My house earns more than I do, and has done so every year since we bought it: nice for me, but less so for my children, and horrible for the vast majority of their generation, who made the terrible mistake of being born to parents who don’t own property in southeastern England.
The housing crisis doesn’t just throttle labour mobility; it crimps lives. People start families later than they want, commute longer distances and live in crowded conditions.
This stokes a smouldering generational resentment. Change will be slow and painful. But failing to do so risks social upheaval. People yearn to own their own homes. Why shouldn’t they? It chimes with the natural human nesting instinct. Our homes are not just bricks and mortar, they are suffused with memories and associations. Home ownership spreads wealth, solidifies families, entrenches happiness and stokes civic feelings.
But as house prices have outstripped incomes, home ownership has become unaffordable. As a thought-provoking report for the think tank Civitas earlier this summer pointed out, between 2000 and 2014 average earnings rose by 51 per cent, but average house prices rose by 132 per cent.
The causes are complex. It is too easy to blame only a failure to build. Other factors matter too, such as the shrinking size of households. By most counts, scarcity (the housing stock relative to population) now is no worse than it was in the 1970s. Even the biggest housebuilding programme we can practically manage won’t dent prices as long as we continue to subsidise demand.
So first, we should stop throwing fuel on the flames. The government’s gimmicky help-to-buy schemes give a lucky few a foothold on the over-priced bottom rungs of the ladder. But these programmes make the problem worse for everyone else.
The real answer is to remove some of the economic rent (unearned income) from the lucky generation — mine and my parents’ — and transfer it to “Generation Rent”, whose plight was so clearly outlined in yesterday’s report by the Resolution Foundation.
It is impossible immediately to do anything about Britain’s absurdly low interest rates, which hurt those saving for mortgage deposits (or retirement or anything else), and make life unfairly easy for those who already have them. But we can use regulatory means to curb the supply of cheap credit to landlords. The buy-to-let boom has been a boon for them, but tightens supply further for Generation Rent.
Next, we need to bring as much supply as possible on the market. This means abolishing stamp duty. It is not just inefficiently costly to collect. It creates even more inefficiency by deterring buyers and sellers. In effect, it is a tax on moving, which slows labour mobility and keeps people trapped in parts of the country where they no longer want to live or work. It also slows down the downsizing (and upsizing) needed if the housing market is to work properly. Both recent major UK tax policy studies, the Mirrlees Review (by the Institute for Fiscal Studies) and one from the 2020 Tax Commission, recommended abolishing this tax entirely.
Then we should introduce a real land-value tax. This would be levied not on the value of the house (as with current council tax, and the old rates) but on the value of the land itself. This has many advantages. First, it hits the rich (who own land) much harder than the poor (who don’t). In particular, it raises the cost of living in a big house, but hardly affects people in small flats. It penalises those who sit on land waiting for it to rise in value — as was scandalously the case for decades with Battersea Power Station. If you pay tax on land whether you use it or not, you are more likely to bring it into productive use or sell it. Most taxes depress economic activity; land-value taxation actually stimulates it. It is cheap to collect and hard to dodge.
Land-value taxation also tackles the root of the housing problem: unearned income. The value of my house has little to do with my DIY skills. It has a great deal to do with the spectacular development of our once-grotty corner of London, notably the new Imperial Wharf Overground station — for which we paid nothing.
Tougher measures will be needed too. Until 1963 in this country we taxed “imputed rent” — the money that owner-occupiers would be paying if they rented their properties. This was called “Schedule A”. Abolishing it has slowly skewed the market in favour of those who own property, and against those who are trying to buy it. Not only is Generation Rent trying to scrape together a mortgage deposit out of taxed income. Its members are also paying the rent out of it too. Meanwhile those of us with our mortgage wholly or mostly paid off are living tax-free in an asset that is fast appreciating.
Taxing people to live in their own homes will produce howls of protest. But this will pale beside some even more drastic moves that may be necessary. One is ending capital gains tax exemption for residential property. I am against capital gains taxes in general. But if we have them, they should be levied widely, not narrowly. It doesn’t make sense to exempt a large chunk of our housing stock, when the bubble in its value has such pernicious social effects.
The most draconian measure of all— advocated by the Civitas report mentioned above — would be to introduce a right to buy for private tenants. This could be done in a market-friendly way (making sure that the landlord didn’t lose out), or in a confiscatory way, perhaps accompanied by 1970s-style security of tenure and rent freezes.
The effects of this on confidence would have course be catastrophic. The 1977 Rent Act crippled the private-rental market, in effect expropriating landlords without compensation. Even now tens of thousands of lucky tenants still enjoy security of tenure and tightly controlled non-market rents.
But the overreach of the past should serve as a warning now. If we do not deflate the housing bubble and make its beneficiaries pay more, we will sooner or later have a government elected by the majority of the population who are suffering from its effects. It will run housing policy based on what it regards as fairness; property rights will come second — or nowhere.
