1. Adam S. Posen, Research Staff, posted on www.iie.com
2. Bank of England names Adam Posen as new MPC member, The Telegraph, 16 June 2009, posted on www.telegraph.co.uk
3. HM Treasury, Facing global challenges: Supporting people through difficult times, Pre-Budget Report, Cm 7484, London, The Stationery Office, November 2008, p 177
4. Ian Abley, Predicting the future of British house building, 10 November 2009, posted here
5. Brian Green, House building looks set for growth in 2010, 19 November 2009, Brickonomics
6. HM Treasury, Facing global challenges: Supporting people through difficult times, Pre-Budget Report, Cm 7484, London, The Stationery Office, November 2008, p 94
7. University of Sheffield, Department of Town and Regional Planning, and The Halcrow Group, Valuing Planning Obligations in England - Final Report, Wetherby, Communities and Local Government Publications, May 2006, p 43
8. HM Treasury, Facing global challenges: Supporting people through difficult times, Pre-Budget Report, Cm 7484, London, The Stationery Office, November 2008, p 3
9. Ibid, Chart 1.1, p 11
10. Ibid, p 199
11. Bank of England, News Release - Finding the Right Tool for Dealing with Asset Price Booms: Speech by Adam Posen , London, Bank of England, 1 December 2009
12. Adam Posen, Finding the Right Tool for Dealing with Asset Price Booms: Speech to the MPR Monetary Policy and the Markets Conference, London, Bank of England, 1 December 2009, p 2
13. Ibid, p 11
14. Ibid, p 5
15. Ibid, p 11
16. Edmund Conway and Angela Monaghan, Posen calls for 'bubble tax' on homes, The Telegraph, 1 December 2009, posted on www.telegraph.co.uk
17. Adam Posen, Finding the Right Tool for Dealing with Asset Price Booms: Speech to the MPR Monetary Policy and the Markets Conference, London, Bank of England, 1 December 2009, p 12
18. David Blanchflower, Wrong on the way down and up, The Economics Column, New Statesman, 23 November 2009, p 21
19. Ian Abley, Predicting the future of British house building, 10 November 2009, posted here
Adam Posen's desperate idea for the Chancellor
Adam Posen
Adam S. Posen is a senior fellow at the Peter G. Peterson Institute
for International Economics, a private, nonprofit, nonpartisan research
institution devoted to the study of international economic policy. He is an
American expert on European and Japanese political economy, central banking
issues, and the resolution of financial crises. (1) In June 2009 Posen was
parachuted in to assist the Monetary Policy Committee of the Bank of England,
in an apointment by Chancellor of the Exchequer Alastair Darling that runs
until September 2012. (2) Darling has been at the Treasury since June 2007, and
has managed the bursting of the housing bubble. He hopes to be returned to
office after the next general election early in 2010, assisted by popular
housing market reinflation.
Darling has lost tax revenue from negotiations over "planning gain" since Britain's house building activity has halved. Just over 200,000 homes were built in 2007. In 2008 the Treasury recognised that:
'Private housing construction orders fell 53 per cent on a year earlier, having been particularly hit by the effects of reduced supply of mortgage finance and falling house prices on activity.' (3)
100,000 homes are likely to be built this year, (4) and some analysts are beginning to suspect that a low level of production may persist for some time. Brian Green has dared to say that '... the chances are that completions on an annual basis may drift below the 100,000 mark before rising towards the end of next year.' (5) I think production will not rise.
The loss of tax revenue from "planning gain" negotiations with developers via the planning system will be a persistent factor for the Treasury. No doubt Darling wants to build more housing each year, and extract more "planning gain". He probably believes that:
'Government is committed to promoting the long-term stability of the housing market and meeting the long term challenge of increasing the housing supply, including through releasing more public sector land for housing, while providing support to homeowners through these difficult times.' (6)
Alastair Darling
Darling can't force new house building from the private
sector developers, who share his interest in "planning gain". He can't easily
afford to pay for very much more new housing through Registered Social
Landlords and the negligable public sector. He knows that the failure to build
only serves to strengthen his effort to reinflate the housing market. He will
not like the political consequences of building so few homes every year, but he
would like the housing market to deflate even less. He hoped in 2008 that
renewed house price inflation would revive the ability of developers to realise
"planning gain", with some of it recovered by government.
