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July 04, 2015



"Granted, my early retirement won't be a devastating loss to anyone" What about your readers?


I'm confused by the assertion that home ownership "diverts finance away from productive uses". This implies that there is a fixed amount of capital available in the UK economy and a lot of it is wasted by people buying existing houses from their current owners.

Yet, in the sale/ purchase of a house no capital is used (excluding transaction costs). The buyer receives a house, the seller receives the purchase price, which can be used for productive investment. In principle, this isn't any different from people buying equities in the secondary market on margin.


"Of course, the causality doesn't just run from home ownership to shonky economies, but this is suggestive of some link."

The more direct link , as I'm sure you're aware , is to the mortgage debt associated with "ownership". A nation with high rates of free-and-clear homeownership would likely be more prosperous than most.

It's been shown by several authors that debt bubbles associated with real estate booms result in the most damaging and long-lasting post-boom crashes.

I agree that the something-for-nothing gains and other gimmicks - like mortgage interest tax deductions - contribute to bubble formation and the subsequent busts. We should have policies that result in slow and steady rates of change in home purchases. A rapidly rising homeownership rate should be an obvious warning sign going forward.


I just came across this article on voxeu which is relevant to this discussion :


See the section "What causes business cycles?" for their description of the lemming-like behavior of homebuyers.


Feel guilty about your windfall? Would you like to donate it to the poor? Of course you wouldn't.

The working class can kiss my arse / I've got the foreman's job at last etc.


I am sure you are right on the economics which many people from all political viewpoints have explained at length. But worse than the economics is the immorality of all the policies of the Cabinet. I am sure they understand these arguments perfectly yet their sole aim is to cut the welfare state which actually helps people based on need, so they can subsidise land speculation by people who are well off already. It is an appalling indictment of contemporary society and political culture that this is going to be lauded as very clever and Osbournes gambit to replace Cameron.

Sordid entirely sordid.


There's an irony of course that higher overall inflation would probably have been good for the economy over the last 5 years. A crucial issue is that homeowner culture amplifies rentier culture.

We live in a world where asset price inflation and wage inflation have been disconnected. One is considered good, the other bad. One of the downfalls of economists is they prefer to pretend these things are still connected.


Whether you believe (erroneously) in loanable funds or you take a pragmatic view based on regulatory hurdles + economic conditions + commercial imperatives, there is a limit to the amount of lending banks can do in any given period.

So, in essence the stock of lending is fixed (in any given period) and if more of it goes on housing, less will go to other things.


Favorable treatment for investment income tacked onto a progressive income tax is a poor substitute for a progressive consumption tax. I presume Mr. Osborn understands this and that is precisely his reason for the measure.


"And the £400,000 is the tax-free profit I made from rising house prices."
Correct. Screw you. This is why we need land value taxation.
Higher land prices are not even a zero sum game - but negative sum, sucking money and life out of the productive economy.

Steven Clarke

I personally 100% agree with you, but I understand why public opinion differs:

* While many house-price gains are themselves 'unearned' - home-ownership is likely correlated with working, having a highish income and being nice and middle-class.

Unearned welfare benefits are likely correlated with worklessness, poverty and being one the underclass.

* The 'high house price' constituency is well represented in the media, and as you point out the more we hear from certain people, the more sympathetic we are to them.

Welfare recipients don't have any voice in the media, and are only represented on Benefits Street or Jeremy Kyle, where we are unlikely to sympathise with them

* People who gain from house price gains and inheritances vote in large numbers, those who lose out don't.

* Inheritance tax hits at a very emotional moment, where people won't be thinking in bloodless terms of economic efficiency and distribution.

There's also a strong emotional attachment to home-ownership.


Marxism destroyed.


"There's also a strong emotional attachment to home-ownership."
And yet homeownership rates have fallen, especially among the young.


"there is a limit to the amount of lending banks can do in any given period."
Er, subject to capital requirements. But other than that, no.

Steven Clarke

@Bob True. But that's most likely because they can't afford to. It might be an adaptive preference.

Also, renting Millenials like me have little political clout at the moment. The Baby Boomers have done very well out of home-ownership and windfall gains and do have said clout.


OK, so tax house price gains if you like but the fundamental problem is lack of supply, the market is dysfunctional. An old empty nester may consider downsizing - but decent small houses in acceptable areas are like hen's teeth. The price differential is fairly small - so it hardly happens. So without a proper marketplace, taxing gains seems unfair.

There is another something-for-nothing, pensions taken before the current crises were based on highly dubious, not to say fraudulent notions of worth. High time George creamed off this generous perk.

Ralph Musgrave

The large proportion of lending devoted to property purchase “.. diverts finance away from productive uses.”???

One problem with that claim is that SMEs fail to repay loans twice as often as house buyers. A business which can’t repay a loan is by definition not very productive.

Second, I know banks are incompetent in some ways, but surely the default assumption must be that they are not totally incapable of working out which types of lenders are credit worthy. And the latter fact that SMEs are not too credit worthy compared to house buyers indicates that banks do have a rough idea as to who is creditworthy.

Steven Clarke


A primary residence is exempt from Capital Gains Tax, so in that sense a home is 'unfairly' given preferential treatment over alternative forms of investment.

But I completely agree the real issue is sorting out a dysfunctional market where supply is completely unresponsive to demand. Tax measures may have a part to play but reform of the planning system will be more important (and giving locals more incentives to accept more development).


R. Werner believes that 'the problem' was brought about by the issuing of the 'wrong' type of credit. There is 'productive' and 'unproductive' credit.

“Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power - something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”


"It creates a large constituency with a vested interest in loose monetary policy and higher inflation; inflation favours home-owners but hurts renters."

I don't buy this stuff about selfish homeowners gloating over the rise in property values and looking forward to more of it. Those of us with children want them to be able to buy a home as we did. A house is for living in. I'd be quite happy if prices halved tomorrow, despite the large notional hit I'd take.


The thought occurs that Osborne's "£1m house inheritance" plan may incentivise some old people to stay on in a large property after the kids have flown the nest, rather than downsizing to that cottage by the sea.

Chris Bertram

Is it true that by this measure

"George Osborne will exacerbate all these problems by further increasing the constituency with an interest in house price inflation and in getting something for nothing." ?

I'd have thought that the effect will rather be to reduce the proportion of people able to own homes and to increase the private rented sector in which those priced out of property will be renting to the lucky inheritors. Also horrible, of course, but a different effect.


How would taxing such gains improve labour market flexibility?
Would this not discourage movement even more?

Pat Jennings

Are you coming out as a secret Tottenham fan, Chris? David Blanchflower is mis-named in your article.
Enjoyed the read and thank you as ever.

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