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.
- Original article in The Conversation
- Professor Nick Gallent's academic profile
- UCLBartlett School of Planning
- UCLThe Bartlett Faculty of the Built Environment
I am a housing and urban planning expert with a deep understanding of the historical and economic aspects of housing in Britain. My expertise is grounded in the transformation of housing into a financial asset during the second half of the 20th century, as well as the implications of this shift on the housing crisis. I have a comprehensive knowledge of the economic factors, policy changes, and societal shifts that have contributed to the current challenges in the housing sector.
The article you provided discusses the evolution of housing in Britain into a financial asset and suggests a potential solution to the housing crisis through a land value tax. Here's a breakdown of the key concepts mentioned in the article:
Transformation of Housing into a Financial Asset:
- Governments collaborated with financial lenders to increase demand for private housing.
- Reduced credit controls in the 1970s and banking deregulations made it easier for families to secure larger mortgage loans.
- The housing market became a magnet for domestic and international investment, turning housing into an asset.
Economic Shift and Housing Crisis:
- The disconnect between housing costs and people's ability to cover them is attributed to the economic shift in the latter part of the 20th century.
- House price growth outpaced underlying inflation, leading to a housing cost crisis.
Land Value Tax Proposal:
- Economists, inspired by Henry George, propose a solution: a regular tax on land values.
- The removal of regular tax on the beneficial interest in land values, as per the 1963 Finance Act, contributed to the housing crisis.
Benefits of Land Value Tax:
- A land value tax would be fixed to ownership of any housing, distinct from council tax.
- It could increase net workplace earnings and suppress house prices, addressing the housing crisis.
- The potential to keep people, especially the over-50s, in the job market by reducing the reward from owning housing.
Fairness and Impact:
- A land value tax is viewed as fair, ensuring affordable access to housing and reducing wealth inequalities.
- Taxing unearned rent (land values) is considered fairer than taxing work.
- Private landlords might seek to recover land tax losses through higher building rents, but this could be tempered by the release of empty homes to the market.
Restructuring the Economy:
- A comprehensive taxing of ground rents could shift the economy away from housing-based rentierism.
- Lower land values might facilitate councils in building homes, including in new towns.
In summary, the article advocates for a land value tax as a crucial step in addressing the housing crisis, providing a detailed analysis of how the housing market evolved into a financial asset and the potential impacts of implementing such a tax.