a zinger or how pithily you can express your disdain.

If you think that property taxes are a necessary and appropriate requirement in maintaining a well-functioning civil society, that no reasonable person should object to them, and that people who do are essentially spoiled, entitled and ignorant and should be treated like children who are too immature to realize what's good for them - this is my best shot at charitably rephrasing your one-liner into a coherent position - then you need to actually state that and defend that, not just mockingly rephrase the person you are disagreeing with a statement of the obvious that's supposed to imply that their statement was so absurd as to need no meaningful rebuttal.

Fair point… but I stand by my claims. People are stupid about taxes.

Gilts are UK versions of American Treasuries. So government bonds.

There’s no deadweight loss, it’s very difficult to game/avoid,

Property taxes very much have a deadweight loss - you may choose not to put your property to it's most efficient use since that would increase it's assessed value. Gaming is also reasonably straightforward - make improvements off the books (i.e. to interiors of your house and don't get permits).

That's why an LVT is so much better than a property tax - a vacant lot, a burned out husk, a single family home or a 20 story condo, either way you pay the same tax but more improvements -> more value for you and others.

Gaming is also reasonably straightforward - make improvements off the books (i.e. to interiors of your house and don't get permits).

Or make improvements legally, but pick improvements that don't change or reduce the resale value of the house. Modelling your living room like the Starship Enterprise is nicer when it saves you a few thousand a year.

From my post:

land tax especially

I think we’re in agreement! Land value tax would solve an immense amount of problems, people really sleep on how many issues stem from poor use and distribution of land/property.

Homelessness for one would be far cheaper and easier to solve if we could just reform our zoning and property tax codes. It would also do a lot to help increase fertility, young couple often say buying a house is one of the main reasons they delay having children.

But people love to get theirs and pull up the ladder behind them unfortunately.

Yeah guess I misinterpreted your post as saying both property tax and LVT have this property, as opposed to just the latter. My bad!

Urbanists like LVT (any LVT, not just the Georgist one) because municipal expenses scale more with people (related to improvements) than area (land), so if you're paying for municipal expenses with an LVT then one landowner's improvements effectively raise the taxes on everyone else's land, thus giving them an incentive to improve to keep up.

Homelessness -- that is, the problem of the unsheltered homeless -- has nothing to do with zoning or property taxes, but rather the characteristics of the homeless themselves.

young couple often say buying a house is one of the main reasons they delay having children

They say a lot of things. Then you look in the past and see fertility was much higher when people were living 10 to an apartment with only cold water if you were lucky, so maybe what they say isn't accurate.

one landowner's improvements effectively raise the taxes on everyone else's land, thus giving them an incentive to improve to keep up.

Exactly. This is good because everyone else benefits from higher economic activity and more value being generated around them. Otherwise you have situations where poorly run businesses can skimp by because they have a prime location and are surrounded by good businesses that actually provide a lot of value. I don’t see the issue.

They say a lot of things. Then you look in the past and see fertility was much higher when people were living 10 to an apartment with only cold water if you were lucky, so maybe what they say isn't accurate.

I agree that sometimes people have revealed preferences, but I think generally it’s good to take folks at their word. Also, it’s disingenuous to act like these situations are equivalent - if people in poor conditions in the past had access to birth control, they would probably have less kids. The aristocracy did this frequently. Humans just like sex.

Do you think that a lack of housing is not a major driver in having kids? If not what is your list of causes for the fertility crisis?

Exactly. This is good because everyone else benefits from higher economic activity and more value being generated around them. Otherwise you have situations where poorly run businesses can skimp by because they have a prime location and are surrounded by good businesses that actually provide a lot of value. I don’t see the issue.

I don't have it as a value that every square inch of land should be put to its highest economic use. And I don't think the taxes on one parcel should go up because improvements on another parcel resulted in an increase in municipal expenses.

Do you think that a lack of housing is not a major driver in having kids?

No.

If not what is your list of causes for the fertility crisis?

One is that there's no longer any economic reason to have kids. That's not particularly new, of course. Two is that the cost of having kids -- not just the economic cost in dollars, but the non-delegable cost in time -- for middle class and above parents just keeps going up. Helicopter parenting is tiring, expensive... and expected. Three is birth control (also not particularly new).

