Debate Magazine

Killer Arguments Against LVT, Not (354)

Posted on the 19 February 2015 by Markwadsworth @Mark_Wadsworth

One genuine problem is that we LVTers argue and bicker between ourselves too much over relatively minor matters (while agreeing on the broader principles). I pointed out that in the grander scheme of things and at current price and rent levels, the site premium of most homes is in the range of 3% - 3.5% of its selling price.
Physiocrat: Why is it even necessary to think about selling prices at all? There is so much rental evidence on the property websites.
One of the things you will notice is that there is a "floor" to these rentals - for example, you will not find a three-bed semi to rent anywhere for less than around £500 pcm. As a first approximation, it could be assumed that the land value in these instances, which covers a substantial area of the scabbier parts of the UK, is zero.
This assumption also does away with the argument for homestead allowances and other complications - the allowance is built into the valuation on the basis that the land value is too small to measure or be worth collecting.

In principle he is quite correct and I do not disagree (apart from the word 'scabbiest'), but let's look at the numbers:
The purist approach
A quick search on Zoopla tells us that you the rent for a three-bed semi in one of the cheapest areas (TS6) is indeed about £6,000 a year gross (£450 a month plus council tax).
Knock off £4,000 a year actual costs (amortisation of bricks and mortar, repairs, insurance etc) and the site premium here is about £2,000.
The rough and ready approach
Three-bed semis in TS6 sell for as little as £70,000 - £75,000.
£70,000 x 3.5% = £2,450 site premium.
I rest my case.
Clearly, there must be a few little houses in the most run-down streets in the areas with the lowest wages and highest unemployment where the site premium is zero or close to zero, but that's only a few thousand houses out of millions and not worth worrying about. Such houses sell for £20,000 or something, and 3.5% of not much is next to nothing. £700 a year is the marginal cost of pavement repairs, refuse collection and street lighting if nothing else.
The other point is that when somebody buys an existing home, what he is paying for is future profits i.e. gross rental value minus running costs i.e. the 'site premium'.
Therefore homes trade for a multiple of their site premium and that multiple is surprisingly similar for all homes except the bottom one or two percentiles and the top one or two per centiles. But who cares? You can't base a sensible tax system on outliers; you start in the middle and work outwards.

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