A member of the Bank of England’s rate-setting Monetary Policy Committee has suggested that taxation may be needed to curb future boom-bust fluctuations in the UK housing and commercial property market.
Adam Posen, an economist on the nine-strong MPC, used the occasion of a speech at a London conference this week to present the case for a tax on rising property prices in order to contain price bubbles.
He argued that swings in real estate values have a more damaging effect on the economy than falls in the equity market and that tax tools may be required to control house price inflation.
Mr Posen said: “Real estate bubbles tend to have much higher real economic costs than equity bubble, perhaps because they involve illiquid collateral and local spillover effects.”
That fiscal measures, rather than monetary policies such as interest rates, are better placed to tackle the issue of property prices formed the centre of Mr Posen’s thinking.
He added: “The bottom line for monetary policy coming out of a crisis is, if you have a financial problem, use financial policy tools to fix it. That applies to bubbles, which means monetary policy should not be targeting asset prices as well as inflation.”
In other words, if interest rates cannot be used to contain asset values, alternative instruments may be put in place to ensure that house price rises don’t spiral out of control.
To counter booms in property values, Mr Posen put forward the case for imposing additional real estate taxes, such as stamp duty and capital gains charges, during periods of high prices to act as “automatic stabilisers”.
He continued: “If we can contemplate a Tobin tax on financial transactions, we should be able to set up something in a similar spirit for real estate transactions which are already taxed and regulated. Something modest, without any large implications for tax revenue over the cycle.
“It would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly, a simple, blunt instrument targeted to lean against the wind in real estate prices in an automatic fashion.”
Mr Posen concluded: “One could be more ambitious and complicate matters by taking into account second houses, speculative purchases, the amount of time owned before sale, and so on.”