By Roger Jarman, HQN Associate.
After the bruising no-confidence vote on 6 June, Boris Johnson began the “re-set” of his premiership the following Thursday, with major policy announcements on housing.
His trio of initiatives on the Right to Buy for housing association tenants, the use of benefit income to pay off mortgages for low-income households and mechanisms to improve access to mortgage finance for households with little or no savings have (unsurprisingly) been met with dismay and incredulity from the housing sector.
But like all mainstream politicians, the prime minister is just tinkering at the edges of the housing crisis that has afflicted the UK for a generation and more.
The key problem for the sector in the UK – but not unique to this country – is the ‘commodification’ of our housing assets. Housing is seen as more of a financial asset than a place to live, take roots in a community and perhaps raise a family. This has been exacerbated by the poor returns from other forms of investment: pension funds, the stock market and savings accounts.
So, perversely, as the pandemic dented economic growth and real wages fell, house prices increased significantly and now stand at record levels. This is all happening at a time when interest rates are projected to rise as inflation nears 10%.
Rising interest rates should herald a fall in house prices. But maybe this just won’t happen given the wall of money propping up investment in the UK housing stock.
These trends have had a catastrophic impact on the affordability of housing. As recently as 1997 the salary to house price ratio was 1:4. Police officers, teachers and nurses could become owner-occupiers back then – and often when they were only in their twenties.
The same ratio today is 1:15, putting owner-occupation out of the reach of most young people on average pay unless the ‘bank of mum and dad’ can provide deposits that keep mortgage repayments at affordable levels.
So, what’s the answer? Certainly nothing proposed by the PM. In fact, his policy initiatives are likely to make matters only worse, largely stoking demand and doing nothing to increase supply. No wonder the government has quietly dropped its manifesto commitment to build 300,000 homes a year.
Fundamentally we need to see the affordability ratio reduce to the levels we saw in the 1990s. One way to achieve that is through a massive investment in housebuilding so that housing supply outstrips demand.
But some commentators have estimated that this would involve the construction of one million homes a year. That just won’t happen – and neither should it, not least because the country could not build housing at such a rate (or afford it) and there are adverse sustainability/environmental concerns that need to be considered too.
Like Professor Danny Dorling and others have commented, we need to make more efficient use of the housing we have. Broadly, there’s a household/dwelling balance in this country. And there are 20 million+ spare bedrooms. The best way to make more efficient use of our housing is to introduce a property tax that incentivises households to consume only the housing they need.
Where housing is an investment good and property taxes are low or non-existent (ie, in the UK) individuals are encouraged to ‘over consume’ housing. This is a waste of resources and drives up prices. Council Tax (CT) is levied on households to pay for local authority services. It’s a property tax of sorts but as CT bands have remained in aspic for 30 years, it’s become increasingly regressive as house price inflation has taken grip.
A fully-fledged annual property tax could help to redress the balance of the tax burden in the UK, where 85% of tax is taken from personal incomes and consumption activity (eg, VAT).
Furthermore, as part of a package of reforms, Stamp Duty could be abolished thus assisting those households looking to move home given the tax burden associated with the ‘over-occupation’ of their housing. Low-income households looking to remain in property with a relatively high property tax could have charges placed on their property so that the tax can be collected on death.
There’s already a campaign which in part addresses this issue. Fairer Share advocates a proportional property tax (PPT) that would replace CT and Stamp Duty on residential sales. An annual tax of 0.48% on the value of all residential property in England would raise as much income as CT and Stamp Duty does currently.
Fairer Share claims 75% of households would benefit from such a reform, with households living in areas of low property values in the North of England and the Midlands seeing the biggest savings on their CT bills.
This modest measure would dampen demand for housing as an investment good and would put downward pressure on house prices. The tax rate could also be increased if policymakers wanted to take further heat out of the housing market at any given time.
As a quid pro quo, tax on incomes and/or consumption could be reduced. This would ensure that the overall personal tax burden would remain broadly neutral across the economy (although the effects would play out differently for individual households).
More efficient use of the housing stock would emanate from further tax measures, such as increased taxes on second/holiday homes and heavy financial penalties where homes are left empty.
To complete a virtuous circle, additional funds raised from something akin to a PPT and other taxes could be pumped into the provision of new social housing.
Vested interests will undoubtedly ensure that the UK’s dysfunctional housing market, and its damaging addiction to ever higher house prices, remains in place for some time to come. But at some stage the harm this system causes for millions priced out of the housing market, and to the economy more generally, will need to be addressed.
Perhaps part of the solution to the UK’s failing housing system might see the introduction of a PPT (or similar) to help make housing affordable once again.