Opinion

Dissecting the housing crisis: radical progressive policy solutions for Britain’s housing market

Property To Let, London.

Ricardo Teixeira-Mendes explores a more radical solution to Britain’s housing crisis.

By Ricardo Teixeira-Mendes

The problems that Guildford faces with housing aren’t entirely local. What we face: high rents, housing shortages, the burden of taxation and the lack of significantly helpful government assistance are not simply natural facets of a housing market. In reality, they exist as a result of a property market rigged in favour of those with economic privilege. Confused? Let’s look at the problems step by step and how to solve-and not to solve- it.

High Rents
In 2005, American political activist Jimmy McMillan famously ran on a platform to reduce rents with his infamous “Rent Is Too Damn High Party”. Taken humorously and subsequently turned into a meme, Jimmy nonetheless highlighted the importance of rising rents in a small metropolitan area. This problem of course is not limited simply to New York, or to London for that matter, but can affect smaller towns like Guildford if the conditions reach that point. The simplest solution to high rents is a policy advocated time and time again, particularly by Labour in their 2015 manifesto – that of rent controls. Politically, it makes sense to try and ensure that rents aren’t left to ebb and flows of capital and are secured as affordable; housing is seen as a human right, so what’s to stop the government from capping rents? Simply that in the long run, rent control does not work and only addresses the symptom while allowing the problem to fester – it is in both theory and practice a disaster.

The theory is simple enough; putting a price ceiling on any product below the market rate causes shortages. With shortages those lucky enough to be first come, first served will get a house. While previously unaffordable, living in the area where rent control is applied becomes impossible. In Sweden, rent control has kept rents so low that people queue for properties. A vacant property can attract hundreds or thousands of applicants. It can take a decade or more to have a realistic chance of getting a first-hand contract.

Furthermore, an effect of government oversight is to retard investment in residential rental units. In most businesses, governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that investors are less likely to build or purchase rental housing?

Not only does rent control stop new construction, but by putting a stranglehold on supply it destroys neighbourhoods. Real-life experience with rent control has been predictably awful, with entire neighbourhoods in New York City becoming decayed and abandoned. Because demand outstrips supply, there is little incentive for landlords to keep their properties in a decent state, especially in poor parts of town.

Politically we mustn’t give an inch towards what is an unambiguously terrible policy- that does not mean we cannot solve the problem and deliver social justice. Fundamentally, the advocates of rent controls fail to recognise that high rents are a symptom of a lack of adequate supply.

House building
Which brings me onto the next policy that everyone agrees with but cannot deliver: build more houses! Everyone today agrees that we need to build more houses but the question of where and what kind always puts the brakes on new development. NIMBYism, the conservative instinct to prevent local construction is often the highest hurdle, with stringent planning regulation, committees, and bureaucratic hoops existing, purposefully designed to appease local residents’ concerns. New housing developments are often stopped by local governments for the most arbitrary reasons; in one recent case a Conservative council stopped the construction of new housing that would block the view of the local roundabout.

NIMBYism isn’t simply expressed in local politics but on the highest level of Westminster via the Green Belt. The benefits of the Green Belt are severely overstated, accruing to a small group of people at the expense of many more in denser areas. Access to the Green Belt correlates closely with household income: Green Belt policy preserves large amounts of plentiful green space around the well-off at the expense of rarer green space near the badly-off in England’s cities. By limiting supply the policy inflates house prices and rents and acts as a de facto wealth transfer from poorer non-homeowners to middle- and upper-income homeowners.

We do not have to be radical: recent studies have predicted that by developing on only 3.5% of London’s Green Belt, 1 million new homes could be built within walking distance of a railway station. Ironically, much of the protected land is not environmentally valuable at all- 37 percent of London’s Green Belt is intensively farmed agricultural land.

Furthermore, Brownfield land is not a viable alternative: perhaps surprisingly, brownfield sites often have high environmental value, and are much more expensive to build on than Green Belt. The environmental effect could in reality be positive: cheaper land would mean more gardens and parks in residential areas, which are both environmentally positive.

