UK national housing crisis

Mark mark at
Mon Feb 26 12:50:53 GMT 2007

3 articles from the Guardian in the last couple of months which have been
pretty good (last one advocates land tax - based on argument of Fred
Harrison from the Land Research Trust)

Slippery slope
By underpinning Britain's soaring house price inflation, the planning
system favours the interests of the middle class at the expense of the poor

by Oliver Marc Hartwich
Wednesday January 24, 2007
The Guardian

The recent BBC documentary, What Makes Britain Rich?, began its
investigation into the wealth of the nation by looking at the value of
the houses we own. An understandable starting point, one might think,
considering that the Halifax had just estimated that the UK's total
private housing stock was worth £3.8 trillion.

One can only begin to understand this staggering amount of money by
putting it into perspective: it is a sum larger than the national
economic output of the UK, France and Germany combined. Not only that,
house prices went up by £410bn last year, which is more than the annual
GDP of Australia.

Surely, then, rising house prices must be a good thing if they continue
to make us all so much wealthier? But things are not that simple, and
rising house prices are at least as much a curse as a blessing. In fact,
they may be both simultaneously; it very much depends on who you ask.

The basic problem of high house prices is that they have reduced social
mobility: the chance to climb up the property and, thereby, the social
ladder. Those who already own land or property benefit at the expense of
others who do not. At the root of this gross injustice is a system that
is still regarded by many as rather benign regulation, the planning system.

Policy of containment

Planning was introduced to coordinate development while ensuring that
people could live their lives in decent accommodation and in a pleasant
environment. In operation, however, it has become a piece of policy
machinery that, perversely, limits the spatial extent of cities, thus
cramming more and more people into existing spaces. Land was to be saved
from development, but this policy benefiting the rural few came at the
expense of the urban many. So, eventually, the winners of this planning
policy of containment were the property owners, the rich and the rural
population. At the same time, people in the city with no property,
first-time buyers and the younger generation lost out. It is in this way
that the planning system has become a burden on society.

Still, for a nation that has developed a seemingly insatiable appetite
for consumption and luxury, rising house prices have become not only a
kind of steroid but also an addictive self-fulfilling prophecy. The more
we grow accustomed to ever-rising house prices, the more increases we
expect in the future. Since we believe that house prices can only go one
way, those who can afford it are pumping more and more money into the
housing market - often financed through borrowing against property they
already own. As a result, house prices rise even further, benefiting
those able to invest in property.

So for the owners of land and property, rising land and house prices are
obviously a good thing. They are the real beneficiaries of our
restrictive planning system. But what about the others? What about those
who are struggling to make their first steps on the property ladder?
What about those who, upon buying their first home, find themselves
trapped in debt, with mortgages sometimes stretching over five decades
at more than five times their salary? What about the younger generation,
who can only dream of being able to afford the kind of home that their
parents were able to purchase when they were their age?

Quite the opposite of having been made richer, these people are the
losers of our culture - or perhaps one should say cult - of house price
increases. For them, the property ladder has lost its bottom rungs. Not
only that, they have not been able to join in the joys of increases in
their personal wealth, but they are positively prevented from
participating in any future house price increases.

Looking for the reasons behind rising house and land prices, it is
impossible to overstate the role that the planning system has played.
Since the Town and Country Planning Act was introduced in 1947, British
cities have been constrained in their spatial extent by a policy of
limited land supply. Where demand is growing and supply is restricted,
economic theory predicts that prices have to go up, and this is
precisely what has happened.

A hectare of land without planning permission will sell for an average
price of around £10,000 in England, but residential land fetches a
price, on average, of more than £2.6m per hectare - the result of
planning-imposed artificial scarcity. This is an unnecessary condition,
especially considering that, far from being an urbanised country, only
10% of the UK's land mass is developed - far less than in countries of
similar population density.

With all these problems becoming ever more apparent, it should be clear
that our general smugness about our record of house and land price
inflation is unjustified. Something has to be done if we do not want to
risk losing our economic competitiveness and creating further divisions
within society.

The key to reform has to be the supply side of the market. Only if we
significantly increase the land available for development will we stop
the rampant property inflation. If supply goes up, prices will fall.
This means that planning must become less complex. Not only must we
coordinate development, rather than hindering it, but we must also
encourage development by giving local communities fiscal incentives.

Our report, The Best Laid Plans - How Planning Prevents Economic Growth,
makes several recommendations that would ensure the planning system
works faster and does not act as a brake on development, but would,
rather, be a facilitator. We believe that it would make sense to
introduce simplified planning zones as a measure to reduce delay and
speed up the planning system. Planning generally should be much less
complex and the level of detail that planners deal with must be reduced.
The national green belt policy is a clumsy way to protect the
countryside and we would like to see local communities making their own
decisions about their environment.

