and then I read this piece of ‘research’.

Vote Liberal Democrat to wipe £100,000 off your house price – hardly a winning slogan!

The release performs a very pedestrian piece of calculation: if a house gets a higher bill attached to it, then its value ought to fall to reflect that higher bill.  In a rational market,  £2m houses will become less valuable by £100k.  Another way of putting it is that the £5k a year that would be payable by a £2m house is worth in net present value terms about £100,000.

So ought this to lower the value of more costly houses?  Yes, of course: and that is one of its advantages. It means, for starters, that future purchasers of such houses will pay a lower price to reflect this – and therefore this is far from being a ‘tax on aspiration’, since current efforts to work hard to enjoy a large house in the future are not being penalised.

They say ‘it would reduce the average residential property price by £2,000’.  If so, this is good news.  This £2000 can only be reached by there being a small number of figures like £100,000 and a lot of figures like £0.  Or £0.40.   The fact is, the vast majority of houses are worth £200k or less (look at these figures for wealth distribution).  They will require a housing boom several times the size of the last one to get anywhere near the £1m mark.  So the effect on the median house is extremely small.  If the effect is £2000 on the mean housing value, then it suggests that, in total, the net present value of the tax is about 25m houses X £2000 = £50bn.

So Vince Cable has managed to propose a tax that will raise a current value of £50bn, while leaving the vast majority of houses unaffected.  Furthermore, it dulls some of the asset price action that is so clearly a part of the mess we have been in for the last few years.  Fewer housing bubbles, a stable source of income – brilliant, and hardly ‘a crackpot scheme’.  Clearly the CEBR is possessed of the Daily Mail idelogy that house prices should always be shooting up.

I once quoted CEBR approvingly for what I now recognise was a pretty thin piece of research backing the VAT cut.  Now reading this piece, and a similarly dire one on Osborne’s tax and spend plans, I realise they have a simple heuristic: if it involves lower tax, it’s good, otherwise it’s bad.  Amazingly, this last one actually got BBC coverage as a prediction about QE!  It is bullish about the prospects of the economy under conditions of a great fiscal squeeze, using this hopefulness:

The policies depend for their success on keeping monetary policyvery loose –a combination of quantitative easing and base rates at 0.5% until mid 2011 at least and a fall in the 10 year bond yield to 2.5% in two years.

Um, have they not noticed that QE has no stimulative effect on demand at all so far? No, because that would undermine the conclusion they want to reach – that fiscal policy is harmless in the presence of fully functioning, elastic markets.  Unfortunately, it isn’t 1981, folks . . . .


One thought on “Once upon a time I thought the CEBR did economics

  1. I have written to CEBR to ask them for details of how they calculated their £2000 figure. I think it unlikely that any reasonable methodology would give any effect on the average house. I will post any substantive reply that I receive. So far their have written back to suggest that I take an undergraduate course in microeconomics!! (For those who don’t know me, I have 6 qualifications in econ, and taught micro for many years).

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