APPENDIX 6
Memorandum from the Henry George Foundation
RESPONSE TO THE BARKER REVIEW OF HOUSING
SUPPLY BY THE HENRY GEORGE FOUNDATION
In the context of soaring house prices and record
levels of homelessness, a consensus has emerged that the cause
of these problems is the historically low level of new house building.
The assumption, expressed in the very name of this review, is
that the problem is one of supply.
This paper argues that the problem is in fact
one of excess demand, caused by the perversities of the land market,
and exacerbated by the iniquitous and distortionary effects of
government taxation and subsidy policies.
Consequently, the solution lies in correcting
perverse incentives and harmful market interventions, reducing
effective demand and therefore lowering house prices to more affordable
levels.
A PROBLEM OF
SUPPLY?
It is undeniable that in many parts of the country
there is a genuine crisis of affordability, but it is not clear
that the problem is exclusively one of under supply. In fact,
there is a tendency to read the market signals backwards, identifying
effects as causes and assuming that choices made in the market
represent absolute preferences. While there may be a place for
perfect market hypotheses, the UK housing sector is clearly not
it.
Firstly, there is evidence that population growth
may be less than predicted. The population recorded by the 2001
census was 900,000 lower than the official estimate for that year,
yet predictions of housing need have followed the earlier, higher
figure.
Secondly, there is a general assumption that
changing patterns of family formation mean that there is insatiable
demand for smaller, one or two bedroom dwellings. This is to read
the signals backward: with unprecedented rises in houses prices,
it is inevitable that people will be squeezed into the lower end
of the housing market, but this does not mean that this is where
they want to be. Rising affluence and increased consumption makes
people more likely to seek larger dwellings than previously. Also,
the extremely conservative nature of the mortgage lending market
means that borrowers are channeled into single person or couple-based
housing, regardless of their preferences.
There are plenty of houses in the UK—and
many of them are underused. Many regions have serious problems
with housing dereliction and abandonment, while the south of England
faces continuous housing pressure in the opposite direction. The
problem is not one of absolute shortage, but of geographical imbalance.
There are plenty of affordable homes, but they are not in the
right places, in other words, they are not where the jobs are.
This can be seen as a northern employment shortage as much as
a southern housing shortage.
A further source of underused housing is the
market in second homes. There are an estimated 500,000 second
homes in the UK—and most of these are in very high value
areas. This implies that the problem may be one of wealth distribution
rather than housing per se.
Almost all the attention in this debate is focused
on the supply of new, affordable housing. At present, this amounts
to around 20,000 dwellings per year. The Interim report suggests
that this needs to be raised to 101,000 to retain the affordability
levels of the 1980's. Again, the assumption is that only supply
effects prices. But whether we build 20,000 or 100,000 houses
each year, the supply of new build is only a tiny fraction of
the total housing supply. 99% of the supply is in the form of
existing houses.
Similarly, the assumption that the solution
must lie in the social housing sector is misleading. Almost 80%
of the housing stock is privately owned, and despite the reduction
in the right to buy, this is unlikely to change dramatically.
Even if one million new homes were built for the social sector,
and no new homes were constructed for the private market, the
proportion of social housing would only rise from 21% to 25% of
the total housing stock.
A PROBLEM OF
EXCESS DEMAND
House price growth is caused by the pressure
of demand. There are good reasons for considering the level of
demand to be excessive, and these imply that the housing market
is impossible to influence significantly using purely supply-side
interventions.
Firstly, rising house prices represent growing
levels of debt. The majority of money creation in the UK is in
the form of mortgage debt. House buying is therefore the primary
cause of inflation. More than any other goods, the price of houses
represents not what people can afford to pay, but what they can
be persuaded to borrow.
Secondly, the main source of rapidly rising
housing demand is not need, or expectations of productivity gains,
but expectations of further prices rises. Demand can be considered
genuinely excessive to the extent that it represents expectations
of future house price growth, rather than the ability to pay off
mortgages out of earnings. While speculative motivation is hard
to quantify, it is undeniably a major source of rising prices
in high value areas.
Such speculation is not irrational, because
houses are almost unique in that they tend to grow in value, despite
wear and tear. Of course, it is not the bricks and mortar that
gain value, but the land underneath them. Houseboats, it should
be noted, depreciate rapidly. The unique nature of the land market
is therefore one of the root causes of over inflated house prices.
Mortgage borrowing based on expectations of
future land value rises creates a dangerous bubble economy which
the UK has been riding for many years. Land is uniquely suited
to this sort of speculation, because of the monopolistic characteristics
of land ownership. Locations are essentially monopolies that attract
monopoly profits. Since Adam Smith and David Ricardo, economists
have recognised the special nature of land rent, but policy makers
have been slow to take on the implications.
GOVERNMENT INTERVENTIONS
Given the importance of housing both for the
UK economy and for wider social and environmental wellbeing, it
is not surprising that the state intervenes extensively in the
housing market. However, the existing tax and subsidy system actually
worsens the problem.
Housing costs the public purse around £22.7
billion each year.[2]
This breaks down as follows:
£5 billion on social housing investment;
£2.7 billion on council tax benefit;
£2.9 billion on foregone taxes (CGT
foregone minus inheritance tax and stamp duty on housing);
£12 billion on housing benefits.