The idea of "planning gain" is a consequence of a new home costing more than an existing one. Not an obvious state of affairs when a new car or a new pair of trousers always lose value when they are used, unless they have some value other than their utility. Every new home built enters the second-hand home market. If the cost of management from land acquisition through building to sale, the cost of the land, and the cost of constructing that new home is less than sale price into the existing housing market, the developer is seen to have gained by the planning approval. It has become customary for developers to negotiate with local and regional planning departments to pay a share of the value of the benefit of planning approval back to the public body awarding the approvals. This is formalised in a Section 106 agreement, or a "planning obligation" on the part of the developer. Not all agreed obligations are actually fulfilled, of course, because the planned development may not go ahead, but the vast majority do proceed and are honoured.
Figures are not readily available, but Communities and Local Government have said that '... using a range of estimates the total value of planning obligations agreed in 2003/04 lies between £1.5bn and £2.5bn.' (7) If 80% of Section 106 agreements end in a payment from developers that public share of "planning gain" would be between £1.2 and £2.0 billion.
That is the CLG range for England alone. In that year 176,080 homes were built in Britain, with 143,960 of those in England. There may be differences in "planning gain" agreements in Wales and Scotland. Also, only homes built by private sector developers tend to require such agreements, with Registered Social Landlords and the handful of public sector schemes being considered more favourably. After simply scaling up from England to Britain, and assuming the number of homes built by RSLs and public authorities across Britain are more or less in proportion to private sector house building, "planning gain" receipts might have been roughly between £1.45 and £2.45 billion to the Treasury. A valuable tax on new development collected via planning authorities.
If scaled up to the 202,570 homes built in England, Wales, and Scotland combined in 2007/08, that might have been between £1.67 and £2.82 billion. The housing market also inflated in those 4 years, so the Section 106 receipts may have easily peaked at between £2.0 and £3.0 billion. Maybe more. We don't yet know, it seems. Or the CLG is not saying. Today that Section 106 tax on development is at least halved with housing production down to around 100,000. Probably reduced by more than half since most developers have been forced to renegotiate their Section 106 agreements down as sales prices have been in some decline from their 2007 peak. Darling's public accounts may be one or two billion pounds short of the "planning gain" he had previously enjoyed. This was not his only worry, of course, but it impacted on public borrowing:
'Public sector net borrowing (PSNB) increases from 2.6 per cent of GDP in 2007-08 to 8.0 per cent in 2009-10, reflecting the impact of the economic downturn on receipts, in particular from the financial and housing sectors, the effect of the automatic stabilisers and the action the Government is taking to support the economy.' (8)
With total public spending on housing and the environment of £24 billion, out of a total of £623 billion of "managed expenditure", (9) the loss of a billion or two of Section 106 receipts matters to the Treasury. They hoped housing production would increase and Section 106 receipts would recover. This is doubtful. There are other effects of the bursting of the 1997 to 2007 bubble, which another period of inflation will ease:
'The average of independent forecasts is for house prices to fall by 20 per cent in the two years to the end of 2009. Coupled with continued weakness in property transactions and a lagged impact on receipts of capital gains tax and inheritance tax, housing-related receipts are likely to be £7 billion lower in 2009-10, relative to the Budget 2008 forecast. With the level of house prices lower throughout the forecast than assumed in the Budget, a sizeable element of the shortfall persists.' (10)
Darling is variously out of pocket, and for some time. His hope in 2008 of reviving "planning gain" receipts seem remote today. The Pre-Budget Report for 2009 is to be published on 9 December 2009, next week, and has a "microsite" on http://prebudget.treasury.gov.uk. Darling needs some ideas of how he might raise money if he receives less in Section 106 payments from the nationalised planning system.
Up steps Posen. Or rather, down sits Posen at the Bank of England.
