A great many people who would like homes of their own cannot afford them. What can be done to improve the situation?
The present position.
Something like one and a half million households would like homes of their own, but cannot afford them. Even when people are in work, house prices are often out of their reach. Yet many construction workers are unemployed.
House building encroaches on “greenfield” land, yet there is a lot of vacant “brown” land in the middle of most of our towns.
Many solutions have been proposed to get us out of the mess, but it remains as bad as ever.
Penetrating the paradoxes.
If we want to improve the situation, we need to understand the economics of housing.
The price of what we call a “house” is really two completely different things. There is the price of the building, and there is the price of the site – the land – on which it rests. The price of buildings follows essentially the “law of supply and demand”. If the demand is increased, the price goes up a little, and people will then produce the bricks, glass, timber and labour to make more houses – whereupon the price goes down again.
The price of land doesn’t follow the “law of supply and demand”. There is no way of making more land. So, when there is a big demand for housing land, the price just goes up and up. The ordinary householder who looks at prices in an estate agent’s window sees the price of “houses” going up, without necessarily distinguishing whether it is the price of the land or the price of the building which rests on it which is changing..
Eventually the price of housing land reaches a figure so high that people can’t afford it. Meanwhile, the same kind of thing is happening to other kinds of land – industrial land and agricultural land as well as housing land.
Then there is a sudden fall – a slump – and the whole economy comes to a shuddering halt. That is roughly what happened in 2008-10. In another Topic Paper of this series – No.7 – we discuss the boom-slump question in more detail; but we will consider here the specific question of housing.
To overcome the housing paradoxes, we need to treat land and buildings in different ways.
Making land available.
The value of housing land is not created by the owner, but by its location. That means the availability of such things as pleasant views, good roads, public transport, schools, shops, hospitals, open spaces and so on. The different value of different plots of land is determined by who wants it, and how much they want it.
Much land is unavailable for housing, because of planning rules. There is no need to interfere with those rules, because there is plenty of land which could carry houses which is not doing so. In almost any town there are large areas of land which are available for building, but which are unused, or under-used.
The way to make that land available is by a reform known as Land Value Taxation (LVT). Supporters of LVT think that it would have many other benefits as well as its effects on housing, and some of those benefits are discussed in other Topic Papers in this series. Here, however, we will just consider housing.
Under LVT, the value of all privately-owned land will first be assessed. That valuation will not consider the value of any “improvements” which have been put there by human activity, such as buildings, machinery or crops, but will consider the site alone. Professional valuers assure us that this job can be done quickly and easily. Once the valuation is complete, a tax will be collected, related to that value. At first the tax will be small, but as time goes on it will be increased, and at the same time less money will be needed from other taxes, such as Income Tax and VAT.
What will happen?
1. Much building land will come on to the market. People who have been holding it out of use in the hope of getting a better price later will be glad to sell it, because they will have to pay the same LVT whether they use it or not.
2. Land prices, which at present fluctuate wildly from year to year, will drop and stabilise. This will greatly reduce the danger and severity of slumps.
3. A lot of people who hitherto could not afford to buy houses because of the cost of the land will be able to do so.
4. Other taxes, such as Income Tax and VAT, will be dramatically reduced.
5. Because the tax on a particular piece of housing land will be the same whether it is well used or badly used, derelict house property will be replaced by better housing.
6. Pressure of housing developers to persuade planning authorities to release Green Belt land will be reduced, because there will be more land available in the towns.