I agree with Grant

I know, I know, we’re not supposed to say this here. But by advocating the need for real terms fall in house prices he is right. Grant was twisting and turning trying to avoid using the term ‘falls in house prices’ on R4 just now, but that’s what his house price stability means. His example is house prices rising by 2% while earnings increase by 4%.
No bad thing – so spit it out next time Grant.
More remarkably, Grant says to Sky News that ‘A house is a home not an investment’ – exactly the stance he attacked Labour for just a year ago. 
It would be bad for the economy to have any sudden drops in house prices, so the aim of gradual reductions I’d say is about right.
Interestingly, Grant wants a housing market that is more ‘rational’ than it currently is. I thought Conservatives were supposed to believe that free markets are necessarily ‘rational’ and it’s state interference which makes them work in ‘irrational’ ways?
It’s good to see a Conservative minister coming round to a left-wing way of thinking.
This aim requires considerable intervention in the housing market by the government. What do the right-wingers in his party think about this? Interfering seriously in a private market and pushing down the value of people’s homes?
Labour could look to make cheap political capital out of arguing that this is an attack on homeowners and homeownership, as Grant did in opposition.
Or Labour could welcome this. I argued here that one of Labour’s future principles should be intervention in the housing market to prevent further excessive house price increases. We should take Grant at his word and challenge him to tell us how he will intervene in the mortgage and housing markets to make this a reality.
He’ll still find that pretty tough to answer.

0 replies on “I agree with Grant”

I have a quick suggestion for him.
“Reintroduce schedule A tax. That was the schedule for return on investments including notional benefits. If you invest in a house you pay tax on the income. If you home-swap and live there yourself you used to be treated as if you paid yourself rent, and were taxed accordingly. If you sppent money on the mortgage or on repairs you got tax relief . The tax was never revalued for rising rents/inflation and eventuallu abolished. The tax relief, paradoxically remained for decades more and really started the ramps in house prices in Britain.
Here, Minister, we have a means of removing or at least reducing the speculative investment element of house-buying, and of bringing in some more money for the Chancellor, which he will really thank you for, as he can then ameliorate the cuts.”

Bernard Crofton is stopping short of the true solution. The real problem is that the entire personal investment market is distorted by the fact that owner-occupied housing is free of liability to capital gains tax, unlike other forms of investment like shares. The result is inevitable – those who earn money think it a priority to get a house to live in (which is understandable), to own that house (which has some benefits like ensuring more maintenance than a rented property gets, and commitment to the locality, but downsides in terms of labour and social mobility), and to maximise the gearing effect of a mortgage by buying as pricey a property as can be afforded in the hope of future appreciation increasing personal wealth. You only have to consider what proportion of the average 50-year-old’s gross equity is in the house they own to see how distorting this effect is. We pay for it by a consequent under-investment in enterprise.
I do not oppose home-ownership per se, and can see all the advantages. But so long as people think property will outstrip other investments in real terms, a self-fulfilling prophesy in the circumstances, they will gear to the maximum. This fuels the property prices, and that fuels the nonsense levels of indebtedness associated.
No politician dares propose the application of CGT to personally-owned and occupied properties. It would be political suicide. It would also be very difficult to create a package of rules that was fare, since it should only be the real terms inflation element that gets taxed. The more exemptions that get created, the more complex the rules, and the more easily attacked they would be. But I have no doubt that in the end, something has to be done to level the playing field

Of course, I meant “package of rules that was fair” – typing fare was due to huge fare increases also being on my mind.

It seems to be a pattern that new ministers don’t mind recognising the need for house price stability – only to go rather quiet on the subject later when the short term political gain of price rises or pain of falling prices begins to be felt. It was Gordon Brown who said in 1997 that he recognised the damage house price bubbles caused and would make sure one didn’t happen again…
But of course Grant Shapps and Tony are right – the ideal would be a gentle, predictable relative but not absolute decline in house values. The problem is that our expectation-driven (aka speculative) market is incapable of such benign conditions, and any of the tax interventions aimed at acheiving it risk serious adverse consequences – though I agree that tax is the missing piece of the jigsaw that has to be addressed.
I discussed the various tax options in my Compass pamphlet and came out cautiously in favour of a Land Value Tax over Schedule A or CGT – mainly because of its wider economic benefits and the problems of imposing CGT without roll-over relief (and with relief it achieves almost nothing).
The key to successful intervention is timing – you want to impose a change at or near the bottom of a bust, not at the top of a bubble when it will do most harm. But I don’t see much chance of a Tory campaign for taxing homeowners….

