Houses Of The Holy

This is the post I’ve been waiting for, from Mark Wadsworth and might I suggest you read it in conjunction with his other pieces on LVT, as well as the comments on his own site.  Thanks for that, Mark:

Today, let’s look at the relationship between house prices and earnings in the various regions of England & Wales. A simple scatter graph with an auto trend line shows a relationship, which might be skewed by the one in the top right hand corner (London), so let’s try that again without London (click to enlarge).



Yup, definitely a correlation.

So let’s plot the house price-to-income ratio for the ten regions of E&W, in order of increasing incomes (the lower series, double line). As you can see, the trend line for that series slopes upwards slightly (so in areas with higher incomes, house prices are disproportionately higher).

You can flatten off the trend line by deducting an amount to represent bare minimum living costs excl. housing costs of £5,500 per capita (this figure arrived at by trial and error, but seems reasonable enough). The result is the upper series (bold black line). I can suggest a couple of reasons why the South West ratio is so high*, but I’m not immediately aware of any reason for the East Midland ratio being so low. Click to enlarge.

What conclusions do we draw from this, if any?

How about this:

i. There are no massive regional differences in the standard or quality of housing, so it must be fair to say that the main driver of the price differences is the extent to which regional incomes exceed a basic level of spending on other necessities (i.e. £5,500 per capita in this case).

ii. The rent or mortgage payments for an ‘average’ household in any area will be x% of the value of the house or flat, or y% of that household’s gross income minus £5,500 per person.

iii. We also know that income tax/National Insurance are calculated as 43.8% percentage of your gross income above an arbitrary amount of £6,064 per annum.

iv. Your rent or mortgage is just a payment to live in that home in that area, of course, but if you live in a higher income region, a large part of what you are paying for is the fact that it is easier to find a high paying job in that area. Similarly, income tax/NIC increases the more you earn; it is the ‘rent’ that you have to pay for the right to go about your trade or profession.

v. We all know that income tax/NIC are ‘publicly collected taxes’ (boo! hiss!), but if rents and mortgages are calculated on more or less exactly the same basis, are they not just ‘privately collected taxes’? It’s fair enough for a landlord to charge you for what he provides (a roof over your head, repairs etc.) but isn’t he also charging you for ‘stuff that havs nothing to do with him’ or even worse ‘the right to work’?

vi. In other words, while it is conceptually easy to scrap ‘publicly collected taxes’ you can never get rid of such ‘privately collected taxes’. We already have Land Value Tax, it is just that it is collected privately (in non-cash form in the case of owner-occupiers).

vii. There will never be such a thing as a ‘tax free’ society – the only question is whether LVT should be publicly collected** and spent on things that benefit us all (like scrapping income tax, NIC, VAT and so on, let’d get rid of the taxes that we can do something about), or whether we ought to allow it to be privately collected.

* A high proportion of second home owners; a slightly higher proportion of pensioners that rest of UK (so GVA per non-pensioner is higher), rabid NIMBYism and the fact that it’s just a nice place to live, with the beaches and everything.

** Yes of course there’d be exemptions or discounts or a deferment option for pensioners.

18 comments for “Houses Of The Holy

  1. September 26, 2010 at 11:11

    My pleasure. Ta for bunging in those extra links.

  2. Rossa
    September 26, 2010 at 11:15

    Interesting post Mark.

    There may not be much difference in the ratio of house prices to income. The main difference is in the cost of living. It is definitely cheaper to live in the North than the South. Prices of food and petrol, 2 things most people have to buy, is significantly less oop here!

    In the early nineties I worked for a US company based in London on a basic salary of £25k. My colleague could only afford a 2 bed flat in the Wembley area. For the same amount as her rent, I not only paid the mortgage on my own house but also rented another home nearer to my office so I didn’t have to commute over the Pennines. I also ran two cars to her one. She could never get her head around that one.

    Last week in Somerset and Cornwall we shopped in Tescos and Sainsburys. I would say that on average fresh food prices were 30% higher than I pay in Yorkshire. And petrol was about 5p a litre more.

    I appreciate that that may be more to do with higher overheads for the retailers that is passed onto the consumer, but it sure makes my money go a lot further.

  3. September 26, 2010 at 11:16

    I’ll be looking at this in detail a bit later on.

  4. September 26, 2010 at 12:17

    Rossa, you’ll find the biggest price differentials with goods or services that are consumed at or near the point of sale.

    This is particularly noticeable with e.g. hotel rooms, hair cuts or a pint of beer in the pub, where there is a correlation between the price and how desirable or expensive the area is (even plotting these from Central London outwards).

    Conversely, the price of a dress in Matalan or a hi-fi in Comet is much the same all over the country because they come from thousands of miles away and retailers would find it hard to maintain price differentials in such non-perishable goods.

    The reason is slightly circular – when you stay in a hotel room or drink a pint, part of what you are paying is ‘rent’ for staying in that area or having a pint in that particular location.

    Your example of two people doing the same job for the same wage in different parts of the country is a good illustration of this – but by and large, two people doing the same job in different parts of the country will receive very different wages (public sector national pay rates notwithstanding, an abomination in themselves).

  5. Rossa
    September 26, 2010 at 12:49

    Good point Mark. My example was an exception as our employer was American and didn’t differentiate on location. There were only 2, HO in Wembley and a satellite office in Warrington to service the Northern customers.

