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Collecting land rent without LVT

There are of course three main ways a government can collect land rent.

1. Just own land and buildings and rent them out. That way there is no need to differentiate between rental value of buildings and of the location. We have that with Crown Estates and Housing Associations (which are QUANGOs and ultimately part of the government) who rent out at or close to market value and council housing, which is supposed to be there for lower income people who can’t afford lower market rents.

2. Replace other taxes with Land Value Tax.

3. Lend money to people wanting to buy land and buildings and collect the interest, which is mathematically similar to Land Value Tax. It is largely the private banks that do this, of course, but there is nothing to stop the government doing it.

Somebody asked me about 3. recently, and I did some workings for them. In a perfect world…

a) The goverment, which runs HM Land Registry would simply no longer register private mortgage charges. The same as I can’t borrow money secured on my right to vote. That’s not for sale. If banks want to make huge unsecured loans to people and just rank along with all other creditors in case of non-payment, there’s nothing to stop them, but I doubt they would (see tweaks).

b) The government sets up its own mortgage bank as monopoly mortgage lender, which has easy to access to a bottomless pit of funds i.e. government bond issues.

c) The bank knows what monthly payments people can afford, and can work backwards from that to choose a suitable combination of income multiples, mortgage term, target house prices and interest rate.

Worked example, at today’s prices with private banks: Our average borrowers buy a house for about 7.7 times their income, or £280,000. Knock off ten percent deposit, and prevailing interest of 2%, the monthly repayments would be £938 for 30 years.

The government chooses the following combination:
– Max loan-to-income four or twice joint income,
– Deposit minimum 10%, max 20% (see tweaks),
– Mortgage term 35 years (or however long borrowers have before state retirement age, also up to government to decide),
– Average house prices to level off at about £145,000 (four times income plus 10% deposit),
– The required interest rate, to get monthly repayments of £936 (same as now), would be 8%.

d) The government bank can borrow for about 1%, being backed by the UK government and mortgages which are secured on assets that can only go up in value (in line with wages). So in future, the government bank’s profit (monthly repayments IN minus net selling price and interest paid – directly or indirectly – to the vendor OUT) would be about £6,000 per year per average home, approx. equal to average site premium.

e) There’s no need to worry about Poor Widows In Mansions, they will have paid off the mortgage and will be left in peace (having pre-paid the land rent before retirement).

f) Once the system is up and running and all houses have been bought and sold, the bank’s net profit would be – in theory – £100 billion a year (tricky to calculate, assume two-thirds of homes are subject to mortgages and one-third owned by mortgage-free pensioners).

g) Even if it’s only half that, it’s a handsome chunk of money, enough to replace Council Tax, SDLT, planning fees and so on with plenty left over.

That is the general idea. It needs some tweaks. Clearly, movers would have to be allowed to ‘port’ an existing government mortgage and existing equity. Apart from that, there shouldn’t be any cash buyers. If you want to buy a house, you just HAVE TO take out a government mortgage for 80% of the purchase price.

When a house is inherited, the government bank would give the executors a deposit with itself for 80% of its value and grant an 80% mortgage under the same terms and conditions as any other buyer. If the heirs want to continue living there, great, they can spend the deposit on subsidising their monthly repayments (effectively cut them by half). Which is Inheritance Tax in all but name, so we can scrap IHT as well.