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You Don’t Make Money By Buying Property

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The current political belief among all too many people is that we should tax the money people make on their own homes. The difficulty with this being that, as an equally large number of people obviously don’t understand, you don’t make money on your own home. The gains are purely from inflation which is something that we think is a bad idea to tax.

Think on it. You buy a house is some area, something of such and such a size, for £100. You then sell it 10 years later for £200. OK, you now have more money than you started with, sure. But what is now the price of a house of such and such a size in that nice area? £200, that’s why you could sell it for that price. You’ve not made money here. It’s just that money has become worth less in relation to houses – that’s what inflation is.

Say we had the usual capital gains tax on own homes of 28%. You have to pay £28 on that nominal £100 of profit. You now only have £172 to try to buy a home of the same size in the same area. You’ve not lost money, you cannot afford to buy what you owned 5 minutes ago.

You don’t make money on property.

OK, it’s possible to make money building a home, developing one, tarting one up, that’s all possible. But simply buying and holding doesn’t make you a profit. To claim that you are is to mistake inflation for profit.

For example, if someone bought a flat in London in 2010 for the average price of £309,786 and sold it in 2019, they would have received £552,733: a nice 44pc gain of £242,947, according to Savills.

But prices were rising across the market. Over the same time period, the cost of the average terraced house jumped by 43pc to £677,627.

Quite so, you’re not making money, are you?

Capital gains reform to include primary residences would be worth an extra £26.7bn a year to the Treasury, according to the National Audit Office’s calculation from the 2018-19 tax year.

Which is where the idiocy comes in. We’ve just agreed that you’re not making a profit. So why are we trying to tax something that’s not a profit?

If movers pay capital gains instead of stamp duty, they will end up paying more tax overall. But at least they will be paying an amount based on how much they have profited, not based on how much they are spending.

But you’ve just told us that houses have gone up in price generally – inflation – rather than that the buyer has made a profit.

What we would prefer, of course, is that we didn’t have inflation in house prices. That means building more of them, that in turn means issuing more permissions to build houses. Preferably for the sort of houses people would like to live in where they would like to live.

Remarkably, tax isn’t the solution to that. Amazing to think of but how much cash can be taken off us isn’t the solution to many things.

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9 COMMENTS

  1. I’m not entirely sure I agree with you here. House prices in London are insane, and granting more planning permission outside of London won’t help with that (you can’t really build any more houses in London unless you get rid of parks etc).

    It might help to clear out the people who live there but don’t work there (there’s an argument that social housing should be better controlled – I can’t see it happening any time soon though).

    The proper long term solution is probably LVT, though – it would massively reduce the value of the most expensive houses if properly set up.

  2. Build more houses, yes. But you also need to stop the ‘inflation’ . It would also help to properly reform tax and subsidy policy.

  3. Glad I found you, again, Tim!

    How about a run down on inflation and tobacco stocks, primarily the ones in your neck of the woods.

  4. If there is no cap on demand then increasing supply is not all that effective. Which brings me to the supply of people. Which in terms of expansion is entirely supplied by immigrants.

  5. I’d have to argue with your logic here. If by selling your house for £200, you only have £172 after CGT to buy the next, where did the £200 come from? If the chap sold his house for £200 to buy yours, he only had £172 after CGT. Except. ..

  6. What proportion of the increase in house prices is inflation in the traditional sense of improving economic prosperity versus that driven by the notions that housing only ever goes up in value?

    Government policy is to avoid at all costs forcing out the reckless risk takers who overreached themselves by socialising the costs to others (such as savers).

    That leads to the inevitable situation where we are now that people assuming it’s a one way bet and even if not, they will be bailed out.

    For me, the element that represents the above should be taxed heavily.

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expunct

in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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