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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.
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.
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