What ought to be done is the abolition or reform of the Green Belt to allow construction of housing on intensive farmland and other damaged land, while protecting Areas of Outstanding Natural Beauty and Sites of Special Scientific Interest. We should also replace the current planning system with a rules-based system, along the lines of those in most continental European countries, with a presumption in favour of development.

Tax
But in order to build, one must consider incentives. As mentioned previously, the property market is in fact rigged in favour of those with economic privilege already. Land, unfortunately, is a commodity that is at fixed supply, and those lucky enough to own land have monopoly privileges and the whole state machinery to back up their claims.

Morally, we should consider that unearned income, particularly from land rents, fails to reward hard work, entrepreneurship and is parasitic in nature. A political and economic system that rewards labour, rather than punishes it, is moral- this is a precept agreed by those across the political spectrum, from the Labour Land Campaign to the Liberal Democrats, all the way to the Institute of Economic Affairs. What unites them is the proposal of LVT (Land Value Tax). LVT is a periodic levy on the unimproved value of land only (that is, it disregards the value of buildings, personal property and investments on the land) based on estimates of said unimproved value of land.

The idea of LVT has been advocated by many economists throughout history (Adam Smith has said “nothing could be more reasonable”; Milton Friedman termed it “the least bad tax”). The tax has attracted many proponents because it is as close as possible to an ideal tax – it is efficient (does not alter economic activity), equitable (the richer tend to have more land than the poor) and has revenue raising potential (the tax is difficult to avoid or evade). LVT can easily replace business taxes, council tax and stamp duty, all taxes with disincentives for investment and are significantly less equitable.

As well as simplifying the tax code, this would also recognise that non-business landowners should partially bear the cost of beneficial community investment. LVT discounts what is on top of the land, and is based on the estimated market value of the land itself. Any improvements in amenities or transport that makes the land more desirable and therefore valuable is in turn partially funded by the landowner themselves.

There are however practical barriers: the problems of implementation (i.e. measuring the value of a land beneath a property) and the costs of administration and compliance. But these problems are overstated – there have been many practical proposals in how to implement and administer such a tax policy, such as comparing the value of similar buildings across the country thus ascertaining the value of the land beneath it. The problems tend to be more political, many landowners will quickly be faced with a large tax bill (chiefly because the rates would have to be high for the tax to be effective).

Thus, LVT has been thought of as too politically difficult and so far, has been largely ignored by politicians. This is why politicians should, at minimum, consider taking the small step of rolling out LVT as a replacement of business rates which curtails political risk. As the merits of the tax became apparent, politicians can then consider extending the tax to partially or wholly replace council tax and stamp duty. But despite these benefits, many people will feel shafted, made “losers” of such a radical change in the way we approach land and taxation, that is where the government will need to step in.

Government assistance

So far, the only government assistance towards the housing market have been in the forms of council house building, housing benefit and Help to Buy.

Council house building is ill-advised particularly for some of the maintenance issues described regarding rent control, but crucially because of the well-known finding that labour immobility reduces employment levels. And in the British housing market there’s nothing so immobile as a council tenancy. The government can and should invest in house-building, but the type of houses ought to be freely owned to maintain labour mobility for a dynamic economy.

Housing benefit too has its issues, because it in effect results in 70p of every £1 of the £26bn system going into the pockets of the landlords in the form of higher rents, the remainder is an inefficient and distortionary intervention: the system encourages people with less means to move to the most expensive areas, since the level of payment is tied to prevailing rents, which means that the bill is artificially inflated. Abolishing housing benefit and utilising more direct ways to supplant incomes: tax credits, raising the National Insurance Contribution level to at least minimum wage or make the rate of Universal Credit withdrawal less steep would be far more effective means of making rents and housing more affordable.

In addition, the widespread political opposition to house-building can and should be tackled through direct cash payments. NIMBYism could be neutralised, or at least dampened with compensation for new builds to residents, this would ensure that the benefits accrued from development are spread more equitably.

