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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.
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.
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.
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