Tax future house price bubbles, Bank of England tells Treasury

Property taxes would help safeguard economy, says MPC's Adam Posen

Economics Editor,Sean O'Grady
Wednesday 02 December 2009 01:00
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A leading Bank of England policymaker has called on the Government to raise taxes to prevent housing booms in the future.

Adam Posen, an independent member of the Bank's Monetary Policy Committee, said in a speech yesterday that the authorities should seek to limit house price bubbles because of the damage they inflict on the rest of the economy when they burst. He also suggested that property speculators and second home owners be subject to additional restraints.

Adam Posen, an American economist who joined the MPC this year, said: "Real estate bubbles tend to have much higher real economic costs than equity bubbles, perhaps because they involve illiquid collateral and local spillover effects."

Mr Posen suggested that real estate taxes, which include stamp duty and capital gains on properties apart from a main residential home, could be used as "automatic stabilisers" – rising during a boom but falling in a slump.

Mr Posen proposed: "Something modest, without any large implications for tax revenue over the cycle... It would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly, a simple blunt instrument targeted to lean against the wind in real estate prices in an automatic fashion."

Altering loan-to-value ratios and income multiple rules in the mortgage market could have a similar effect. Mr Posen added: "One could be more ambitious and complicate matters by taking into account second houses, speculative purchases, the amount of time owned before sale, and so on."

Mr Posen's intervention comes as evidence builds that the property market could be stabilising, if only for now.

The Nationwide said yesterday that house prices rose by 0.5 per cent in November, the same as in October, bringing the annual rate of house price inflation to 2.7 per cent, up from 2 per cent in the year to October.

It was the seventh successive monthly rise, and left average house prices only about 12 per cent off their October 2007 peaks. Even so, the rate of increase is now stabilising compared to the dramatic bounce back in the summer, and few expect it to pick up again in the near future. The average British home is worth £162,764.

Martin Gahbauer, the chief economist at Nationwide, put the improvement down to Britain's flexible labour market, as fewer job losses meant that the expected flood of repossessed homes had not materialised.

"The outlook for the housing market remains crucially dependent on labour market conditions," he said. "A part of the explanation for why unemployment has not risen to the levels implied by the recession's depth is that in many cases employers have opted to reduce working hours and pay rather than make employees redundant. Whether this strategy is sustainable depends on how quickly the economy recovers."

Some economists see the rise in prices as simply another example of asset price inflation resulting from the Bank of England's policy of quantitative easing – injecting £200bn of spending power directly into the economy.

Another factor that pushed prices higher is a relatively tight supply of desirable properties, as sellers are unwilling to crystallise losses and some find they cannot move because of lack of equity or mortgage finance. Opportunistic cash buyers, a revival in buy-to-let and some foreign interest in properties at the top end of the London market have also boosted values.

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