Joe Storey

Joe Storey is an Economics and Politics student at the University of Exeter with interests in fracking, the City and the role of government.

The UK’s dysfunctional housing market is well documented. 2008 saw the lowest peacetime level of new homes being constructed since 1924 – with levels equally bleak today. The last decade saw home ownership fall for the first time since 1951 when Census records began. The price-to-earnings ratio of house prices to average wages is 5.07, well beyond the long-term average of 4.1.

Generation Rent is anxious. Homeowners are gleefully watching their equity grow. Politicians are stalling.

Obscurely, blame is often laid at the door of the market itself, despite the ubiquitous involvement of government through prohibitive planning restrictions and a series of demand-side policies. There are not many areas of public policy where government regulation inflating the cost of living so apparent as it is in housing. Mark Twain noted “Buy land, they’re not making it anymore”. Twain certainly would have been even more bullish on buying land had there been the level of government activity and restrictions during the 19th century.

The green belt, the government’s most prominent involvement in the housing market, is portrayed as much maligned by supporters but many of the criticisms are wholly justified. The noose that the green belt places around London exacerbates the discrepancies between supply and demand to the point where 17 out of 32 London borough’s median earnings-to prices-ratio has doubled since the turn of the millennium. In the UK overall between 1975 and 1995, average house prices rose just 3.5 percent, compared with a 120 percent rise between 1995 and 2009.

The huge magnitude of the impact of the green belt is increasingly apparent in office prices. A 2008 paper estimated the ‘shadow tax’ associated with planning regulations around the world. The ‘shadow tax’ rate (above pure construction costs) is roughly 800 percent and 500 per cent in London’s West End and the City respectively, compared with 300 per cent in Paris and 50 per cent in Manhattan.

Artificially inflated house and office prices (fueled by low volumes of house and commercial property building) are bad for society as a whole, and particularly for the taxpayer. High house prices prevent essential workers access to great cities such as London and exacerbate inequality. Even the baby boomers feel the cost, with their accrued gains on the house more often or not used as the ‘Bank of Mum and Dad’ to children struggling to get on the housing ladder.

The taxpayer is significantly burdened by working people claiming housing benefit, estimated to cost £12.9 billion a year between 2010 and 2018, equivalent to £488 for every household in the UK. With a continued rise of this cost expected, there is no alleviation of the burden in sight for taxpayers. Moreover, a reliance on social housing (which expensive housing inevitably causes) fosters a dependency culture through the perverse incentives of the system, namely that the more reliant on the state you become, the faster you rise up the social housing queue.

The economic benefit of building more houses is undeniable: for every 100,000 new houses built, it is estimated GDP grows by a further one percent and that for every home built, 1.5 jobs are created. Overall, £1 spent on housing creates £2.09 in direct value for the economy.

Britain’s obtuse tax system also contributes to the growing housing market problem.

As Janan Ganesh outlined in the FT, the tax burden on three different Britons is grossly inequitable. The Briton who risks her savings to set up a business is taxed on all profits and then again when selling it through capital gains. For the Briton who buys a home and benefits from significant house price inflation due to the chronic undersupply plaguing the market, the only tax which is paid is to the local council on bands set at the start of John Major’s incumbency. The Briton who inherits a house worth £600,000 pays no tax whatsoever. Two of these Britons benefited financially from effort and work which was nothing to do with them, yet the government taxes them less punitively than the Briton who risked her capital and hired others.

Foreign investors are vilified as the cause of this crisis. The Australian state of Victoria recently applied an extra three per cent stamp duty tax on foreign investors. There have been calls worldwide for housing systems that give preference to natives over foreign investors. The government should resist populist efforts to punitively tax foreign nationals and instead favour a simpler, fairer tax system that ensures the correct level of tax is paid and ends taxation anomalies and loopholes.

Critics also lay blame at the door of developers, who are accused of land banking to accrue profits. This charge, whilst popular, is a factoid, with only four per cent of sites (by volume) awarded implementable planning permission yet to be developed by larger homebuilders.

For all the accusations surrounding the housing market, the government and its regulations should certainly not get off scot-free. Demand-side policies such as Help to Buy have fueled demand at a time when supply continues to be fixed, with some studies blaming these policies for a three per cent rise in average house prices.

Advocates of liberalising the planning regime are not calling for Britain’s green and plentiful lands to become a concrete jungle, but for a modest amount of green belt land to be allocated to house building. Removing restrictions on land 10 minutes’ walk of a railway station (just 3.7% of Greenbelt land) would allow the development of one million more homes surrounding London alone.

With this extra capacity, would the private sector build? There is no reason to suggest not: in 2014, private house builders commenced work on 115000 new homes, whilst housing associations were responsible for just 23000 (an average of just 15 homes a year given there are 1500 housing associations in England). Even during the boom years, private house building far exceeded the increased capacity provided by housing associations: 146,000 new houses compared with just 24,000 per year.

Failing planning regulation liberalisation, a form of Land Value Tax could play a fundamental role in improving market efficiency, with those benefiting from the planning regulations paying a premium for the benefit they derive. Land taxes internalise the economic and spatial externalities from which land derives its value from and equalises the speculative real estate cycle. Yet determining who owns what land in England and Scotland – the process of introducing a LVT – could descend into bureaucratic mayhem. More worryingly, a lack of tax-cutting appetite amongst contemporary politicians may render LVT a further tax burden, with the tax becoming supplementary, rather than replacement form of taxation.

Inertia on the housing market is threatening our economy and the government needs to be bold in its reforms and press on with liberalising the green belt and necessary tax reforms. Reforms are likely to be unpopular, with the housing market presenting significant risks to our economy; politicians who commit to bold reforms will ensure the country reaps dividends in the long-term.

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