We are in a situation where we have two doors and one of them is about to close. Fewer and fewer young working Londoners are able to buy their own homes simply because the prices are getting out of their reach. But there is another door that could be closed that would re-open the home-buying option for those embarking on their working lives. What this door represents is a little more complicated to describe – hence my attempt at a graphic!
When house values go up, other than home improvements almost all the increase is due to higher demand for its location. Higher demand comes about because its location is attractive – and a location becomes more attractive because of the activities of everybody (other than thieves and muggers) in the area. From street entertainers to employers to night-club owners to shopkeepers to businesses-hardly-anybody-understands-what-they-do to hospital workers and funding authorities, council rubbish collectors, public and private transport providers and as imperfect as they are, the police and justice system.
People engage in these activities for their own reasons and are rewarded accordingly. But what most people seem not to realise is that in the process of doing so they are also, in making the location more attractive and the land more valuable, constantly bringing the gift of higher value to land owners.
Now I actually don’t have a problem with that in principle. In fact I am benefiting from the same thing happening with my bitcoin holding. I was fortunate enough to have bought bitcoin last year. Everybody who decides they want to participate in the Bitcoin economy now and henceforth by providing services in exchange for bitcoin or simply changing local currency for bitcoin increase the value of all bitcoin – including mine. Thank you! Exactly the same as with land.
The problem with the land scenario is only one of the two aforementioned doors can remain open. In order for young working Londoners in future to be able to buy their own homes something has to change. And that which in my eyes makes most sense is to close the door to existing home-owners perpetually receiving gifts from everybody else. Close that door and the other will re-open.
And the mechanism by which this can be done is by means of a Location Charge. The technical economic term for the ‘gifts’ we’ve been talking about is ‘economic rent’. The idea behind the Location Charge is that the economic rent is diverted into the public purse instead of accruing to the home owners. There are all kinds of fantastic other advantages to doing this, including the potential abolition of all other forms of taxation, which I won’t go into here because this is about a means of opening the door for the youngsters. Even among London home owners the likelihood is because of other repercussions of the introduction of the Location Charge many will still be better off so I have no need to appeal to you either.
To those relatively few in the highest value locations in London this is the cost I am asking you to consider accepting. Paying an annual Location Charge on your property means by the time you go sell it you will have paid an equivalent to the increase in value whilst you owned it – as will the buyer need to continue to pay. This takes the incentive out of buying a house as an appreciating asset, lowering demand and thereby lowering value. And it gets ‘worse’…
There are vast numbers of vacant potential development plots in London currently owned by speculators who can simply sit on them for decades at virtually no cost whilst receiving the gift of increased value we’ve been talking about. By taking the gift away whilst at the same time demanding the same Location Charge per square foot as a neighbouring house they will be heavily incentivised to either do something with it or sell it to someone who will. The result? Loads of new properties coming on the market increasing supply relative to demand resulting in even lower property prices. There are no two ways about it. In order for house prices to be low enough for those starting their working lives to afford prices will have to come down meaning the value of your property will come down.
In years to come when the switch to a Location Charge as the sole means of raising public revenue has occurred it won’t be so painful to home owners. Values will have settled and home owners will have accepted the era of an automatic increase in their net worth year on year is over.
But for today’s home-owning residents of Mayfair, Chelsea & Islington I’m asking you to make a tough choice. If it’s any consolation, all proponents of Land Value Taxation (what the ‘Location Charge’ has been called for decades) agree other forms of taxation should reduce as it is introduced. This means should you decide to sell you won’t have to pay stamp duty; you don’t need to accommodate for inheritance tax; whether you put your money in a bank or in any other investment you won’t have to pay capital gains – and if you decide to invest in a business with it there will be no corporation tax. The only investment that would incur an annual charge is land. So there’s no getting away from the fact if a Location Charge comes into force, choosing to remain in one’s home will mean both paying a high annual charge whilst watching the value of one’s home decrease.
Is this something you could live with to make the world a fairer place?Follow @thoughtfan
PS Apologies for the poor quality of my graphic. If there is anyone who has even a smidgen of ability with graphic stuff who’d be happy to make this piece not look quite so amateurish I’d greatly appreciate it – for a charge if required.