How to Make Housing Affordable
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
How to Make Housing Affordable
A Land Tax is 200 Years Overdue
Here are excerpts from an article that appeared recently in the online edition of the Guardian (UK).
A levy on what lies beneath our overpriced houses could reduce society’s inequalities
by Ashley Seager
We have now lived through 10 years of New Labour and a massive housing boom. The two are inextricably linked and the latter goes to the heart of understanding why there is still an excluded underclass in Britain. Gordon Brown said in his budget speech of 1997: “I will not allow house prices to get out of control and put at risk the sustainability of the recovery.”
Since then house prices have tripled, adding £2.5 trillion to the wealth of those owning residential property – equivalent to two years’ national output.
Last year Tony Blair said: “There is a group of people who have been shut out of society’s mainstream and we have not yet found a way of bringing them in properly.” He fretted about the issue again in last week’s new year message. Labour has been rattled by its inability to narrow income inequality.
Might there be a connection between that huge untaxed wealth gain and the fact that the excluded people Labour are concerned about are generally living in rented property? You bet. Does economics offer insights into what could be done? You bet.
The government’s response is to try and raise the share of home ownership from 72% now to 80%. But how they think someone on £15,000 a year can afford the average of £150,000 that first-time buyers are paying is beyond me.
Beware of the bull
The problem, they imply, is not so much that property prices have risen so fast but that not everybody can share in the gains. But as Martin Weale, director of the National Institute of Economic and Social Research, puts it: “People say that not everyone is benefiting from house price rises. The problem is that house prices are rising in the first place.”
Residential property is an unproductive asset. If all houses rise in price, we do not, as a society, get richer. As Mr Weale noted in a fine paper last year, rising house prices do not create wealth, they merely transfer resources from people who will own houses in the future to those who own them at present.
Rising house prices have also led to a huge rise in debt, a drop in savings and a “crowding out” of investment in more productive enterprise. The fact that house prices have risen far faster in the south-east than elsewhere also inhibits labour mobility because someone in Scotland – where prices have only doubled over the last decade, not tripled, and from a much lower base – finds it hard to move south.
The government’s raising of stamp duty has also discouraged people from moving and has been blamed for pushing up prices by inhibiting supply. Housing stock is not being used efficiently.
There has been a global housing boom, of course, but it has been bigger in the UK than elsewhere. Even allowing for Britain’s lack of housebuilding and its rapid population growth, Mr Weale thinks house prices here are 20% or 30% above the level that can be explained by the supply and demand.
The gap could be down to the fact that house price gains are not taxed, meaning it is has a tax advantage over any other type of asset, even after stamp duty and inheritance tax are taken into account. Last year, inheritance tax and stamp duty raised £8bn, just 2% of the £340bn that house prices rose by in total, which is nearly four times the total NHS budget. The idea that these taxes are too high is laughable.
And people withdrew about £45bn of this untaxed capital gain last year to spend on things such as second homes, new cars and deposits for their children’s houses. Was that money available to renters? No chance.
Consider this. The government builds a new school in an area. The school is a success. This pushes up the house prices in the area leading to a windfall, untaxed gain for home owners as a direct result of government spending. The teachers in the school, on their modest salaries, will probably not be able to buy a house close to the school. There is clearly a problem here.
Fred Harrison, research director at the Land Research Trust, has just published a book on this “great tax clawback scam”. It works as follows. Someone in the bottom 20% of the income spectrum pays about £250,000 in taxes in their lifetime. Someone in the top 20% pays £1.2m in taxes. But those at the top will own property and see their total tax liability wiped out in just a couple of years by rising property values. This does not happen to the bottom 20%, since they are renters.
Mr Harrison points out that the Blairs’ London house rose by nearly £1m in value in the past year alone, accounting for a huge chunk of their total lifetime tax payments. Thus the rich get a free ride on the backs of the poor.
This is the fundamental reason, Mr Harrison says, why the welfare state of the past 60 years has not worked.
So what is to be done? Mr Harrison, Mr Weale and other economists say the burden of taxation needs to be shifted off income and profits and on to those untaxed gains in property values. In short, we need a land value tax.
The wealth of other nations
This is a not a new idea. Adam Smith argued two centuries ago that such a tax was a “peculiarly suitable” way to raise revenue since it did not distort people’s incentives to work, save and invest. Churchill favoured a land value tax, as did Lloyd George. Mr Weale advocates a tax charged on residential property at 1% of its value each year, replacing council tax.
Mr Harrison, and others such as David Reed at the Labour Land Campaign and Dave Wetzel of the Professional Land Reform Group, argue for a tax on all land to encourage its more efficient use.
Think of the 13-hectare Battersea Power Station site, which has stood derelict since 1982. It was sold last month for £400m by a developer who bought it for £10m in 1993. A yearly tax on its value would have focused owners’ minds on making better use of it.
House buyers would factor an annual tax on the value of the land under the house into calculations of what they would be prepared to pay for it. This would lower prices and discourage speculation. Second homes would carry a higher cost than they do now.
This is not about raising more tax revenue. The revenue from a land value tax would be used, for example, to scrap stamp duty and/or council tax or to reduce income tax or VAT, which is highly regressive. Many countries, such as Denmark and Australia, already have some form of value tax. Hong Kong – that bastion of free-market capitalism – has no private land ownership at all. Land is owned by the state and leased.
A land value tax is hard to avoid. The world’s super rich who spend much of the year in London but avoid paying income tax could not avoid the tax on a big house in Mayfair.
Land has a scarcity value when it is in desirable locations. That value is not down to individual effort but derives from the community, and often from schools, hospitals and parks provided by the public purse. Therefore, as the economist David Ricardo explained, land has a rental value that can be taxed.
Mr Blair and Mr Brown regularly call for national debates. Let’s have one on a subject that could make the New Labour project actually work.
See the new book by Fred Harrison: Ricardo’s Law: House Prices and the Great Tax Clawback Scam (Shepheard-Walwyn) 2006.
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