The ‘housing crisis’ is no such thing. It is a ‘transfer of wealth’ crisis
Reprinted from “Young People’s Party” submission to the Intergeneration Commission.
The current state of the housing market is not a ‘crisis’ – something that suddenly happens because of unforeseen forces outside the government’s control – but the inevitable result of quite deliberate changes in government housing policy over the last thirty years, i.e. the dismantling of the old system.
There is no lack of physical housing in the UK. All we are seeing is a massive transfer of wealth (via house prices and rents) from younger generations to those lucky enough to have inherited land, or acquired it cheaply in the past (the Baby Boomers).
YPP is a modern progressive party, but we have not forgotten the lessons of the past – for most of the 20th century the UK simply did not have a ‘housing crisis’, and there is no mystery as to how this happy state of affairs was achieved.
No UK government since the Liberal government of 1909 was ‘Georgist’, but there was a tacit acceptance that there has to be a limit to how much wealth could be transferred from the many to the few via land ownership, which was and still is highly concentrated in very few hands.
So while we have never had Land Value Tax as a major component of the tax system, for most of the 20th century there was a bundle of policies that had a similar effect on the distribution of housing wealth. And the bundle worked: from 1945 to the 1980s house prices and rents were relatively low and stable; owner-occupation levels increased rapidly from 30% to 60% and the number of social tenants increased from 20% to 30%. What is less often mentioned is that the number of households renting privately fell from 50% to under 10%.
So, what were we doing right until the 1980s, and what has changed since then?
- The government had been controlling rents since 1918 with a series of Rent Acts. Landlords could only collect some of the location value so a lot of it went to tenants or first time buyers for ‘free’ and as of right. The 1988 Housing Act ended rent controls and rents have been rising faster than wages ever since.
- Rent controls reduced the amount which landlords were prepared to pay for a home, making it much easier for first time buyers to compete. Until s21 of the 1988 Housing Act was amended in 1996 to make no-fault evictions much easier, banks were unwilling to lend to buy to let landlords. After the change, leveraged speculation by ‘investors’ became the norm.
- The private home building sector cannot be relied on to build enough homes to keep prices down. They are profit maximising enterprises and their profit maximising level of output is to dribble one new home onto the market for every nine existing homes that are bought and sold each year. So if there is a downturn in normal market activity (2008 onwards), then developments are mothballed. Schemes like Help to Buy and its predecessors since 2009 have merely pushed up prices without increasing the rate of new constructions. There is a school of thought that by easing planning restrictions, more homes will be built and prices will come down. The fact of the matter is that the large home builders control land banks with planning permission for ten years’ worth of supply, and they make more profit from land price gains than from building homes.
- Rent controls are a blunt tool with their own unintended consequences (lack of supply). In the medium term, their major impact was not keeping rents down for private tenants but – by making the housing market unattractive to private landlords – making it much easier for tenants to buy their own homes.
- So local councils built 150,000 units of social housing each year until the 1970s, which were relatively easily available at very affordable rents. Council house building fell to a trickle in the 1970s and until the council house sell-offs, there was no need for Housing Benefit and mortgage lenders earned nothing from the social housing stock. One-third of council homes sold off are now rented out privately at rents inflated by Housing Benefit payments.
- There were mortgage restrictions to stop first time buyers entering into a borrowing arms race and bidding land prices back up to their unregulated value. Until the 1980s, the average loan-to-income multiple was as low as two. Nowadays multiples of over four are the norm and deposits have to be much higher. The deposit required to buy a home in London is about as much as it would have cost to buy that home outright twenty years ago.
- To prevent homes in the more expensive areas being sold to the cash rich owner-occupiers for their unregulated value, there was Schedule A taxation of notional rental income (until 1964) and Domestic Rates (until 1989) which were highly progressive – the tax on the most valuable homes was a hundred times as much as on the cheapest. Abolishing Schedule A taxation while retaining MIRAS was a major factor in the house price bubble of the early 1970s. The government had to mask the following real terms house price crash with hyperinflation – which in turn led to the UK’s ‘lost decade’. Replacing Domestic Rates with the short lived Community Charge (aka Poll Tax) and then Council Tax was a giveaway for those in large or valuable homes and further pushed up prices.