Posen sits on the current MPC, chaired by Mervyn King, the Governor of the Bank of England, alongside Charles Bean and Paul Tucker, the two Deputy Governors, Kate Barker, Spencer Dale, Paul Fisher, David Miles, and Andrew Sentance. The BOE makes it clear that Posen spoke for himself, and not the MPC as a whole, (11) when he gave a speech days before Darling's Pre-Budget Report. This speech was titled Finding the Right Tool for Dealing with Asset Price Booms. Posen imagines he can see a way for governments to manage housing markets and stop them inflating into bubbles. He is deluded, but he may be on to something.
Posen rightly insists that '... trying to manage asset prices, let alone pop bubbles, with monetary policy instruments will not work.' (12) Adjusting BOE interest base rates will not control housing bubbles. The attempt may have other consequences. It may not be possible to raise interest rates. 'We should go after some of the problem directly, beyond the banking system itself.' (13) What is needed, in his view, '... are changes to real estate taxes.' (14) Posen observes that:
'Residential real estate bubbles are very different from equity price bubbles. Real estate bubbles tend to have much higher real economic costs than equity bubbles, perhaps because they involve illiquid collateral and local spillover effects.' (15)
In Britain only sales of second homes are currently liable for capital gains tax, but Posen suggests imposing capital gains on all homeowners. The Telegraph thought that Posen's proposal will '... cause consternation in the Treasury, in the run-up to the Pre-Budget report.' (16) But extending capital gains tax would be administratively easy for Darling.
As Posen notes in his speech:
'There are already in place systems to make sure that every real estate transaction is recorded by law, and title and other fees that are already collected on those transactions. It is a matter of building upon those systems that are already in place, in every country, even if the specifics vary. There should be no new regulatory infrastructure needed.' (17)
It is easy to assume that an extension of capital gains tax on housing asset inflation would be politically unacceptable. But I'm not so sure. I don't think Posen has a good idea. This is an expression of the Bank of England's desperation about the inflationary consequences of the British planning system, and the retreat into financialisation. I just suspect that in Britain's current economic predicament there could be a political constituency for Posen's desperate idea. Even among those with homes in the most inflationary regional and local markets. Posen's idea for effectively a "sustainable" housing market may be posed by politicians as an economic, social, and environmental virtue.
It might be possible for politicians to convince the electorate that Britain's housing market is better taxed than collapsed. A level of capital gains tax on house price inflation could be justified as a way to fund the housing and environmental services that Section 106 agreements were expected to. A tax for the community. The level of taxation could be adjusted depending on the general rate of house price inflation, varied locally, and would be easy to collect. The MPC would be uninvolved, and the Treasury would be politically responsible for budgeting the tax every year. All the main parties might like this.
It would not stop popular house price inflation. It would politicise the problem of anticipating house price bubble formation in a fresh way in Britain. Posen's idea might be imagined by the housing equity rich as a way of at least partially providing for those needing affordable housing, provided the taxation was not an attempt to deny them all gains. Posen is not saying tax 100% of homeowner gains.
Of course Posen's idea is predicated on a continuation of the low level of new house building that sustains house price inflation. It maintains the 1947 Town and Country Planning Act, without which developers and planners would have no "planning gain" to negotiate. Section 106 agreements would still be in place. It would mean that the Treasury need not be so bothered about the low level of new house building, provided government looks credible in the provision of "affordable" housing.
House builders might like not having to negotiate onerous Section 106 agreements, meaning that the 50,000 luxury eco-homes don't have to carry so much of the costs of 50,000 subsidised "affordable" eco-homes.
It could be popular amongst planners and land owners because they would no longer be required to negotiate too hard either. The "planning gain" on a smaller number of homes built and sold into an inflating housing market could be increased, while the inflated trade in the much larger stock of existing homes is gently taxed.
The alternative of removing the 1947 TCPA and letting farmers sell land for building at the cost of construction is the way to encourage house building. While such an approach would undermine house price inflation, it would also terminate negotiations over "planning gain" through Section 106, and remove the prospect of taxing housing asset inflation. More significantly it would threaten the security of an inflated housing market required by the membership of the Council of Mortgage Lenders, with £1.2 trillion of mortgage lending extended to Britain's home owners. Darling would never want to threaten that financial security.
