Killer Arguments Against LVT, Not (450)

Two equal and opposite ones:

1. Landlords will just pass on the tax to their tenants.

2. House prices will fall, people will be trapped in nequity, banks will go bankrupt, world will come to an end etc.
——————————-
Clearly, if 1 is true, then house prices would be unaffected, as the net income/benefit from owning one is unchanged. So at least one of them is untrue, or the truth is somewhere in the middle. Also, falling house prices would A Good Thing overall and any transitional issues could easily be smoothed out, but let’s assume it’s A Bad Thing.

Having thought about it for a while, prediction 1 will, after the event *appear* to have been correct – provided there are equal and opposite cuts to VAT and National Insurance (and minor taxes like Council Tax). Rents are set by the disposable incomes of tenants who are in work; an average tenant household would have £10,000 – £15,000 more disposable income, so we can assume that rents would increase to soak up half that, which (coincidentally) would cover the LVT on an average rented home.

This is neither A Good Thing nor A Bad Thing, nor is it an argument against (tenants would still end up a lot better off; landlords would not lose out).

We can therefore safely conclude that KLN 2 is quite simply not true (regardless of whether it would be A Good Thing or A Bad Thing):

a. If net rents stay the same, then the price which landlords would be willing to pay for a home would also be unaffected.

b. It’s mortgage lending which is the main driver of house prices. Buyers are in a borrowing arms race and whoever is prepared to borrow the most gets the home, banks are willing to lend up to an ‘affordability’ pain threshold i.e. mortgage repayments should leave borrowers enough to live on plus a bit of a cushion.

Borrowers’ disposable incomes, even after deducting the LVT they will be paying, will be considerably higher, so if anything, the amounts which banks would be willing to lend will go up, meaning that it is possible (but unlikely) that house prices would actually go up slightly.

c. Clearly, if most people’s disposable income goes up, then some other people’s income will go down, i.e. semi-retired and retired in more valuable homes. But such people are unlikely to be taking out mortgages as banks don’t like repayment periods which extend into people’s retirements. Therefore, their fall in disposable income has zero influence on house prices, they will be trading down to minimise their LVT bills and free up cash i.e. the opposite of taking out a mortgage to trade up.