The government’s Help to Buy scheme is arguably the worst policy and entirely counterintuitive. It has already driven up house prices by increasing demand for but not supply of housing – it will not improve overall access. It risks taxpayers’ money with no guarantee of a return and importantly by subsidising homebuyers and introducing the possibility of socialising lender losses, Help to Buy risks recreating the perverse incentives that led to the 2000s-era US housing bubble.

However, many could argue that the government was pressured to adopt Help to Buy out of a lack of political manoeuvrability. More radical means to ensure that those on lower incomes are able to afford housing will ultimately face opposition from homeowners and landlords- key demographics to Conservative funding and electoral support.

A Stakeholder society

Crucially, the opposition from homeowners and landlords towards policies as drastic as LVT relies in the central problem that Margaret Thatcher attempted to address all those years ago when council housing was sold off: creating a stakeholder society. Few people own many tangible assets beside their own homes, and cheaper housing will undoubtedly shrink the net-worth of homeowners, presenting a political obstacle to necessary, radical reform.

Moreover, most of the poorest third have negligible assets outside of their few personal possessions.  They have nothing to draw on, nothing to borrow against, nothing to tide them over during hard times.  Most of them live precariously from hand to mouth, worrying whether their income, drawn from whatever sources, will meet their outgoings.  They struggle to get through to their next payday, and some are reduced to short-term borrowing at punitive rates of interest. Without ownership, they have no reserve.  Their income is entirely used up in day to day living.  They have no margin to set aside for saving against unexpected emergencies or even harder times.  They might be described as stakeholders in their country, but they have no tangible stake, nothing they can call their own, and nothing they can use when they need help to get by.

Many of the poorest third are working poor who are trying to get by on low wages. While welfare payments can undoubtedly help some of them to get by, they do nothing to solve the basic problem of a lack of capital. There is plenty of literature and evidence in the real world about real stakeholder ownership given to citizens, often the privatisation of pensions and state industries gave large shares to the public to enormous benefit to the poorest especially.

Some may, for these reasons, support public ownership;  however, this is not ideal as the public cannot enjoy any of the rights of ownership.  Someone who owns property can decide how it will be used, what will be done with it, and who shall have access to it.  None of this applies to public ownership.  Furthermore, someone who owns private property can alienate it.  They can sell it, give it away or trade it.  They can use it, if they wish, as collateral and borrow against it, using it as security for a loan.  None of this can be done with anyone’s share of what is supposed to be owned by the public.  No-one can sell their share of it or transfer it to someone else.  They cannot borrow against it.  It is theirs in name only because they enjoy none of the rights that apply to private ownership.

Dispersed ownership is key, and the selling of approximately £1.3 trillion of government assets is a means to do so, so that we do not have our collective eggs in one basket (the housing market); we are better protected as individuals and less likely to face some of the catastrophic issues of the 2008 financial crisis which grew out of this very problem. Obviously, there are some assets that would be difficult to sell, and some that should not be sold at all, but that still leaves space for a huge sale to take place over the years with tranches of state assets being disposed of systematically.  That sale could transfer capital nominally owned by the public into capital actually owned by people individually, and would take a huge step towards solving the lack of capital that gives the poorest in the economy no reserve or cushion, and no fund towards their eventual retirement.

That, in reality is the deeper problem beyond rents, beyond housing and beyond tax: lack of any true capital or social mobility, exemplified by the ever-distancing dream of home-ownership. You do not have to subscribe to any traditional conservative notions of property being an inherent right or mechanism for proper behaviour, nor do you have to subscribe to failed socialist-inspired past solutions in order to address the growing inequality and lack of opportunity in Britain. But radical reforms along these lines have enormous empirical evidence as far afield as Australia, Sweden, Hong Kong and the Czech Republic for the elements of these policies that have already been tried. Thinking outside the box and pushing for these types of ambitious, redistributive and progressive reforms will improve outcomes for all, but crucially the poorest, who at the very least in the housing market, need all the help they can get right now.

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