Vince Cable's Bubble Muddle

This week Vince Cable claimed that increased property prices justifies capital gains tax because rent profits that come from investment make price rises unsustainable. Vince Cable and his Lib Dem cronies want to tax capital gains on people making lots of money from property rental.

Regrettably, Vince Cable is so focused on the mote of capital gains in the far distance that he’s failing to see the beam of regulation right in front of him. Here’s what he’s missing. Under normal market conditions investment in property should bring prices down, not up. If renting property is hugely profitable then investors will look to build more property in order to generate more profits. If lots of investors do this then housing supplies will increase, demand will lessen, and prices will be brought down. Vince Cable should ask himself what it is that is preventing this normal market chain of events. The answer, he'd find, is the huge restrictions placed on where (and how) property can be built.

The supposed ‘wisdom’ coming from Westminster is as follows: meddle in the markets to interrupt a natural flow that would increase supply and bring down prices, and then impose a capital gains tax on people who are beneficiaries of the short housing supply, disincentivising investment in property investment.

This is all preposterous and harmful to the UK, and yet another example of why the State should not try to dictate the industries we pursue. According to Paul Chesire's research on price differentials from the LSE, we find:

"Relative to other prices, house prices have gone up five-fold since 1955. In less than 20 years the price of houses has doubled relative to incomes; since 1997 lower quartile house prices have increased 80% relative to lower quartile earnings – even despite the crash of 2007-09”.

The logical corollary, then, according to natural market forces, is that demand for housing is high. If demand is high and supplies scarce enough to cause a drastic shortage, the obvious solution is to deregulate some of the green land prohibitions and allow the natural forces of the market to bring supplies closer to demand.

So we should just expand cities like London by keep building more houses on green land?

I didn't say yes or no to that – I merely pointed out that it's a bit rich politicians complaining about a housing shortage when it's the artificial restrictions by councils on the supply of land that creates the shortage. The economic answer is that we should expand cities like London where demand calls for it, and preserve green areas where demand calls for that.

That’s all very well, but even if they start to lift some of the restrictions we still have the problem of lots of foreigners buying our houses in London and leaving them sitting empty while UK folk struggle to find housing.

Careful now, that sounds very xenophobic, as well as being factually inaccurate.

Xenophobic and factually inaccurate?

Yes, there are no foreigners 'buying our houses' - we (whoever we is supposed to be) don't own those houses, so they are not ours to buy or sell. Any property sold to foreigners is sold willingly by the owner of that property. To adopt an aversion to that based on the principle that the buyers are foreigners smacks of xenophobia.

One of the few good things a government can do is ensure that its public spending makes the country a better place. Keeping more up to speed on the social housing need is a good place to start. And for the private market, diminish the housing shortage by lifting land regulations, which will the enable the building of more private homes in a market that badly needs them.

** Point of note: this article by the LSE’s Paul Cheshire contains the following finding: “Most privately owned Greenbelt land is intensively farmed with limited rights of access and has no amenity value at all. Recent studies have shown that its value is captured only by those who own houses within it, and that intensively farmed land has a negative environmental value.”