Saturday, 3 April 2010

The government keeps spending our taxes to inflate house prices

I am yet to buy a house as I believe that house prices are still overvalued. I try and demonstrate this monthly with the house affordability ratios that I present. This current government however seems intent on using our taxes to prop up this property market bubble. This offends me because my (and your) taxes are being used against me to keep me out of the market and also as an electioneering tool.

Let’s discuss a couple of examples.

My first example is last week’s budget. The chancellor decided that first home buyers would not pay stamp duty on house purchases up to £250,000. I’m not against this concept in principle as I’m one of the first to suggest that there shouldn’t be stamp duty on property purchases at all. This though is not because I want house prices to be propped up but because we should be encouraging social mobility. Why? Well if global warming really is occurring we should be looking to reduce emissions. At the very least we should be trying to save our natural resources for the future generations. One way is to reduce travel which could be achieved by making it easy and low cost to move house allowing us all to live closer to our places of work.

What I am however against is why I think the chancellor abolished the stamp duty. This in my opinion was clearly done to keep first home buyers entering the market in an attempt to keep property prices rising as well as attempting to buy an election by getting these very first home buyers to vote labour as they think he is helping them so much. I tell you if the bubble does burst and I was one of these first time buyers I wouldn’t be best pleased knowing I’d been used to keep the house price inflation going while at the same time understanding that I’d been saddled with a life time of debt by overpaying for an asset.

I also have an issue with how the chancellor paid for this. He has placed a stamp duty of 5% on those buying properties over £1 million. So if I’m buying a million pound house (don’t worry its anecdotal I’m not that rich) I need to find £50,000 to move from one house to another before I even think about removal fees, conveyance fees and estate agents fees. All this is doing is forcing those with large houses to stay where they are and drive (or worse fly) half way around the country. I’m with Merryn Somerset Webb who suggested that all stamp duty on houses should be abolished and instead replaced with capital gains on the sale of property. That way whether you move each year or move once every 10 years you are not overly disadvantaged.

My second example is that The Times this week revealed that our taxes are not only being used to pay the interest payments for those reckless people who over leveraged themselves and have then landed in financial difficulties but also to pay down the principle on many of the loans. These in my opinion are people who bought property using a mortgage without first creating themselves an emergency fund to allow for eventualities such as periods of unemployment. The article states that the ‘Chancellor extended the Governments mortgage rescue scheme for another 6 months at a fixed rate of 6.08%’ however ‘about a third of homeowners are on a standard variable rate and 15% are on tracker deals. The average interest rates on these mortgages are only 4.1% and 3.65%.’ This means the government will overpay on the mortgages by as much as £280 per month. That’s your and my taxes we’re talking about. The Department for Work and Pensions reply. It does not keep ‘“robust figures” of the interest rates payable by the 220,000 claimants’.

In my opinion what should have happened? If we were in a free market economy many of these people would have been repossessed. Now I don’t wish that on anyone but it would at least discourage moral hazard in the future. All these people have learnt is that if you get into financial difficulties you go to the government cap in hand. If they were repossessed then these properties would have come back onto the market. Maybe the laws of supply and demand may have then been able to operate. Excess supply may have resulted in reduced house prices. Of course that wouldn’t win an election though would it.

As always DYOR.


  1. Moral Hazard indeed. Tempted to buy, buy a new car go on a world cruise and quit my job. Would be a damn site better than this depressing state, watching my savings fall, my tazes being abused and prices rise. Really hate this situation.

    Good blog by the way!

  2. Shutthedailymail11 May 2010 at 20:14

    This is all done to keep "money" intact: most savings are in building societes which require the property they have lent on to have a value. In other words, to maintain the very existence of the savings you are so proud of borrowers cannot be allowed to default. Capitalism itself requires growth or inflation or it has no point. Buy yourself an acre of ground and get your hands dirty rather than sitting at a desk complaining.

  3. Hi Shutthedailymail

    Thanks for the comment and clearly a very different opinion to mine. I personally don't believe that governments should distort markets.

    You say that borrowers can't be allowed to default. So government are themselves borrowing to bail out the borrowers. When the government defaults who is going to bail them out?

    Alternatively if we were to implement your suggestion of allowing nobody to default then clearly very strict rules would have to be implemented otherwise don't we just have moral hazard everywhere?

  4. Shutthedailymail11 May 2010 at 21:54

    What I was trying to get across was your failure to see that your stated aim of early retirement (around 40?) is simply to put you on someones back (prseumably cutting sugar cane or moulding plastic bottles) while you do nothing. What proportion of the population do you see doing that? Your search for "yield" has been part of the problem: there are limits to growth: get used to subsistence farming.

  5. @Shutthedailymail

    Thanks for the reply.

    I'm targeting early 40's. I look at it that I am bringing my ability to work forward as much much as possible and adding extra value to society now to help me 'retire' early. This means that I am expending extra energy now which will then be offset by that equivalent extra energy from somebody else tomorrow. Future generations deserve a job also. I could choose to work 40 hours a week like the majority of the population however I choose to work over 60 hours allowing me to bring forward my retirement.

    I think one bit of my strategy that you may have missed though is that for me retirement is stopping all activity. IMO that's the way to early death. For me retirement is work becomes optional. This means I have choices such as:
    - if I'm enjoying the current job then I can keep doing it
    - if I'm not enjoying it I can do something else and I have the option of accepting less salary
    - if I'm made redundant I don't have to depend on the state (which is somebody elses labour and they deserve the fruits of that labour rather than me taking it)
    - if I become ill I don't have to depend on the state
    - I could stop work completely and instead do charity work somewhere in the world which would be still adding value to society.

  6. Note for those following the above discussion it reconvenes over here