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 am an expert with a deep understanding of the topic at hand. Over the years, I have extensively studied and analyzed the dynamics of housing in Britain, particularly the economic factors influencing the housing crisis. My expertise is grounded in a comprehensive understanding of historical trends, economic shifts, and policy implications related to housing.
The information presented in the article revolves around the transformation of housing into a financial asset in the latter half of the 20th century and the subsequent housing crisis in Britain. Let's break down the key concepts:
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Historical Context:
- Housing in Britain became a financial asset in the second half of the 20th century.
- The article refers to a shift to taxing land as a proposed solution to address the housing crisis.
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Housing Crisis in 1974 vs. Today:
- Activists occupied London’s Centre Point Tower in 1974 during a housing crisis characterized by rising homelessness and many empty homes.
- The current housing crisis is considered worse than that of 1974 due to factors such as the decline in public housing construction and the disproportionate increase in house prices and rents compared to earnings.
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Economic Shift in the 20th Century:
- Housing was transformed from a home into an asset in the latter part of the 20th century.
- Governments collaborated with financial lenders to stimulate demand for private housing, reducing the state's role in providing council homes.
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Land Value Tax Proposal:
- Economists, inspired by Henry George, propose a regular tax on land values as a solution to the housing cost crisis.
- The article argues for a shift in focus from taxing earnings to implementing a land value tax, which could ease the housing cost crisis.
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Impact of Housing as an Asset:
- House prices outpaced inflation, making UK housing attractive for domestic and international investment.
- Governments began to view house prices as a measure of economic health, and the underlying value of land became foundational to the UK economy.
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Benefits of Land Value Tax:
- Implementing a land value tax is proposed to increase net workplace earnings, suppress house prices, and address the disconnect between housing costs and people’s ability to cover them.
- The tax could discourage leaving homes empty, promoting productive use of land and housing.
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Fairness of Land Value Tax:
- The article argues that a land value tax is not an attack on aspiration but a means of ensuring affordable access to housing.
- Taxing unearned rent (land values) is considered fairer than taxing work, as land values are influenced by the agglomeration of human activity.
In summary, the article proposes a land value tax as a key solution to the housing crisis, emphasizing its potential to address affordability, suppress house prices, and promote a more balanced and fair housing system in Britain.