However Posen only offers a brief political way forward, if Darling dare promote it. Posen's idea may be held up as a political innovation, but the process of taxing British house price inflation will be increasingly seen as perverse. House prices are already disconnected from income, and Posen offers no reconnection. He simply proposes that the government will take a share of the value of the house price inflation it sustains by refusing to let anyone build freely on cheap farmland. If implemented how much gain will government be prepared to take by taxing an inflationary housing market sustained through the planning system?
The last bubble will seem modest. It is not unreasonable to expect average British house prices to inflate to between £350,000 and £450,000 before 2020. London average prices peaked at the lower figure, and while average homes in The City of London oscillated above £350,000, average homes in Westminster never fell below £450,000 after the bubble burst in 2007. The graphs are heading up again steeply, and the rest of the country could see average house prices at levels only associated at the moment with parts of London. Those parts of London will have inflated off the present graph.
However, Posen's desperate idea may be just enough of a political way forward for Darling in New Labour's effort to win another term in office. Environmentalists are already behind a tight planning system. Planning as a political denial of the freedom to build is considered an ecological good by the public, but it serves as the security behind a vast fund of largely unproductive, avoidable, and socially burdensome mortgage lending.
Posen offers Darling a way to fund housing and environmental works without requiring the planning system itself to generate the funding from new development. Building new housing within the planning system will be less significant for the Section 106 revenues it brings the Treasury as an effective tax on development profits through "planning gain".
Posen sees this as more than Treasury fund raising. He argues that adjusting a capital gains tax on all homes will enable the Treasury to prevent house price inflation turning into a bubble, and then bursting. People know that housing bubbles burst, and that taxing capital gains will not stop another bubble bursting. The threat of greater taxation seems unlikely to prevent bubbles forming, and can do nothing to stop them bursting. It is not hard to see that Posen claims too much for his tax innovation. We know that Darling needs to raise tax revenue to pay for the government's intervention in support of the financial system, and needs more than arguing with developers over "planning gain" can provide. Posen's desperate idea for the Chancellor may only partially work in raising revenue, but that might be enough.
Britain's housing market is perverse. With a population free to build the finance system would be more interested in cheapening new construction on lower cost land. Instead government is preoccupied with securing the financialisation of periodic but persistent house price inflation.
Darling can't afford to allow people the freedom to build. If he follows the lead of his appointee on the MPC, Darling might instead try to argue that all homeowners should be happy to be taxed as a fair way to subsidise "affordable" eco-homes and other environmental initiatives.
Of course, Posen's desperate idea for capital gains tax might be quietly ignored in the Treasury Pre-Budget Report next week. Darling may doubt the wisdom of his appointment. Expecting a further economic shock the ex-MPC member David Blanchflower was saying in November that '... the committee's members have lost the plot.' (18) Kate Barker was evidently bankrupt of ideas in the last bubble. David Miles is an obscurantist expert in mortgages. Stephen Nickell only talks about meeting demographic demand. (19) Maybe Posen has given the MPC and Mervyn King a fresh story about asset inflation for government to retell as a morality tale.
My guess is that New Labour will like the Posen idea because they can see Section 106 revenue falling, and average house prices inflating nicely for them to raise taxes that can be seen as virtuous. They will claim again that they are "supporting people through difficult times." That they are saving the planet with a tax slice of the house price inflation pie.
Taxing gains in the inflating housing market will be a confidence trick, it is desperate, but it may win support if handled by a clever enough Chancellor of the Exchequer who has few other choices. Darling has managed to survive Gordon Brown, so he could pull off the trick.
Don't fall for it! A home is not capital. It is a utility.
The denial of development rights in the 1947 Town and Country Planning Act is the problem. That old law impacts on a twenty-first century Britain, increasingly dependent on finance, and in retreat from production.
Ian Abley 03.12.2009
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