I have had a quick read through Toby’s Compass leaflet (though not yet the 67 comments on it – a high number relative to those on other Compass leaflets showing how much higher Labour Party folk rated housing as a political issue than our late Government appeared to rate it), and I commend it to others.
The trouble with the LVT as described is that it is complex and open to local manipulation to make it valueless; for example “The percentage tax rate would be set locally by the council within a range determined nationally by central government. This would ensure local discretion in tax raising and help reinvigorate local government” – I can imagine a Tory council setting the rate as low as possible and a Tory Government, whilst on the way to rubbishing and probably abolishing the LVT, setting the range determined with a floor at nil, rendering the LVT nugatory in Tory-controlled areas.
I am grateful for the information provided in the pamphlet, for example “home owners still receive a unique exemption from capital gains tax,worth about £13 billion in 2007 (although this figure will have been lower for 2008). The shocking fact is that housing wealth is almost entirely untaxed. No other asset class is treated so generously, so it is small wonder that people are prepared to borrow heavily to buy homes, pushing prices up and further boosting thewindfall for existing home
owners.” Politicians, and the public more so, have not paid much attention to capital gains tax as its yield is so much lower than income tax, but the reason is the exemptions slash its possible yield. So when he writes that “ever since the neo-liberal turn under Thatcher, governments have become increasingly wary of interfering with all markets – and the housing market is a very big one to intervene in” he is in effect saying that the value of the non-intervention on CGT exemption for owner-occupation is £13billion, which is no small sum. The Government IS intervening and distorting the markets simply by leaving this huge exemption.
When he writes “By privatising the gains of the housing market we have also individualised the risks to a worrying extent. The biggest losers from the current bust will be those who bought in the last five years, with large mortgages at high multiples of earnings – especially younger, working families without large inheritances” he overlooks that it is also the group who are most heavily geared who stand to gain the most (tax-free, to boot) if property prices race away again. Only the working home-owners with no other homes cannot cash in their chips so easily as those owners who own several.
One final observation on his pamphlet – his “principles for a new housing economy” do not include the importance of equality of access from around the country. We need a more mobile work-force, and we need the option of individuals to move of their own volition to other parts of the country for other reasons, whether to retire to the coast, or be nearer relatives. At present our structure do not enable this.
Churchill once said “Don’t argue about difficulties. The difficulties will argue for themselves…” but the history of Labour tax innovation is littered with initiatives that fell apart under analysis including Selective Employment Tax as a notorious example. So if we were to have a land value tax, the principles and details should be argued through thoroughly to ensure it is workable and has some degree of acceptance. For my part I am not sure I agree that CGT on owner-occupied homes would require a roll-over provision – why should someone, who has for example netted a £1million gain on a house simply through the rocketing of demand for that kind of nice Georgian property, be able to roll that over to the next one. I would want some fair measure of indexation to exclude from taxation the rise in the property value simply related to general (not land or property) inflation. But if my pension inflation increases take no account of housing costs despite my being accutely vulnerable to them as a private renter, I don’t see that the index for inflation on property base costs should take any account of property and land value rises.
Meanwhile council tax is a crude proxy for a tax on property values so it drifting up by slightly more than inflation is not altogether the end of the world, but it takes no account of property value changes since 1991, it is levied on the occupier rather than the land owner (who ultimately benefits from the property value inflation), and lacks the mitigations required for a progressive tax, and is especially harsh on the income-poor, whether property-rich or otherwise; and our systems also assume that at all ages a small property suits a single person which ‘ain’t necessarily so’ if, like me, you acquire possessions as you grow older.
One other important thing is to realise that if we are to invest proportionately more in housing, that comes out of the national cake and something else will have to give to make way. Personally when I was first elected a councillor I thought that housing – dry, warm, secure housing with sufficient space for its occupants – was the highest priority, its price was possibly a secondary consideration and that relative to other sectors it deserved a higher share of the cake. That’s a national debate still to be had.

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