Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

Infinite Evidence

Somebody over at HPC asked me what impact falling house prices would have on the Retail Price Index, so I had to gen up on this before giving an answer. The first port of call was to look up what’s in the Retail Price Index ‘shopping basket’, which the NSO explain here.

It shows (page 3) that over the past 24 years, the share of ‘housing’ in the RPI shopping basket has increased as follows:
1987 – 15.7%
1992 – 17.2%
1997 – 18.6%
2002 – 19.9%
2007 – 23.8%
2011 – 23.8%

There is a big jump in 1997 because “Depreciation costs were added to the housing group in 1995” (I dunno why they didn’t rework the old figures) and the only blip is in 2008 when the share was 25.4%. ‘Housing’ costs include (broadly speaking) rent, average mortgage interest payments, depreciation, Council Tax/rates, water and other charges, repairs and maintenance and DIY materials There is a separate category for ‘Household services’ which has also increased from 4.4% to 6.3%

Ho hum, what is the reason for this large increase in less than quarter of a century?

As I’ve mentioned before, Henry George (further developing Ricardo’s Theory of Rent, which in turn was based on James Anderson’s theory of agricultural rents) observed that land rents increase slightly faster than GDP growth generally, which is a bit counter-intuitive, because the share of the economy which we traditionally see as land-based (i.e. agriculture) is constantly declining as a share of GDP. The gimmick here is that land is fixed in supply, so as gross output rises and goods become cheaper and more abundant, the balancing figure goes to the least elastic factor, i.e. land.

Of course, while agriculture can be carried out quite happily without much infrastructure, a modern economy needs lots of ‘infrastructure’ and the areas where there is sufficient infrastructure to sustain it are of necessity quite small (the UK has plenty of physical land, that is not the issue here); more infrastructure attracts more people and more activity, which in turn attracts more infrastructure, which in turn attracts more people and more activity and so on (agglomeration). The lucky people who happened to ‘own’ the land on which all this takes place are now quids in, of course.

I’ve submitted other statistical evidence to support this. While house prices around the UK are broadly proportional to local average wages, the house price-to-wage ratio is higher where wages are higher, i.e. where the economy is more advanced, a larger share of local GDP goes in rent.

Problem is, as soon as you mention Ricardo or Henry George, the Homeys and Faux Lib’s either stick their fingers in their ears and sing la-la-la or subject you to ad hominem attacks. And as Robin Smith never tires of pointing out, I’m probably wasting my time with ‘infinite evidence’ because people are so conditioned to believe that it is acceptable to tax incomes but not to tax land values, that they will simply deny the validity or relevance of any evidence which I provide to support the opposite conclusion.

The bitter irony is that arch Home-Owner-Ists like Kirsty Allsop know perfectly well that all this is true, which she expresses in the mantra “Location, location, location”, i.e. the value of any plot of land is dictated by everything else that goes on in the vicinity of that plot, and not the efforts of the owner of the plot.*

Her advice is always to buy in an “up and coming area” where e.g. somebody else is going to pay (probably out of your income tax) for a new railway station to be opened in the future, on the assumption that you can then make a windfall gain by having bought a plot there beforehand (and hopefully get more back in windfall gain than you had to pay in income tax). My advice is that it would be better not to tax incomes in the first place and just to tax the rental value of the land instead.

* The occupant of any plot of land can have some small impact on the value of neighbouring plots (whereby pushing them down is easier than pushing them up) but not on the value of the plot he occupies (short of polluting it, but even that does not affect the location value, it’s merely a negative improvement).

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