A solution to the asset rich, cash poor problem

This is something I wrote last year, but didn’t publish. I just saw a tweet to which it seems relevant, so with some minor changes I’m publishing it here now. On rereading, I feel it deserves a more thorough rewrite, but I think the central idea, a revenue neutral, non market distorting change to the operation of the Land Registry to allow more efficient property taxation is a good one.  Happy to discuss further.

It’s easy to argue for property to be more heavily taxed; it will lead to existing property being used more efficiently, and since richer people proportionately spend more on property, such taxes are progressive.  But various tax breaks and other encouragements to invest in property are justified as a way to ‘get Britain building’, and with new supply still needed, and without a relaxation of other supply constraints, the positive effect on net supply of better use of existing property may be outweighed by a discouragement to new build.

There is also the problem of the perceived unfairness of those who are ‘asset rich, cash poor’ being forced by increased property taxes to sell up, and move away to a less attractive area, severing all their local ties and friendships.  Pro market economists can say that’s how markets work, and that interfering with them eventually leads to bigger problems, but they should also ask why market forces cannot also create an efficient way for the value of a property being taxed to be used as collateral for a loan, whereby a property owner’s decision to move, if they have to, is deferred to a time more of their choosing, at which point the loan could be paid off.

The idea being put forward here would be to have a simple check box on any form for paying property taxes – in the UK this means currently Council Tax paid to local authorities – for the tax payer to pay on account, with the amount of the liability to be secured against a Land Registry charge on the property.  When the property was sold, any such amounts, with interest added at rate appropriate to the low risk of the loan, would be recovered by the government. Meanwhile, the government could borrow and the same rate against the claims in its favour, and pass this to the local authority which would normally have received the tax directly.  It would be possible here to go into further details, such as how the appropriate interest rates would be established, but the mechanics would not be difficult by modern standards, and with government central to the process, there need be no anxiety that the financial engineering would run out of control.

It would be much more satisfactory than “equity release”, which is what market forces have been able to deliver to date.   Why have market forces not been at efficient, what could be done about it, and what would the impact be on the housing crisis?

There are two sources of inefficiency in current arrangements.  First the procedures for registering charges on properties have evolved over time, with no reason why they should be as flexible as required by this proposal, and also, before modern information systems, not actually feasible.  Second, financial service providers have come to expect high margins from new products, rather than develop simple, easy to use services such as suggested here.  It is possible to blame governments for creating the environment in which such business models work, but for the situation to change, it’s reasonable to expect government to take the lead.  

This proposal defines a series of government transactions which could be almost entirely automated as part of the Treasury function of the UK Treasury.  The costs would be minimal, and if the rate at which outstanding claims were increased was set above the government borrowing costs, the net cost could be zero.

Behavioural Impact – How would tax payers, government and the financial sector respond?

In the first instance, it is worth asking how the asset rich, cash poor owners of valuable properties would respond.  For them, an increasing government claim against them would still be an economic signal that they should at some point move somewhere smaller – or “downsize in situ”, renting out some of the space in their house, so also achieving a more efficient allocation of housing.  But it would do so far less brutally than requiring an immediate sale of assets, taking out an equity release, or selling up the property.  It would soften the immediate impact of property taxes in achieving more efficient use of the housing stock, but the concern it addresses is real, and the proposal would be a reasonable part of a package of moves towards higher annual property prices.

Non ‘cash poor’ tax payers might also wish to take advantage of such an option.  In the existing example of a similar system operating in Denmark – see footnote –  the option is restricted to tax payers over 65, and limited to a single property, but I am not sure that this is necessary.  The restriction to a single property implies that this option is a sort of special concession, which needs to be limited, rather than a contract, and a market price, between the tax payer and the government.  Many property owners would take up this option, since it would be a cheaper way of borrowing than available from the private sector.  There would probably be some concerns expressed about easing credit in the property sector, but since the amount such debt could increase would be limited to the amount of Council tax, this should not be a major concern.

For government there would be the immediate attraction of making the raising of Council Tax more palatable. Against that there would be the costs, financial and organisational, of introducing a new system.  Of these organisational costs, the greatest might well be the changes it would require of the Land Registry, to allow frequent small changes to the charges on properties which it tracks, and for this information to be made easily accessible to other parties with an interest in properties.  On the other hand, there is a danger that the government would see this as a money making opportunity, by increasing outstanding claims are a margin over its cost of borrowing such that the operations more than covered costs.  The Land Registry itself an example of a profitable arm of government, but its proposed privatisation is controversial; many would argue that such well-defined government agencies should be run primarily to serve the public.

Some in the private financial sector, we suspect, would protest that this was government encroaching on the equity release market. However, as argued above, this scope of this encroachment is limited, and if it led to the radical streamlining of Land Registry operations, it should also help the private financial sector deliver better products.

  1. PROPERTY TAXES AND VALUATION IN DENMARK, Anders Muller, OECD Seminar about Property Tax Reforms and Valuation, 2000. http://www.andywightman.com/docs/muller.pdf

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