Category Archives: 1974

Housing Prices and the Attack on Speculators

After reading a recent piece by Ann Pettifor titled “House Prices & Global Wall of Borrowed Money” dated January 18, 2023, we were struck by a point that was made to explain the increase in housing prices.  Pettifor says:

“As I wrote back in 2018: House prices have been blasted into the stratosphere, not by a shortage of supply, but by the excess of a potent propellant – finance.”

According to Peittifor, it is this “propellant” that, once withdrawn, should generate a decline in prices.

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Pettifor’s citation of The Guardian article from 2018 is noteworthy in one of the solutions to rising home prices that is proposed:

“The best way to do this is through the tax system. First for consideration should be a property speculation tax (PST), as in Germany.”

Leaving aside the Panama Papers showing all the different organizations and people that create shell companies for the sole purpose of getting around the tax system, a look at the German House Price Index after Pettifor’s 2018 article, as provided by Trading Economics (https://tradingeconomics.com/germany/housing-index), we can see that there is little material change in the trajectory in the price of homes. The period of 2018 is indicated by the red arrow on the chart below.  After 2019, house prices appear to rise at an accelerated pace.

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Was there a failure in the PST? Should the Germans have been more aggressive to stem the tide of speculation?  We don’t know. However, what we do know is that previous attempts at curbing the rapid rise in real estate prices, aimed specifically at speculators, from Singapore to the United States, have all failed.

Let’s cover a few of the attempts at curbing speculation from a very interesting article titled “Special Capital and Real Estate Windfall Taxes (SCREWTS) in CANZEUS: A Phenomenon.” by Donald G. Hagman and Dean Misczynski published in December 1975.  The key takeaways are:

  1. Australia: The Land Development Contribution Act, April 8, 1970.
        1. “But land prices kept soaring…”
        2. “The Liberal-Country Government repealed its own tax…”
  2. Vermont: The Tax on Gains from the Sale or Exchange of Lands, May 1, 1973.
        1. “If the theory is correct, land prices should increase less rapid…”
        2. “The reduction is apparently mostly due to to the recessed economy rather than to any changes in the law.” This shows how windfall taxes mark the top in speculative environments and generate less revenue that initially anticipated and don’t stop the speculation as was intended.
  3. New Zealand: The Property Speculation Tax Act of 1973
        1. “Specifically aimed at curbing speculation in land…”
        2. “But that tax is so focused on ‘speculators’ that relatively few transactions are actually caught.”
  4. Canada: The Land Speculation Tax Act, 1974
        1. Spiraling land prices blamed on foreign speculators prompted the tax.
        2. Thought to generate $25 million in the first year, $55,450 in the first four months.

By all appearances, the legislative efforts to reduce land speculation has failed.  in addition, it is noted by Hagman and Misczynski that “these taxes have largely been imposed in turbulent, initially booming land markets, under dynamic circumstances that complicate realistic analysis and render all conclusions moot.”

In 2013, Singapore, after the doubling in property prices:

“…added measures to curb speculative buying - Singaporeans have to pay additional tax when they buy their second homes. Three years ago, the government modified loan schemes for select housing projects and asked foreigners and companies buying properties to pay additional taxes.”

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The red circle in the Price Index of HDB Resale Flats highlights when the tax was added.  As with the history of windfall taxes, they generally occur at a natural peak in the market.  The problem with this is that it is thought that the tax alone is the reason for the decline in prices.  Additionally, once the decline arrives it is realized that there are insurmountable losses in the economy rendering it more unlikely that those who were supposed to benefit from the tax legislation can’t due to their inability to qualify for new stricter loan standards, caused by the decline.

To better understand the role of government in the effort to address the needs to the public, an important step is understanding of past failures.  Too often, strategies are devised in reaction to public outcry and once implement at significant cost, are retracted meekly and hardly with as much pomp. Market forces are out of the control of government and even when the government thinks it is in control a black market or workaround is devised.  

Critical Points

  • Tax schemes are already circumvented by those who can afford to hire the experts (big accountants and consulting firms).  This leaves only those who can’t afford to pay experts to either break the tax law or become the primary targets of the law.
  • Government isn’t the problem, but it isn’t the solution on these challenging housing issues.
  • Windfall taxes are usually instituted at the top in the market.
  • When windfall taxes aren’t at the top in the market, they show little or no effect on the trajectory of the price increase that follows.
  • A person unable to afford an overpriced property is more likely to get a loan from a bank in a booming market (high prices) than the same person in a declining market (low prices).
  • Markets work in spite of the government, not because of the government.

Sources:

The History of Mall REITs

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