The dissapearing property ladder

westernpromise

Physics wrote: »

You're forgetting leverage.

If I borrow £50 from you to buy 100 Mars Bars, and then the next day sell them for 60p each, I've made £10.

Not if you are immediately required to get hold of another 100 Mars bars you haven't.

Inflation on property can only be encashed by foregoing something. You can buy a house foe £200k and it appreciates to £300k, but what you now have is £300k of houses and cash. If you sell it and downsize to a £180k house, you've still got £300k in houses and cash. The cost to you of turning 40% of your wealth into cash is that you've foregone living in a £300k house and you now live in a £180k house.

It's only profit if you can buy at £200k, spend nothing, and sell at £300k while other identical houses still sell for £200k. I.e. it's inflation, not profit.

Physics

westernpromise wrote: »

Not if you are immediately required to get hold of another 100 Mars bars you haven't.

Well of course, I wouldn't just use my money to buy Mars Bars. I'd just borrow some more money from you to buy them with.

Now I have £10 of real, solid cash, £60 of debt, and 100 Mars Bars (worth £60). I still have my Mars Bars (forgoing nothing), and I have my £10.

Borrowing money to make a profit on a rising asset/commodity is done all the time. "Margin trading" is how it's known, I think, in financial markets. It's common, and it works, because leverage is incredibly powerful.

It's also incredibly risky if the risk of the asset depreciating, and the risk of being forced to sell, are correlated.

westernpromise

Physics wrote: »

Well of course, I wouldn't just use my money to buy Mars Bars. I'd just borrow some more money from you to buy them with.

Now I have £10 of real, solid cash, £60 of debt, and 100 Mars Bars (worth £60). I still have my Mars Bars (forgoing nothing), and I have my £10.

Borrowing money to make a profit on a rising asset/commodity is done all the time. "Margin trading" is how it's known, I think, in financial markets. It's common, and it works, because leverage is incredibly powerful.

It's also incredibly risky if the risk of the asset depreciating, and the risk of being forced to sell, are correlated.

So you started out with no cash, £(50) of debt and 100 Mars bars. You now have cash of £10, £(60) of debt and 100 Mars bars.

Remind me again what £10 - £60 makes?

Do you consider your £10 should be considered profit, and taxed?

westernpromise

westernpromise wrote: »

So you started out with no cash, £(50) of debt and 100 Mars bars. You now have cash of £10, £(60) of debt and 100 Mars bars.

Remind me again what £10 - £60 makes?

Do you consider your £10 should be considered profit, and taxed?

Eloquent silence....

IveSeenTheLight

westernpromise wrote: »

So you started out with no cash, £(50) of debt and 100 Mars bars. You now have cash of £10, £(60) of debt and 100 Mars bars.

Remind me again what £10 - £60 makes?

Do you consider your £10 should be considered profit, and taxed?

I think the point he was making was that: -

He initially had £0 cash, £0 debt and 0 assets
Now he has £10 cash, £60 debt and £60 assets.

The the debts and assets cancelling each other out, he has a profit of £10.

As for taxable, once any further deductions were included (interest on the debt), I don't think that £10 would be a sufficient value to be taxed.

Loughton_Monkey

IveSeenTheLight wrote: »

.....The the debts and assets cancelling each other out, he has a profit of £10......

Or £20 when the price of Mars Bars goes up to £70.

I firmly believe that things would be a bit different if only they were to make more Mars Bars. But there are 99 reasons why they can't do this quickly....

Those of us with a fridge full of Mars Bars are OK, Jack.

MFW_ASAP

westernpromise wrote: »

And therefore so would I in trying to sell my own place, in which case I am still short of the CGT.

Therefore the CGT would be irrelevent. You're not able to buy the house because you can't afford it.

westernpromise

IveSeenTheLight wrote: »

I think the point he was making was that: -

He initially had £0 cash, £0 debt and 0 assets
Now he has £10 cash, £60 debt and £60 assets.

The the debts and assets cancelling each other out, he has a profit of £10.

As for taxable, once any further deductions were included (interest on the debt), I don't think that £10 would be a sufficient value to be taxed.

That's the wrong comparison though. Physics' argument was that starting from borrowing £50 to buy 100 Mars bars, a rise in the price of a Mars bar from 50p to 60p constituted a profit.

I have shown, I suggest, that it's not. In his own example, he's gone from having a £50 net debt and 100 Mars bars to £50 of net debt (expressed as £10 - £60) and 100 Mars bars. So given this, what I want to know is, does he still expect to be taxed on the first part of that term, his £10, as though it were profit?

Clearly the answer to this has to be No.

MFW_ASAP

Only on this forum do we go from talking about property tax to talking about Mars bars.

westernpromise

MFW_ASAP wrote: »

Therefore the CGT would be irrelevent. You're not able to buy the house because you can't afford it.

Right - in a market in which CGT was levied on house sales, almost nobody would ever be able to afford to move.

This outcome is apparently desirable to people who can't afford to buy now, but I can't think why. It would mean the only sales would be probate sales.

It would, however, incentivise BTL nicely. Say you buy a house for £200k. Over say 20 years it appreciates to £500k. You'd then face a huge CGT bill if you wanted to sell.

So you never do. Instead, when its value hits say £350k, you take out £150k and you buy another house a different size to the one you live in, and you let it out. When you house's value hits £500k you take out another £150k and do it again.

You now have three houses that you own, all different sizes. All are exposed to CGT but it's much more efficiently distributed. You've got the exact same inflationary gain of £300k, but it's now spread across several properties, each with a separate CGT allowance which you optimise by selling them at intervals.

Meanwhile you therefore live in whichever one suits you at the time, and you let the other two out.

The enormous cost of stamp duty in the south-east is already bringing this situation about it - the bit where nobody sells unless they have to, that is.

To sell and buy a million quid house (not that lavish in London) is going to cost you about £20k on the sale and £44k in stamp duty on the buy - call it £75k in total. As a result nobody relocates if they can avoid it - the £75k involved is better spent on a new kitchen + bathroom + loft conversion.

Stamp duty doesn't incentivise BTL but CGT would.