- Also worth a mention is that for most of the period, rental income was taxed at higher rates than employment income. Over the last thirty years, income tax rates have come down and National Insurance contribution rates have gone up. Buy to Let Landlords only pay income tax, so this has shifted the tax burden from landlords onto workers and businesses.
- Until 2009, the Bank of England base rate was set at a market rate (it tracked 3-month LIBOR), which was good for savers and kept a lid on house prices. Since then, the base rate has been kept artificially low – below inflation, merely to sustain the house price bubble and subsidise the financial sector, all at the expense of older savers and younger people who would like to buy their own home.
Many Baby Boomers have conveniently forgotten how they benefitted from all this and genuinely believe that they are somehow morally superior to those born after 1975 or so because they ‘rolled up their sleeves and paid off the mortgage’.
They are blind to the fact that they could buy their homes relatively easily because all these policies kept house prices down to affordable levels. They did not even pay off their mortgages out of taxed income – their interest payments were subsidised via MIRAS, so a large chunk was paid out of untaxed income.
Having benefitted from the old system when they bought, the Baby Boomers made massive tax-free windfall capital gains (albeit often only on paper) when the tried-and-tested policies were phased out, with entirely predictable results:
- The number of households renting privately has doubled since the early 1990s, from an all time low of 9% back up to 20% of all households today and the number of social tenants has fallen to 17%.
- Owner-occupation levels have fallen from 71% to 63% over the last fifteen years and this is a continuing trend. Owner-occupation rates for the under-40s are half what they were twenty years ago.
- Housing Benefit now costs the taxpayer £20 billion a year, half of which goes to private landlords, twice the amount they pay in income tax.
- House prices have more than doubled relative to earnings – from a long-term average of three-times-earnings to over six-times-earnings today.
- The banking sector has swollen to a dangerous size, lurching from one crisis to another (being bailed out by taxpayers and savers every time) and dragging the whole economy down with it.
YPP’s preference would be to adopt a ‘Georgist’ tax system, with lower or no taxes on output and employment, earned income and much higher taxes on location values (Land Value Tax). This would ensure a fairer distribution of the benefits of land ownership (as under the old system), with an average working household being considerably better off, with the added benefit that the productive economy will grow much more quickly and sustainably.
Failing that, and at a bare minimum, YPP would like to see the old system reintroduced:
- Replace existing taxes on residential land and buildings (primarily Council Tax, Stamp Duty Land Tax and Inheritance Tax) with a flat Land Value Tax (akin to Domestic Rates) and reform Business Rates into Land Value Tax and extend it to home builders’ land banks.
- Reduce National Insurance contribution rates and the main rate of VAT and increase income tax/corporation tax rates to match.
- Reintroduce rents controls and rent caps for private tenants
- Increase construction of social housing for truly affordable rents.
- Banks and building societies to cap residential mortgages at three times main income or twice joint income.
- Abolish Help to Buy
- Phase out Housing Benefit payments to private tenants i.e. private landlords
- Abolish tax relief for interest paid for private landlords
- Increase the Bank of England base rate to inflation plus 1%.
None of these suggestions are ‘pie in the sky’. They are based on what worked so well in the past. We are more than happy to discuss the finer details of all these recommendations if required.
We are – of course – well aware that a shift to LVT will have to be a gradual process, carefully managed in administrative and political terms. A robust system of valuations can be done quite easily; but there will have to be a deferment option for low-income pensioners; relieving measures for recent purchasers who find themselves in negative equity; protection for bank depositors; and equal and opposite reductions in other taxes so that most households realise that they are better off and their annual tax savings more than make up for a one-off fall in house prices. These principles apply even if only our less radical suggestion of going back to the old ways is adopted.