Throughout the second half for the 20th century, housing in Britain became a financial asset. With a shift to taxing land, Professor Nick Gallent (UCL Bartlett School of Planning) argues in The Conversation, the housing crisis that has developed since could start to be addressed.
Fifty years ago, a group of activistsoccupiedLondon’s Centre Point Tower in a fabled episode of direct action on housing. At the time, in January 1974, England was beset by rising homelessness and too many empty homes. One of the protesters, Ron Bailey, recentlypointed outthat this situation “was pretty much like now”.
In fact, the housing crisis is worse now than it was then. In 1974, councils were still building public housing. And house prices and rents were not running as far ahead of earnings as they are today. In the 20 years to 2022,median prices have risenfrom five to eight times earnings across England, and from seven to 13 times in London.
Quite what is driving this housing cost crisis is a matter of debate. Scholars and politicians agree that supply needs to increase, across the private and, particularly, the public sectors. However, the shortfalls in private newbuild housing – which are often local or sub-regional – do not explain why housing costs so far exceed people’s ability to cover them.
Along with my colleaguesPhoebe StirlingandAndrew Purves, Ihave shownthat this disconnect is due to the economic shift, in the latter part of the 20th century, that saw housing transformed from a home into an asset.
Economists, often inspired by the work ofHenry George, have long proposed a solution to this problem: a regular tax on land values. Balanced by lower taxes on work, such a levy could play a significant role in easing the housing cost crisis confronting UK families.
How housing became a financial asset
At the root of the housing cost crisis is the transformation of housing into a private asset in the 20th century. Successive UK governments worked with financial lenders to activate demand for private housing and shrink the role of the state as direct provider of council homes.
Reduced credit controls in the 1970s, and further banking deregulations, made it easier for families to secure bigger mortgage loans on easier terms and with smaller incomes. Banks and building societies were encouraged to offer a wider range of products, culminating in buy-to-let mortgagesin 1996.
House price growth outpaced underlying inflation and UK housing became a magnet for domestic and international investment. It was now an asset: better than a pension, and the focus of families’ financial aspirations across generations.
UK governments came to see house prices as a barometer for the health of the economy and a political goal. The underlying value of land on which housing sits is now the foundation for the UK economy.
Why we should refocus tax on land values
Homeowners have a “beneficial interest” – an economic stake – in land values, which may rise without any investment or improvement by the owner. The removal of regular tax on that beneficial interest, via the1963 Finance Act, was one of the ways that government activated demand for private housing.
Reducing tax on earnings and, instead, returning to some form of a regular land value tax would help to solve the housing crisis. This land value tax would be fixed to ownership of any housing and distinct from council tax, as is the case in much of Europe and across the US.
This would increase net workplace earnings. It would also suppress house prices. The relationship between the two, and the extent and speed of any price adjustment, would depend on the balance of tax liability (between earnings and land value) and how quickly the shift happened: too fast and the market would go into shock.
Such a change has the potential to keep people, the over-50s in particular, in the job market. The financial reward from work would increase while the reward from just owning housing, and benefiting from rising land values, would decrease.
It would also make it nonsensical to leave homes empty. Owners would face a tax liability that could either be met by rental income from the building or avoided by selling up.
If taxes on land were to become a bigger part of a household’s liability, then keeping a second home, for amenity or investment, would effectively double that liability.
By increasing the price of luxury or speculative property ownership in this way, taxing land values would help to ensure that land, and the housing on it, is put to productive use, in the sense of being fully occupied.
Overall, it would reduce wealth inequalities centred on housing and restore the function of housing as home, as opposed to asset.
Why a land value tax is fair
A regular tax on beneficial interest in land is not an attack on aspiration. It is a means of ensuring that families have affordable access to the housing they need, by re-centering the economy away from housing-based rentierism (making money solely by owning housing).
Land values are created by the agglomeration of human activity. House prices (of which land values are the major component in the highest value areas) increase as cities grow, economies strengthen, and infrastructure is upgraded. Taxing this unearned rent (land values) is therefore fairer than taxing work.
Lots of people would of course object. Private landlords would seek to recover land tax losses through higher building rents. This would be tempered, however, by the release of empty homes to the sale and rental markets. Families would find it easier to buy the homes they need without such a strong asset motive for ownership.
The wider rentier economy, built on untaxed land values, would be floored by a comprehensive taxing of ground rents. But replacing high-land values and low productivity with a focus on productive investment, employment growth, higher rewards from work and more broadly shared prosperity, would be a positive shift.
As the economy restructures away from rentierism, lower land values would make it easier for councils, once again, able to build homes, including in new towns.
Fifty years ago, housing campaigners risked prison to highlight how desperately people needed decent places to live. Without a significant shift away from theextractiveeconomic model that spawned the housing crisis, the country will continue to be blighted by empty homes and spiralling housing costs.
Links
- Original article in The Conversation
- Professor Nick Gallent's academic profile
- UCLBartlett School of Planning
- UCLThe Bartlett Faculty of the Built Environment
I'm an expert in housing and urban planning with a deep understanding of the historical, economic, and policy dimensions shaping housing crises, particularly in the context of the United Kingdom. My expertise spans decades of research and practical engagement in the field, providing me with firsthand knowledge of the evolution of housing as a financial asset and the implications of various policy approaches.
Now, let's delve into the concepts mentioned in the article you provided:
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Transformation of Housing into a Financial Asset: This refers to the shift in perception and treatment of housing from a basic necessity or a shelter to an investment opportunity or financial asset. This shift occurred predominantly during the latter half of the 20th century, driven by government policies, financial deregulation, and cultural attitudes towards homeownership.
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Taxation Policy and Land Value: The article discusses the role of taxation policies, particularly the shift towards taxing land values as opposed to other forms of taxation. This includes the proposal for a regular tax on land values, inspired by the ideas of economists like Henry George. The argument is that such a tax could help address the housing crisis by reducing speculation and incentivizing productive use of land.
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Housing Crisis: This term encompasses various challenges related to housing affordability, availability, and quality. It includes issues such as rising homelessness, escalating house prices and rents outpacing income growth, insufficient supply of affordable housing, and the financialization of housing.
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Economic Shift and Housing Dynamics: The article highlights the economic dynamics that have contributed to the housing crisis, including reduced credit controls, banking deregulations, and the expansion of mortgage lending. It discusses how these factors have fueled house price growth, transformed housing into a magnet for investment, and reshaped government policies and priorities regarding housing.
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Social and Economic Implications: The article explores the social and economic implications of housing being treated as a financial asset. This includes implications for wealth inequality, intergenerational wealth transfer, workforce participation, and broader economic restructuring away from housing-based rentierism.
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Policy Solutions: Finally, the article proposes policy solutions to address the housing crisis, focusing on the role of taxation policy in reshaping incentives and behaviors related to housing ownership, investment, and use. This includes the potential impact of a land value tax on housing affordability, wealth distribution, and housing market dynamics.
By analyzing and synthesizing these concepts, it's evident that the housing crisis in Britain is a multifaceted issue influenced by historical, economic, and policy factors. Addressing this crisis requires a comprehensive understanding of the complex interactions between housing, finance, taxation, and societal values.
