Dean Baker hits one out of the ball park

And I\’m amazed that The Guardian of all places publishes it:

Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. The financial crisis may have been good entertainment for those who like to see huge banks collapse, but it was a sidebar. The real story was the rise and demise of the housing bubble.

Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain.


Worth reading the whole thing.

And as he says, if it wasn\’t the financial markets that caused the problem but the housing market then the action required to prevent it happening again is reform of the housing market not reform of the financial system.

In the UK that might be along the lines of an LVT, or a relaxation of planning permission rules (for it wasn\’t the value of houses that bubbled, it was the value of the right to build on a piece of land that did….the value of planning permission).

All this about FTTs, Robin Hood and reining in the greedy bankers and their bonuses is a side show. Just the opposite of Naomi Klein\’s thesis. Statists using a crisis to advance theor cause.

14 thoughts on “Dean Baker hits one out of the ball park”

  1. Surely an LVT is going to reduce the level of house prices and not slow their increase. I doubt it would prevent bubbles from forming. It might reduce the amount of a household’s income invested in property but to do this by a substantial amount I suspect the tax would have to be pretty high.

  2. While I agree the housing market is in need of reform, I am not sure sure that it’s a simple case of one not the other.

    The financial bods played their part in bringing about the crisis making debt too easily available. So did the government by allowing, indeed encouraging, the bankers to be naughty. The media also played its part by making financial illiterates think they could become property tycoons overnight.

    But the most contentious culprits, the ones least likely to get blamed, were the public who semed to collectively forget the most basic rules of money and leapt upon the property bandwagon without questioning the bollox they were being told by the banks, the government, the media and all the others.

  3. JonnyN,

    a lot of that depends how closely the LVT tracks the movement in land values. If people know that an increase in values will correspond to an increase in LVT, they’ll know there’ll be less profit to be made from housing, which should reduce the extent that people try to use it as a profit making vehicle, which should reduce the amount of money being pumped into the market, which should reduce the bubbling effect.

  4. Your suggestion to relax planning permission can be refuted with just one word: Spain.

    (Well, not convincingly, but I couldn’t resist). Baker points out the massive expansion & subsequent collapse of the construction industry. If, however, the planning regime in the UK was holding back development, we shouldn’t have that problem here. So it’s back to his other issue – collapse of demand.

  5. I think too you can’t just say it was one not the other. A well functioning financial system should be able to cope with a house price bubble.

    William’s point is a good one – the solution to his conundrum might be that we didn’t have much of a housing bubble in the UK? Demand really did rise a lot, and now it’s fallen a bit?

  6. You could take a long view that all money eventually becomes someone’s income. Simplify the tax system massively and include any increase in value when you sell in your income figure.(though I’m not sure what to do if you make a loss…)

    I think that would depress the market for mortgage equity withdrawal which has underpinned the house price bubble.

    You’d not pay much, if anything, as you move up the ladder/have a family but you will if you downsize or move somewhere cheaper. If you don’t move you don’t pay.

  7. The amazement that The Guardian printed this is entirely misplaced as this paper has been adhering to a very strong line on UK housing bubble economics for some time including a full page encomium on LVT from Ashley Seager up to yesterday’s very fair evaluation of the British obsession with property by Larry Elliott,concluding that the necessary action on the housing market by means of stiff property taxes etc would be electoral suicide,so stand by for the next bubble in 2016.
    The Guardian has had a good war on this front.

  8. At least in the United States, there is an excellent natural experiment. Texas has relatively high land taxes; Florida & California have low land taxes. Florida and California bubbled; Texas did not.

    Dean Baker has also re-clarified that the financial crisis was caused *only* by Bear-Stearns inability to get overnight repo.

  9. @Les Cargill,
    Interesting comparative figures.American followers of land tax guru ,Henry George,always argue that the Lincoln Institute figures for Texas,for instance of land values accounting for less than 5% of a typical house selling-price,are wildly inaccurate.Any comments?

  10. DBC Reed:

    I don’t know anything about such things in Texas except that a friend of mine is a builder in the vicinity of Austin. He owns various pieces of land in his vicinity, where the usual building lot (maybe as a matter of law) is 3 acres: such a parcel sells for about $150,000. This past week, he
    sold ($840,000) the home in which he’s now living
    and another 3-acre lot nearby, on which he’ll be building for a customer something on the order of $1.2-1.35M; that would have the land valued at
    12 to 18% of the total. Of course, the land on which closer-together homes are built may well have a lower percentage relationship (a half-acre lot might be close to being only 5% of a home’s value).

    From what I understand, the price of land in Texas (much of which is low-priced when compared with other places) is somewhat enhanced by state laws that limit the rights of creditors; my understanding is that one can’t lose one’s “homestead” on account of any other debts than the primary mortgage and delinquent taxes
    (state and federal).

  11. @Les Cargill. Problem is Texas doesn’t use LVT but does have a ferocious 2.0+% tax on total value of house (up above 3.0% in places).

    @ Gene Berman.What kind of a mark up is your builder friend going to make on building $1 million houses on $ 150k plots? Plenty big enough!

  12. JonnyN, said…”LVT is going to reduce the level of house prices and not slow their increase.”

    It will lower house prices, which is a very good thing. It prevents booms and busts. The 1929 and current crashes are land fuelled.

    There are various levels of LVT. The full one is no: income tax, tax on savings, capital gains tax, inheritance tax. LVT is superb for funding infrastructure. The Jubilee Line extension in London cost £3.4 billion, yet the property values (land) around the line rose by £14 billion – tax free. That community investment in infrastructure can be reclaimed by introducing LVT as the value soaked into the ground as land values.

    We do not need boom and busts, high house (land) prices and we need top class infrastructure like metros in all major cities. LVT can fund a Birmingham or Manchester underground metro and extend the Liverpool underground without any pain at all.

    The UK HAS to implement LVT to safeguard its future.

  13. The Remittance Man,

    You must look at the symptoms not the cause. The cause was land speculation. Land prices rose to silly levels and debt after debt was poured into land. House are LAND, as they are on land. The bricks are pretty well worthless.

    Click on my name and the web site gives a graph of land prices.

    The Stalinist planning system we have did not help at all. Only 7.5% of the UK land mass is settled. The country has a land surplus despite propaganda stating otherwise.

    LVT does not effect business behaviour – it stays the same. Land can still be owned. I always hear we have the right to own land. Well the state owns the land an we have “title”. The state can take it back and does at times in emergencies.

    So we have the right to own land, but the right to build a house where we want to live on this land.
    A nice quality house in the local vernacular in a clump of trees in the corner of field will be rejected by the Stalinist planners.

    OK relax planning and allow people to live where they want to – barring national parks, etc. LVT can fund rapid-transit rail. The Metropolitan Line populated the fields around north west London – with the rail companies making most profit in increased land values.

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