Eurozone: ignore land prices at your own peril!
With the sounds of despair rioting through the streets of Greece, Spain, Ireland and others who no longer have the ability to fund themselves, it is a sign of the times that even the IMF is pushing for improved tax systems relating to land values.
The IMF’s “What Drives House Prices in Australia?” states:
As reported in the Australia’s Future Tax System…The recommended reforms to stamp duties and land taxes should reduce the current impediment to housing supply generated by the tax system.
Not exactly a detailed explanation, but it does show that policy makers are starting to open up to the role that Land Taxes can play in keeping a lid on such damaging land bubbles.
A 2006 OECD report has recently gained headlines as journalists search for answers. It brought the usual predictable howls of derision from the property sector, re-iterating again their limited understanding of economics. This comment by David Newnes, LSL Property Services, reflects this:
“Any further tax hike in this sector would put home ownership out of reach of millions and ultimately punish anybody with an interest in the economic health of the UK. Such measures could ultimately remove the boom, leaving us only with the bust.”
Read more detail here.
A tax on land could firstly be used to cut income taxes. Secondly, it would encourage good behaviour by forcing under-used/ vacant properties onto the market, pushing prices down. Both of these changes would deliver more spending money to the majority of people (lower rents, higher take home wages), helping the economy to recover.
Tellingly, the OECD report was pressured to drop the recommendations for a property tax by Irish bureaucrats! The article states:
The OECD team – which had proposed the introduction of a property tax – was puzzled by the government’s insistence of offering mortgage relief without any apparent form of property tax, he said, but was told that it simply did not understand the Irish attitude to owning property.
The very language adopted by the OECD hints at the need for more understanding of the inter-relationship between land, buildings and community.
Instead of calling them property taxes, they should rightly be called Land Taxes. A property tax penalises builders for improving a location. This gives the land speculator a motivation to destroy livable but perhaps under-developed houses and to leave the sites empty. Families are then forced to pay upwards of 30% or more in council rates than the land speculator. Land is what goes up in value so that is where the tax should be focused.
Ireland is a classic example of the need to include land tax in the financial make up of a country. Look at the Irish property bubble. Guess when they removed their most significant charge on land, the Residential Property Tax? When did their property bubble take off?
Now there are 170,000 vacant houses in Ireland. A raft of loopholes were also manufactured for the propertied class, including:
Mr Cowen was advised by the Revenue Commissioners to close a loop hole which developers used to avoid paying stamp duty when buying development land.
Needless to say, he didn’t close the loophole – until after the bubble burst. The same (above) excellent article by Donal Buckley finishes with:
Now that the bubble is burst some valuers are saying that swathes of development land are technically worthless and this is why Brian Cowen is having to bail out the banks which leant money to the developers and the investors who wanted to avail of the tax incentives.
Over in America the double standards shine on, with reports of foreclosures upon multi-million dollar houses virtually non existent. Naked Capitalism reports:
Another possibility is that the market for $5 million and over homes in this area is so thin (as in non-existant) that they are afraid to take over and put any homes on the market out of concern for revealing where prices are now.
Banks are afraid of the liquidity pressures that would be placed upon their balance sheets if the real value of land amongst their largest assets was reported.
With Australian housing auction supply levels at record levels for this time of the year (equaling the panic of the GFC in late 2008), this hints at the role of supply side constraints enforced by speculative vacancies. Will we end up with 170,000 plus vacant homes like the Irish when the bubble pops and these ghost houses, these speculative vacancies, hit the market?
There has not yet been a significant jump in Australian mortgage defaults, so one can only deduct that there is a significant bailout from the housing market by investors because many realise that property (read land) prices cannot go up much further. Wages simply can’t keep up with 26% annual increases like we have endured here in Melbourne.
Nations need only ignore land prices at their own peril.