Social tariff

Apart from these reforms within the planning system, we believe that it
is necessary to positively incentivise communities, planners and
politicians. In our report, we suggest the introduction of a tariff to
compensate local communities for the social cost of development. This
tariff would be worth a maximum of £500,000 a hectare, to be paid by
developers, and it would go entirely to local councils.

All of these measures, whether they are simplifying the planning system
or encouraging development through incentives, will have the effect of
strengthening development. This way we will help to stabilise - and
eventually, perhaps, even reduce - house prices.

It is time to change our attitude to high land and house prices. What we
should strive for is price stability at the very least. This would
strengthen our economic competitiveness, and future generations of
first-time buyers will thank us - if national politicians ever have the
courage to stop feeding the craving of the middle class for
exponentially increasing house prices.

· Oliver Marc Hartwich is research director at the Policy Exchange
thinktank. The Best Laid Plans - How Planning Prevents Economic Growth,
by Hartwich and Alan W Evans, is published today by Policy Exchange.

Property boom pushes value of homes to record £3.8 trillion

by Angela Balakrishnan
Monday January 15, 2007
The Guardian

The booming property market has pushed the total value of Britain's
private homes to a record level, according to the country's largest
mortgage lender.

The annual housing stock review from the Halifax showed the UK's private
housing stock was worth £3.8 trillion in 2006, up by £410bn or 12% from
the previous year. The rise is equivalent to four times the total budget
for the National Health Service.

While underlying retail price inflation has only come to 14% over the past
five years, the value of residential housing has climbed by 78%.

The latest figures will add weight to calls from campaigners and
economists who argue for a tax on property or land price gains. Last year,
for example, inheritance tax and stamp duty raised only £8bn, just 2% of
the annual rise in housing value.
The steep climb in property values means housing equity now significantly
outweighs mortgage debt. While housing assets jumped by more than £400bn,
mortgage balances increased by less than a quarter of this.

"The UK's household balance sheet is in good shape," said Tim Crawford,
economist at Halifax. "Total housing assets [£3.8 trillion] are now worth
3.5 times the overall level of housing debt. Ten years ago, 2.9 times was
the equivalent figure."

A breakdown of the data revealed that Northern Ireland saw the strongest
rise in the value of its housing stock over the past five years, up 165%.
The north saw the largest rise of the English regions, with a gain of 130%
over the same period. However, every region has experienced gains of at
least 50% since 2001.

Cities accounted for over one-third of the value of total housing wealth
at £1.3 trillion. London makes up around half of that figure, helped by
demand from City workers looking to spend their annual bonuses. But
northern cities have seen the sharpest rises in recent years, with
Lincoln, Kingston-upon-Hull and Salford leading the way.

Despite robust price rises in London and the south-east, the report said
the north-south housing wealth gap had narrowed in the past five years. In
2006, the south accounted for 55% of total housing assets, compared with
62% five years ago. However, the Halifax said the north-south divide had
held steady during the past year.


A land tax is 200 years overdue

by Ashley Seager, economics correspondent
The Guardian
Monday January 8, 2007

A levy on what lies beneath our overpriced houses could reduce society's

We have now lived through 10 years of New Labour and a massive housing
boom. The two are inextricably linked and the latter goes to the heart of
understanding why there is still an excluded underclass in Britain.
Gordon Brown said in his budget speech of 1997: "I will not allow house
prices to get out of control and put at risk the sustainability of the

Since then house prices have tripled, adding £2.5 trillion to the wealth
of those owning residential property - equivalent to two years' national

Last year Tony Blair said: "There is a group of people who have been shut
out of society's mainstream and we have not yet found a way of bringing
them in properly." He fretted about the issue again in last week's new
year message. Labour has been rattled by its inability to narrow income
Might there be a connection between that huge untaxed wealth gain and the
fact that the excluded people Labour are concerned about are generally
living in rented property? You bet. Does economics offer insights into
what could be done? You bet.

The government's response is to try and raise the share of home ownership
from 72% now to 80%. But how they think someone on £15,000 a year can
afford the average of £150,000 that first-time buyers are paying is beyond

Beware of the bull
The problem, they imply, is not so much that property prices have risen so
fast but that not everybody can share in the gains. But as Martin Weale,
director of the National Institute of Economic and Social Research, puts
it: "People say that not everyone is benefiting from house price rises.
The problem is that house prices are rising in the first place."