    I’ve checked my household budget spreadsheet and your figure of £5,500 isn’t far off at all. All other spending for us (2 adults), not including mortgage, is £10,800 a year. That is more or less everything, car, food, housekeeping etc. And we don’t really skimp too much.

    Only big exception is holidays. That varies each year.

  6. September 26, 2010 at 14:47

    R, thanks for feedback.

  7. September 26, 2010 at 23:36

    UK regional house price variation seems to revolve around :

    1) access to employment.
    2) genteelness of neighbourhood.

    It is the volatility of the first and difficulty in measuring the latter that makes formal land tax inappropriate here, at least on any larger scale.

  8. September 27, 2010 at 07:10

    Mark, I’ve read your post, I’ve read this:

    http://www.landvaluetax.org/what-is-lvt/

    and I’ve read this:

    http://markwadsworth.blogspot.com/2010/09/fundamental-difference-between.html

    and this:

    http://www.cooperativeindividualism.org/gerber-george_arguments-against-land-value-taxation.html

    Though understanding more about it now, I still don’t see that you’ve defined Home-Owner-ism any more clearly.

    You define one third as those who wish their children to be able to afford a home and pay the children’s deposits to do so, as my parents did.

    However, you define HOists as those who wish to keep the property bubble going.

    Well, that includes the givers of credit and land speculators who buy second and third properties in order for real estate value to go up.

    Is that whom you mean?

    I also presume you agree that if LVT does force businesses out of London to, say, Warrington, then the land value increases in that area because there is employment and the area is then desirable.

    Building projects and slum removal will take place, it becomes the new mini-London and LVT is reassessed upwards, making it less desirable to be in and so people have to move again to, say, Thurso, where the same thing happens over and over.

    Is that what happens?

  9. September 27, 2010 at 07:26

    Wolfie:

    1. I might as well argue that it is the volatility of people’s employment which makes income tax inapproporiate.

    2. While land values are ‘volatile’ that is largely because there is no publicly collected LVT, which would act like a higher interest rate and this dampen house price bubbles.

    3. Nobody wants to measure ‘genteelness’, it is value that is important (there are a thousand factors that add to or detract from the value of an area); and HM Land Registry know perfectly well who paid how much for each property bought and sold in the last ten years (over half of all UK property) which gives us a good guide to relative values, which are far more stable.

  10. September 27, 2010 at 07:28

    Yes but genteelness is tied to that, i.e. there is a correlation between desirability of living and prices.

  11. September 27, 2010 at 07:31

    4. By relative values I mean that houses in posh areas always sell for twice as much as houses in crummy areas.

    James:

    “You define one third [of homeowners] as those who wish their children to be able to afford a home and pay the children’s deposits to do so, as my parents did [as just normal homeowners].

    However, you define Home-Owner-Ists as those who wish to keep the property bubble going. Well, that includes the givers of credit and land speculators who buy second and third properties in order for real estate value to go up.

    Is that whom you mean?”

    Yes of course, that’s exactly who I mean!

    I’m thoroughly in favour of homeownership, but the genius of Home-Owner-Ist policies pursued by Labour and now by the Lib-Cons (low interest rates, subsidies to housing, very low taxation of housing, high taxes on incomes, very little new development, selling off council houses) is that the percentage of owner=occupiers is falling, down from 71% to 68% over the last ten years or so.

  12. September 27, 2010 at 07:35

    JH: “Yes but genteelness is tied to that, i.e. there is a correlation between desirability of living and prices.”

    Yes of course, the whole thing is slightly circular.

    “I also presume you agree that if LVT does force businesses out of London to, say, Warrington, then the land value increases in that area because there is employment and the area is then desirable.

    Building projects and slum removal will take place, it becomes the new mini-London and LVT is reassessed upwards, making it less desirable to be in and so people have to move again to, say, Thurso, where the same thing happens over and over.”

    Hand about here, we already have LVT but it is privately collected. So I could re-write those paragraphs as follows:

    “I also presume you agree that if high rents force businesses out of London to, say, Warrington, then the rents value increases in that area because there is employment and the area is then desirable.

    Building projects and slum removal will take place, it becomes the new mini-London and rents are reassessed upwards, making it less desirable to be in and so people have to move again to, say, Thurso, where the same thing happens over and over.”

  13. james wilson
    September 30, 2010 at 18:39

    In some American neighborhoods, those which are near to questionable areas, high taxes are seen by the property owners as a smart way of keeping the riff-raff out. Brookline, Massachusetts, which succeeded from Boston a century ago, is very affluent, very expensive, and heavily Jewish. Taxes are, by American standards at least, astounding. They talk the relentless liberal line, of course, but have no blacks or other minorities in the town. Similar situations exist in San Francisco and other liberal enclaves.

    We too know how to talk out of both sides of our mouths at the same time. I don’t suppose anyone has noticed.

  14. October 1, 2010 at 10:15

    James Wilson, that is surely A Good Thing, not A Bad Thing?

    Gentrification or slumification are indeed self-enforcing (a sort of voluntary and spontaneous social engineering), and surely it’s good for social cohesion if a poor person can drive through a rich neighbourhood and think, “Hey, I’ll never be able to afford to live here, but at least these people are paying for my dole, school, healthcare and so on”; and if a rich person can say “Hey, my taxes may be eye watering, but at least I have world-class neighbours”?

  15. james wilson
    October 1, 2010 at 18:46

    If only slum dwellers rode through Brookline and said to themselves, lucky for me these people are paying my taxes. In our dreams.

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