Let’s keep the issue simple so that it does not become too involved

The Bank of England is making a great mistake in clamping down on borrowing so late in the economic cycle when it should really have been addressed far earlier. Their proposal for mortgage ‘stress testing’ is badly thought out and will inevitably be subject to the law of unforeseen consequences by penalising buyers in poorer areas of the country

Firstly the BOE dropped interest rates to artificially unrealistic levels and held them in this depressed state for a number of years, whilst ignoring the impact on savers, who were held out to dry

Secondly the BOE imposed no controls (stress testing) early on at the start of the economic cycle on mortgage affordability and took no account of interest rates inevitably returning to their mean. They now seem surprised that anyone who could, took out unaffordable mortgages, at unrealistic long term interest rates, on unrestricted multiples of income. What did the BOE really think would happen with the introduction of cheap money – one doesn’t really need a crystal ball to predict the outcome?

Now both the BOE and politicians are caught in a dichotomy between economic and social considerations, because interest rates cannot be raised without the inevitable social fallout when mortgage repayments rise and existing home owners cannot afford their repayments. We are told that a 0.5% rise in rates will cause problems for 750k mortgagees and no politician likes the prospect of political suicide such as this

Nevertheless this is the present reality, so what is to be done?

The simple facts are

  • Any housing bubble will be driven by London and the South East in the main, although there are other pockets throughout the country as well
  • Other areas in the county are either stagnant or have falling house prices

The question therefore is how to curb one without affecting the other.

With this in mind, we need to ask what element under state control affects housing irrespective of location and remains pliable. Surely the answer is the rating system and by controlling the rates it is surely remarkably simple to influence the housing market, as well as raising money from wealthy areas to support those that are less fortunate

The current rates system has a cap at the highest band H, which equated to a house price of £320k as at April 1991 (or approximately an average of £1.05m today)

Therefore by definition anyone with a house valued at more than band H is getting a ‘free ride’ by not paying the same proportion of their house value as those lower down the scale; furthermore, the greater the house value the more inequitable the whole situation becomes

Possible Solution

Adopting the following simple approach would allow the weighting to be in favour of those areas in the country where house process have stagnated whilst potentially curbing possible housing bubbles in areas such as London

Change the rating system to be a single percentage for all domestic properties (say – 0.3%) over the entire country and use the latest Land Registry purchase as the base value of the property

  • Easy to implement & collect
  • Simple to change the percentage if necessary
  • Automatic adjustment every year according to Land Registry records – no challenge to RV possible
  • Accommodates asset rich/cash poor who have owned their house for many years
  • Everyone pays the same percentage on the last purchase price of their house

Naturally there will be objections but on balance this is probbaly the simplest and fairest solution to a difficult issue. After all if one can afford to purchase an expensive house then you should be able to cover the running costs; alternatively don't buy the property, it really is very simple

Reference

Mansion Tax Acceptable Idea With Shambolic Presentation

Tags: , | Categories: Bank of England | UK Government
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