Only 22% actually goes on social housing. 12%
subsidises local authorities in the form of council tax benefit,
but 66% of state housing spending effectively goes to landowners
as tax foregone and housing benefit used to pay rent. This represents
a massive £15 billion subsidy for landlords, and is a further
source of house price pressure, pumping public money into an already
overheated market.
The harmful influence of the tax system is not
restricted to the exemption on CGT—all existing taxes on
property have harmful effects. Stamp duty and inheritance tax
lower liquidity, and the other property taxes are specifically
targeted at occupiers, not owners. Council tax is famously regressive
and inefficient, while UBR is zero-rated on derelict property
and half rated on unused property, a clear tax preference for
dereliction over employment.
It is clear that the effects of the property
tax system are perverse. By subsidising landownership it encourages
further rent-seeking and helps drive prices upward. As there is
a negative tax cost of homeownership, and the realistic expectation
of future price rises, houses have a negative user cost.
A DEMAND-SIDE
SOLUTION: TAXING
LAND VALUES
Beyond the various supply-side solutions that
have been proposed, it is clear that demand-side measures need
serious considerations. Reforming the tax system to remove the
distortionary incentives to landownership which drive prices up
is essential. The most effective and efficient way to do this
would be to replace current property taxes with one based on land
values alone.
It has long been noted that taxes on land rents
are the least distortionary taxes possible. Replacing the current
property taxes with a genuine land tax would therefore enable
the housing market to function more efficiently.
An annual charge levied on the unimproved site
value of landholdings would also address most of the issues raised
by the review. It would remove the incentive to hold underused
land, encouraging its release into the market for more productive
use. It would increase the cost of landholding, thereby removing
the potential to make supernormal profits from property. It would
rebalance the tax burden, ending the perverse tax advantages of
landowners over occupiers.
All these effects would, in turn, reduce the
speculative pressures on land prices, which would decrease the
volatility of the housing market dramatically, and would ultimately
lead to lower house prices in general.
Taxing land values makes land cheaper to buy,
but more expensive to hold, encouraging a liquid market and greater
allocative efficiency.
PREVIOUS DEVELOPMENT
TAXES
Although there have been repeated attempts to
capture land rents for the public purse, they have all been seriously
flawed. This is widely interpreted as a sign that land rent cannot
be captured, but in fact it represents merely the overly complex,
confused and compromised nature of the acts.
The three attempts at land taxes by Labour governments
since 1945 all targeted the profits made by developers at the
point of sale, or of planning permission being granted. This simply
added a further distortionary incentive to hold land rather than
release it, and as such cannot be considered genuine taxes on
land rents, but rather development taxes. Development taxes discourage
development, which is counterproductive—and place further
pressure on developers who are already severely squeezed between
high land prices and government interventions.
A true land value tax would be levied annually,
on the unimproved value alone. This would have the opposite effect
of previous development taxes, and would stimulate the construction
market by making housing cheaper to build and developers less
risk averse.
CONCLUSION
In sum, there is a lack of affordable housing
in certain regions because the existing stock of privately owned
houses is too expensive. That houses are not affordable because
they are too expensive is glaringly tautological, yet in all the
debate around this review, few commentators have expressed this
simple truth. Houses themselves are not overpriced, land in the
right locations is. This is because landowners can make supernormal
profits, or rents, from their land, which in turn creates excess
demand that is converted in to effective demand by the mortgage
lenders.
While the market remains structured in this
way it is futile to attempt to improve affordability by increasing
salaries or subsidising home buying, as all such attempts run
into Ricardo's law of rent. While each individual home buying
grant—such as those under the Starter Homes Initiative—may
help the recipient enter the housing market, the combined effect
of such grants is to push the market up further, making entry
even harder for the next grant recipient. The same is true of
subsidised development—it simply pushes up the cost of subsequent
development. The solution to the problem of affordability must
therefore be to reform the land market itself, with the result
of reducing the cost of existing houses and of development land.
This is a politically dangerous idea, and the
government has shown themselves to be highly wary of the perceived
threat from the wealthy homeowners of middle England. In particular,
negative equity is seen to be unacceptable in any form. However,
the consequences of this position are clearly unsustainable. For
negative equity to be avoided, homeowners must be effectively
subsidised ad infititum. The assumption appears to be that homeowners
have a right to profit from rising prices, but no corresponding
duty to carry the risk of a price fall, creating an obvious problem
of moral hazard. It also implies that current owners have a right
to perpetually extract wealth from first-time buyers, and that
speculators on the housing market have a right to keep all their
winnings, and yet also have a right to state compensation if they
lose. It is hard to imagine how we would treat any other group
that demanded such a settlement.
The housing market as it stands is a brilliant
device for channeling wealth away from those who do not have it
and from those who created it, into the hands of those who occupy
the most privileged positions in society. If we are to solve the
housing problem, we have to stop being complacent about the nature
of the housing market. We have to admit that the housing market
as it exists is inefficient, iniquitous and ultimately unsustainable.
We have to stop tinkering with the edges of the market, and tackle
the fundamental issues. We have to accept that affordable housing
requires house prices to come down. Taxing land values would be
the simplest, fairest and most effective way to make housing permanently
affordable.
March 2004
2 All figures in this section are for 2001-02 and
taken from the UK Housing Review 2003-04, by Steve Wilcox, University
of York Centre for Housing Policy. Back
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