Residential property is an unproductive asset. If all houses rise in
price, we do not, as a society, get richer. As Mr Weale noted in a fine
paper last year, rising house prices do not create wealth, they merely
transfer resources from people who will own houses in the future to those
who own them at present.

Rising house prices have also led to a huge rise in debt, a drop in
savings and a "crowding out" of investment in more productive enterprise.
The fact that house prices have risen far faster in the south-east than
elsewhere also inhibits labour mobility because someone in Scotland -
where prices have only doubled over the last decade, not tripled, and from
a much lower base - finds it hard to move south.

The government's raising of stamp duty has also discouraged people from
moving and has been blamed for pushing up prices by inhibiting supply.
Housing stock is not being used efficiently.

There has been a global housing boom, of course, but it has been bigger in
the UK than elsewhere. Even allowing for Britain's lack of housebuilding
and its rapid population growth, Mr Weale thinks house prices here are 20%
or 30% above the level that can be explained by the supply and demand.

The gap could be down to the fact that house price gains are not taxed,
meaning it is has a tax advantage over any other type of asset, even after
stamp duty and inheritance tax are taken into account. Last year,
inheritance tax and stamp duty raised £8bn, just 2% of the £340bn that
house prices rose by in total, which is nearly four times the total NHS
budget. The idea that these taxes are too high is laughable.

And people withdrew about £45bn of this untaxed capital gain last year to
spend on things such as second homes, new cars and deposits for their
children's houses. Was that money available to renters? No chance.

Consider this. The government builds a new school in an area. The school
is a success. This pushes up the house prices in the area leading to a
windfall, untaxed gain for home owners as a direct result of government
spending. The teachers in the school, on their modest salaries, will
probably not be able to buy a house close to the school. There is clearly
a problem here.

Fred Harrison, research director at the Land Research Trust, has just
published a book on this "great tax clawback scam". It works as follows.
Someone in the bottom 20% of the income spectrum pays about £250,000 in
taxes in their lifetime. Someone in the top 20% pays £1.2m in taxes. But
those at the top will own property and see their total tax liability wiped
out in just a couple of years by rising property values. This does not
happen to the bottom 20%, since they are renters.

Mr Harrison points out that the Blairs' London house rose by nearly £1m in
value in the past year alone, accounting for a huge chunk of their total
lifetime tax payments. Thus the rich get a free ride on the backs of the

This is the fundamental reason, Mr Harrison says, why the welfare state of
the past 60 years has not worked.

So what is to be done? Mr Harrison, Mr Weale and other economists say the
burden of taxation needs to be shifted off income and profits and on to
those untaxed gains in property values. In short, we need a land value

The wealth of other nations
This is a not a new idea. Adam Smith argued two centuries ago that such a
tax was a "peculiarly suitable" way to raise revenue since it did not
distort people's incentives to work, save and invest. Churchill favoured a
land value tax, as did Lloyd George. Mr Weale advocates a tax charged on
residential property at 1% of its value each year, replacing council tax.

Mr Harrison, and others such as David Reed at the Labour Land Campaign and
Dave Wetzel of the Professional Land Reform Group, argue for a tax on all
land to encourage its more efficient use.

Think of the 13-hectare Battersea Power Station site, which has stood
derelict since 1982. It was sold last month for £400m by a developer who
bought it for £10m in 1993. A yearly tax on its value would have focused
owners' minds on making better use of it.

House buyers would factor an annual tax on the value of the land under the
house into calculations of what they would be prepared to pay for it. This
would lower prices and discourage speculation. Second homes would carry a
higher cost than they do now.

This is not about raising more tax revenue. The revenue from a land value
tax would be used, for example, to scrap stamp duty and/or council tax or
to reduce income tax or VAT, which is highly regressive. Many countries,
such as Denmark and Australia, already have some form of value tax. Hong
Kong - that bastion of free-market capitalism - has no private land
ownership at all. Land is owned by the state and leased.

A land value tax is hard to avoid. The world's super rich who spend much
of the year in London but avoid paying income tax could not avoid the tax
on a big house in Mayfair.

Land has a scarcity value when it is in desirable locations. That value is
not down to individual effort but derives from the community, and often
from schools, hospitals and parks provided by the public purse. Therefore,
as the economist David Ricardo explained, land has a rental value that can
be taxed.

Mr Blair and Mr Brown regularly call for national debates. Let's have one
on a subject that could make the New Labour project actually work.

· The Housing Market and Government Policy, Martin Weale, NIESR Economic
Review No 195, 2006

· Ricardo's Law: House Prices and the Great Tax Clawback Scam, Fred
Harrison (Shepheard-Walwyn) 2006

More information about the Diggers350 mailing list