Robin Smith and I are debating whether LVT will cause house prices to rise or fall.  I say fall, he says rise.

My reasoning is as follows:

The price of a house has two components, the price of the structure and the price of the site.  What happens to the price of the site?  Well, consider a real-life example from a colleague of mine.  He was looking to move closer to work and found a house in his price range and seemed to him worthwhile buying and he made an offer.  Then numerous problems appeared, one of which was a curious encumbrance that his solicitor found in the title deed.  It effectively said that the parish could, at any time, make a charge of all property owners in the village to pay for maintenance of the village church.  This amongst other things made him wonder whether to go ahead until some spanner thrown by his then-current mortgage company somehow took the decision out of his hands.

(In the end, he did find another place, and despite a couple of us telling him he was mad, took out an interest-only mortgage to get it.  It’s not gonna end well…..)

What’s my point?  A liability that attaches itself to land reduces the selling price of that land, because it makes it less attractive.  And as that’s exactly what LVT is, that’s exactly what it will do.  The question is, how much of the site value will remain in the selling price?  Well, that depends on what percentage of the rental value that’s taxed.  Robin suggested 100% so let’s work with that.

The selling price of land consists of:

  1. The capitalised rental stream from the site
  2. + A certain ‘hope’ value that the rental stream will increase (in a crash, this turns to ‘despair’ and is a negative number)
  3. – Liabilities attached to the site (capitalised if necessary)

With 100% LVT, a site with a current rental value of £100/month will be taxed at £100/month, so clearly the only component of the price left to consider is the hope value.  However, any increases in the site’s rental value (due to an advancing economy, and even for the initial spike as incomes are no longer taxed) get wiped out when the tax is reassessed, so there’s no point buying land expecting to benefit from rental increases.  This means that hope value is zero, therefore land selling prices are zero. That’s not to say that the land is now worthless (Rothbard makes that mistake and thus loses the plot completely), but rather that it’s value is all represented in the levied tax.  There’s nothing left to capitalise.

This is what I mean by LVT breaking the link between rents and house prices.  The rental values can do anything they like – so long as the tax is reassessed accurately and regularly, land title will pass, not with money changing hands, but tax liabilities.  In practice, I’m sure people would try speculating at the start of the tax year and try to make a bit off the rising value before it is reassessed.  The actual values involved would be tiny though.

The only thing left to consider is the price of the structure itself. This, of course, is not affected by the site tax, and has entirely different supply and demand characteristics.  House structures will behave like any other consumer good (ie an advancing economy will tend to lower the price/improve the good), and as house builders no longer have to play the land speculation game, it will be a much more efficient market.

So what does this mean for LVT?  Well, the current system strongly encourages owner-occupation, due to the concept of being ‘free-and-clear’ once the mortgage is paid off.  The fact that much of the benefit is actually taken by the banks in the interest is usually not understood.  People essentially over-pay in the early years in order to have an easy life when they retire (that was until MEW’ing anyway – but you can’t legislate for stupidity!).  Hence the aggrievment when anyone mentions taxing their land.  They’ve just gone through being taxed to get where they are, and usually they expect to get it (and maybe some more) back when they sell.  If the rent is freshly taxed, they lose the land portion of that.  If you’ve spent your whoe life basing your affairs around a fundamentally different system, that will always be a tough pill to swallow.

This also raises questions about those who are mortgaged.  The future rental value has already gone to the previous owner/been pledged to the bank, so LVT would be double taxation, just as other taxes are now.  Anyway, I’m starting to ramble, so….any questions?