People attribute this to the British's affinity for bricks and mortar over investing in companies and while I agree that plays a part (see the reverse in the US where the exact same Ryanair share trades at a 30% premium in the US over its European counterpart)

There is no way this is true.

Yep, ADR premiums (and discounts too, sometimes!) do exist for a wide variety of reasons. AFAIK though Ryanair in the US is still pretty liquid (roughly similar volume by value of shares traded, 5x in number of actual shares but that's because the American ADR is more than 1 share per ADR). But perhaps making that point in my post just detracted from my housing argument which was the main thing.

Oh it's true (%age may be off but a difference very much exists). The shares aren't fungible so you can't turn one into the other (or else this would have been arbitraged away). People are just willing to pay more for shares in the US compared to Europe.

If they aren't fungible then they aren't the same shares.

They literally are the same thing, pay the same dividends, have same voting rights etc., the US version is just a depository receipt of the European share. The reason they aren't fungible is because of regulations, not because they are different. One just trades in the US and the other in Europe.

(Yes, we treat them as separate but highly related things at work due to the lack of interconversion but fundamentally they are the same thing).

The fact that the applicable regulations are different is what makes them different shares. Would you rather have one MSFT share in your IRA, or one MSFT share in your brokerage account? Both have the same nominal value on E*Trade, but they do not convey the same privileges. When Microsoft pays a dividend, I can use the proceeds from my brokerage MSFT share to buy a pack of gum at the convenience store. I can’t do that with my IRA MSFT share. On the other hand, I can sell my IRA MSFT share for a profit without paying capital gains tax. I also cannot trivially convert a brokerage MSFT share to an IRA MSFT share at no cost.

The European stock RYA shows a market capitalization of 17.04 billion euros = 18.51 billion dollars, while the US stock RYAAY shows a market capitalization of 21.54 billion dollars, which is bigger by 16 percent. I'm not saying that's the whole story, but there is a discrepancy.

Just to point out, the UK is several orders of magnitude smaller than the USA, so there’s always a problem for housing prices just from the fact that you cannot simply move to an unoccupied plot of land, buy it and build a house.

A fairer comparison would be to compare housing prices in greater LA or near to New York or Boston. From that point of view, I don’t think UK prices are wildly out of line with suburban or even exurban areas around major metropolitan centers. Sure, comparing with a rural home in North Dakota makes any European home seem expensive, but it’s not policy that makes the difference. The difference is that a lot of the USA is unoccupied and therefore it’s cheaper to buy land and build there.

Just to point out, the UK is several orders of magnitude smaller than the USA

It’s literally not even one magnitude smaller.

According to Wikipedia:

That's 1.6 orders of magnitude.

I don't think your numbers on income tax are correct.

While someone on £40,000 may only pay about £5,000 on the tax called income tax, they also pay National Insurance, which is income tax by another name. In addition, someone earning £40,000 is probably a graduate, and therefore paying back their student loans (a graduate tax by another name, sort of), as well as their mandatory pension contributions, which are a minimum of 5%. That's without going into the National Insurance and pension contributions that their employer has to pay, which, if they were not required, would go to the employee's salary.

A recent graduate on £40,000 living in England, with minimum pension contributions would pay:

Income tax: £5,148

National Insurance (inc employer): £7,555

Student Loan (Plan 2): £1,104

Pension contributions (inc employer): £3,200

Giving them an effective tax rate of £17,000 or 42.5%.

Even if we take out the pension contributions and student loan, this still leaves us with a tax payment of approximately £12,700 or 31.75%.

I definitely agree that Business Rates are far too high and would quite happily shift that burden to homeowners, which could incentivise more efficient use of property, but I don't think you can argue that the UK is a low tax country for average earners.

If you "inc employer" in the numerator, you should also "inc employer" in the denominator. So, it's 15903 over 50755, or 31%.

muh enn-haech-ess

God I'm so stealing that...

The regulation pastiche is "R enn-haech-ess", from the 2020 government's endless mawkish adverts lionising our NHS.

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