Brown announces taxpayer bailout of property developers

In a hardly surprising attempt at vote buying, one aspiring councillor called Gormless Brown announced today that if he were Prime Minister he would set up a £200m fund using taxpayers money to buy up new build houses from property developers.

These new build houses are apparently not selling because so many people can't afford them - after 10 years of rising taxes, low wage growth, a rampant housing bubble - and, oh yes more taxes. As a result some of the property developers are saying they won't build anymore until prices start rising again - and will meanwhile sit on their landbanks.

Gormless was heard to say that his scheme was a sure fire way of propping up the property market - in other words - preventing people discovering that their properties are actually worth some 20-40% less than they have been led to believe.

In a clever twist, Gormless said he would then partly sell the houses he had bought to the very people he has helped price out of the market - and if they have the temerity to try to buy more than 80% of their house he would tax them on the full value of the property (just to teach them not to get uppity) - a close adviser reportedly laughed and said it would "encourage" the peasants to stay loyally dependent on Gormless and his party The New Fumblers.

Thankfully, here in Noddy Land, we have real people in charge with sound economic policies that focus on long term real growth.

Should we tax propery landbanks?

Please don't worry about falling house prices.

Lower house prices are a good thing for the economy, for home owners and for first time buyers.

Lower house prices reduce the price differentials between houses - so making it easier for people to trade up when they need somewhere bigger.

Lower house prices increase disposable income by reducing mortgage payments as a share of household income.

Lower house prices (and lower rents) encourage worker mobility and consequently social mobility.

Low, stable house prices should be seen as a desirable economic and political goal.

To achieve this long term goal and to prevent another housing bubble, we need to convince people that there won't be a housing shortage in the future. The only way to do this is to increase build rates, not just for so called "affordable housing" but for all housing (since increased supply will make all houses more affordable).

Unfortunately the current lack of mortgages (which, unlike falling house prices, is a real problem) is encouraging house builders to cut back on their build programmes.

We therefore suggest the government considers taxing property landbanks to increase the build rates. This may seem counter-intuitive but consider the following.

House building companies have a combined UK landbank of over 500,000 plots with planning permission already granted - that's equivalent to 5-6 years supply at current build rates.

In our opinion, landbanks impose huge social costs because they;
1) create an inefficient market by restricting supply of development land (which is why land is seen as an illiquid asset)
2) reward speculators who buy shares in house builders to bet on rising land prices
3) may encourage owners to hold-back potential development land in anticipation of capital gains
4) slow the release of new build properties so restricting supply and inflating prices.

Landbanks also create problems for local authorities and planners since once they have granted planning approval they have to divert funds to build the required infrastructure. They may therefore feel unable to approve later yet better planning applications because of these prior commitments, even though the later applicants may be more able and willing to build faster.

The efficient way to solve market distortions is to tax the stored asset (while at the same time cutting transaction costs by abolishing taxes on land sales). Council tax should therefore be paid on every plot held with planning permission granted. This would raise £500m a year for councils for use on local infrastructure.

Developers could either:
1) build quicker (so encouraging innovation in building technology - there are some excellent modular construction techniques that many UK house builders are simply ignoring) or
2) sell excess plots to those who can make more efficient use of them, such as self-builders, housing trusts and REITs (which would encourage a wider and more liquid market in both owner-occupied homes and rented accommodation).

Is the credit crisis really nearing its end?

Oddly the Bank of England seems to be sending conflicting views on the credit crisis in one report: its quarterly financial stability report.

Released today, 30 April 2008, the report on one hand says that the credit crisis is easing and markets should gradually return to normal . On the other, it says that UK banks are facing serious losses on commercial property since values in this sector have declined by 15%. However it also points out that banks have not reflected this decline in their lending or the amount they are setting aside for potential loan losses.

Saying that this happy scenario will change, the Bank of England suggests that UK banks may have set aside £5bn to cover commercial property loan losses - equivalent to 20% of their combined annual profits.

If that's not going to keep the credit markets tight (if not closed) then fine - but who wants to bet that the markets will be so sanguine after what they have just been through?