Britain’s economic slowdown, the role of housing and land, and what to do about it
In the last few weeks, two eminent broadsheet columnists coincidentally produced dovetailing pieces about the strategic need to remake housing policy. Will Hutton, in the Observer, detailed the nature and wider significance of our wasteful housing (Hutton compared the ossifying declines and policy mistakes in sixteenth century Venice and eighteenth century Spain as precursors for what is going on in the UK now). Martin Wolf in the Financial Times recognises that many of these weaknesses stem from government (and, with exceptions, economists) resistance to thinking seriously about land as a factor of production and makes an economic and moral argument for Land Value Taxation (LVT), one backed by recent international econometric research.
Unaffordable homes and mortgage debt reliance, but no effective policy levers
Hutton argues, first, that downsizing to release equity, to help fund children into otherwise unreachable home ownership, is now a multi-billion pound annual wealth transfer that relies on baby boomers’ good fortune to be recipients of long term rising real house prices. Your age and associated access to unearned housing wealth appreciation has never been more important in determining housing tenure. While it is the over 55s who now own the vast majority of housing equity, consider those future retirees who will now never own, will have to continue to pay rental costs in their retirement, and magic up sufficient pension income to get by.
Hutton contends that rising property costs and required increases in savings are leading to many households deferring children. This may help to explain declines in the UK’s fertility rate which is well below replacement levels. He calls this a ‘gathering social disaster’.
The blame is also placed on the Right to Buy (still forging ahead in England), which he argues should be suspended, as and until ‘failsafe mechanisms’ are found for replacing lost social sector homes one-for-one. We may wait a long time for that guarantee to be realised. Hutton reiterates long-standing themes in his writing that the UK needs a sustained programme of large-scale housebuilding including essential social and affordable housing.
At the same time, more broadly, he argues that the UK financial system is ‘organised around’ property lending that serves to support bank profitability and balance sheet ‘soundness’, for which reform, which will not be easy, is long overdue. Hutton also rails against the un-revalued council tax and the failure to make the most of land and property in our tax base. The political challenge remains one of facing down status quo vested interests, despite the belief that such voices do recognise that this is all unsustainable and driving the country inevitably onto the rocks. This is the inherent problem with our form of residential capitalism. It cannot sustain but politically no leaders will allow the necessary changes to commence.
A case for land value tax?
Martin Wolf is a longstanding supporter of the land value tax. He thinks it is both efficient and morally just. However, a coalition of landowners and owner-occupiers has made it politically a non-starter. His argument for it now is in several stages.
First, the economic context requires a widening of the tax base (and redistribution of the sources of our tax burden) if we are to build economic growth, support public finances, stabilise our financial system and start to address inequality and intergenerational tensions.
Echoing the financial points made by Hutton, Wolf argues that because credit markets finance land ownership, rents on land become ‘interest on unproductive debt’ and, because of this tight relationship with debt finance, speculative-led land price volatility can seriously distort the macroeconomy.
Second, the moral case rests on the unearned nature of land value increases which are in large part due to the efforts of all the people who made a given local area richer, including the public and their taxes. ‘A large part of the agglomeration value of productive cities is in this way captured by those who happen to own the land’. These were arguments we also made in the recent Shaping Futures report as part of an international study of remaking housing policy.
Third, while capital (and labour) is highly mobile and hard to tax, land is, by definition, fixed and easy to tax, and its supply is not so affected by its price. As Gareth James and I have argued elsewhere, widening the tax base in this way could, on a revenue neutral basis, increase the tax take from an LVT but at the same time reduce marginal tax rates on mobile e.g. labour income taxes. Wolf reports a 2021 CEPR paper that models a balanced budget approach, increasing the tax rate on land value from 0.55% to 5.55%, while at the same time cutting taxes on produced capital (by 28%) and labour (by 10%). Relative to trend, this is simulated to increase output by 15% in the model. This is an important validation of the underlying idea.
Like Hutton, Martin Wolf recognises the huge political challenges of the actual and perceived losses that landowners and owner-occupiers confront, also pointing out that the LVT may impact on hitherto agreed mortgage valuations. He makes three proposals: only introduce the LVT on future values above those of today’s levels; phase the tax in slowly; actively compensate losers in the spirit of welfare economics models (which one could argue the balanced budget tax redistribution idea above would do).
The two provocative columns do us a useful service. They provide a sober appraisal and diagnosis of many of the key things that are wrong with the housing system (arguably, they could have also drawn out the link to reduced productivity). Second, they argue the case for a different approach and try to respond to the likely challenges from those opposed. It is a formidable political task that requires an articulate framing of the benefits and costs, and yes, compensation for losers, as well as stressing the importance of resetting the course of our economic system away from the rocks of excessive reliance on the flawed siren of Anglo-Saxon residential capitalism.
Date: February 16, 2023 12:06 pm
Author(s): Ken Gibb