Debate Magazine

Absolute and Relative Values

Posted on the 09 December 2018 by Markwadsworth @Mark_Wadsworth

Example One - Ted Heath. Having stoked the house price bubble in the early 1970s (the top of an eighteen year cycle), UK governments then had to spend five years deflating the house price bubble, but to avoid people noticing so much, what they did was create massive wage and price inflation; the correspondingly high interest rates kept house prices at the same absolute nominal level, but after five years wages (and all other prices) had doubled, so in relative terms, house prices had halved.
(Let's not get bogged down in precise dates and amounts, it is the principle that matters.)
Example Two - people say a weakness of the Council Tax system is that it is based on 1991 values; in some areas nominal house prices have 'only' increased threefold since then, in others they have increased tenfold. Which leads people to say that there should be a revaluation.
As a matter of fact, because of the way the Council Tax system operates mathematically, a full revaluation to 2018 values would make little difference. This is because each local council has to collect a certain arbitrary £ amount. So let's imagine an area where all homes are worth roughly the same amount (a suburb consisting of three-bed semi-detached houses). In that area, the tax per home is simply the total £ amount divided by the number of homes. It does not matter whether you use 1991 value of £80,000 each or 2018 value of £320,000 each.
Clearly, there will be less valuable and more valuable homes in any local council area, but it is only relative values that matter. So if all the selling price of all the homes (small/cheap, medium and large/expensive) has increased by a similar percentage since 1991, the final bills will be much the same.
Example Three - some time at the start of the Tory-Lib Dem coalition in 2010, a senior Tory (I can't track down exactly which one) said that one of their goals for government was to ensure that house prices would increase slower than wages, i.e. that in relative terms, housing would become more affordable.
Example Four - I had a heated discussion with another Georgist recently (he has posting rights on this blog so is free to put his side of the argument). He said that 'we' want to keep house prices (i.e. land prices) as low as possible. For sure we do, but my point was that to placate the Homeys, we must make the point that absolute house prices would not fall if the tax shift were done properly.
If absolute house prices stay the same and disposable incomes go up (so houses are much cheaper in relative terms), then everybody's reasonably happy. It must be clear that selling prices are largely determined by credit availability i.e. banks willingness to lend and borrowers willingness to borrow i.e. borrower's ability to repay mortgages. As first time buyer disposable incomes would be significantly higher (the LVT on the homes they buy would be half as much as the reduction in taxes on their output and earnings, not to mention the boost to the economy), the tax shift can be easily be tweaked so that house prices do not fall at all.
We ended up agreeing to disagree, but I like writing things down for posterity.


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