THE CORE IDEA TO FIX THE HOUSING CRISIS:

LAND VALUE TAXATION

Is there a housing crisis? Are houses too expensive, shoddy and too small? Is there a need for many more new houses, better suited to modern lifestyles? Of course there is a crisis especially of affordability. First to be fixed is the affordability crisis. Once that is achieved, then the production of better houses and many more of them becomes possible. But getting prices down is the first priority.

            So how are we going to get house prices down?

First of all we have to recognise that it’s not actually house prices that are rising. What isgoing up is the price of the land the house stands on. The cost of producing buildings is about the same in all parts of the country, and (adjusted for inflation) it hasn’t gone up much either. A typical 3-bed house has a build cost of about £126,000 in all parts of the UK With building costs of £1400 per sq m. a typical 90 sq m.  3-bed semi costs £126,000. But just look at the way the price of a House+Land has been outstripped by the price of Land on its own: subtract the cost of land and yes, the cost of the building—the house—is unchanging.

But it’s not just newly-built houses that are affected by this land-price hyper-inflation.  The majority of all house-sales (80%+) are of second-hand properties. Their price is affected by land-values to an even greater extent. Forget about ‘condition’! Even if the previous owner had kept it immaculate, it is still a second-hand house. Since the building itself cannot be ‘worth’ more,  only the inflated price of the plot can explain the huge rises in house-prices. Overwhelmingly it is land pricesthat are driving up the housing market, both new and second-hand. Fix that and you fix the Housing affordability Crisis.

            How is land price fixed? 

Does this sound like a silly question? It’s obvious how a loaf of bread, or a television, or even a haircut gets priced. These things have a cost of production, and a value in use. But Land is different. A plot of land costs nothing to produce and has little intrinsic value apart from its limited supply at a given location. The effectivedemand (from those who can pay) for housing land is thus a result of the  economic health and/or the desirability of the area. If the area suddenly becomes more attractive—if a well-paying firm sets up locally, or a speedy tram system comes by—then the land-price goes up, and with it the prices of houses both new and old.New land cannot be ‘created’ and local Planning Laws also limit the supply.

It is Society, not the Land-owner who creates this price/value in the plot of land. But it is the land-owner who rakes in the uplift in value of the land without making any effort. This is what the dreams of the Home-Owning Democracy is really about. Get rich without working for it. 

But how do people manage to pay these inflated prices (in effect for land) in the first place?This is where the banking system comes in. It is they, through their outrageous privilege to create our money, who fund the mortgages to buy the house+land. It is the home-owners who fund the lavish profits and salaries of the banks through their repayments of interest on the mortgages. There has to be a lure to make sensible people mortgage themselves to the hilt. It’s called capital appreciation, and is the basis for the home-owning democracy. In reality it’s all about getting rich without making any effort.

—————POSSIBLE FIXES FOR LAND-PRICE HYPER-INFLATION————

1.     One way to fix the housing market might be to crush the banks’ ability to inflate land values through easy mortgage lending.  It’s been done before. Back in the 1960s and before, banks were discouraged from lending on mortgages; only Building Societies had that privilege, and they were severely restricted to lend only the money they had on deposit. (this is a bit of an over-simplification, but true in essence).

Then the 1970-74 Tory (Ted Heath) government unleashed the banks to lend on mortgages. That’s when we had our first housing boom in 1972 (see graph above), with the inevitable banking crash, leading to the rescue by the Bank of England ‘Lifeboat’. All because of banking liberalisation! No, they never learn! Or rather bankers have learnt that lending on mortgages was the easy way get riches, and they could squeeze more profit through easy lending for house-purchase. The resulting house-price (land-price really) inflation made it look like a one-way bet. In the end, even if the punters could not repay their massive mortgages then their saviour, the Bank of England would rescue them—just like they did again in 2008 (and will do yet again in the forthcoming mega-crash?). 

2.     A second way to stop Land Values risingis forGovernment take over the ownership of all the Land. That way the Government, on our behalf, could collect the rent, the financial benefit of land-owning. This would deprive existing home- and land-owners of their unearned land wealth, but provide an opportunity to reduce taxes. 

But that’s Communism! So it is, but it’s also how the Asian economic powerhouses of Hong Kong and Singapore work. It’s is a colonial legacy, and they may not fully understand it themselves (Purves, 2015Andrew Purves (2015) No Debt High Growth Low Tax : Hong Kong's Economic Miracle Explained) but it work very well. There’s even a modern-day advocacy of a ‘People’s Land Trust’ which would gradually acquire the land under all the houses in the country (NEF paperNEF paper 2018 Modern Land Reform Duncan McCann (forthcoming))

3.     But the one fix that I am sure will work is to introduce a Land Value Tax (LVT). This way the home owners retain all their rights to use their own land as they wish, but pay an annual ‘rent’ which reflects the value that Society has created in the plot.  This LVT would be collected and used by local and central Government. The first call on this revenue would of course be to eliminate all other property taxes. (By the way, LVT could apply to all landed property, but can I remind you that I’m only talking about the owner-occupied housing sector here.)

Home-buyers and sellers will continue to be free to trade their properties in this new full-on LVT world. What they will discover is that house prices would be the same in all parts of the country. Brand-new house-prices would have a price similar to their build costs (typically £126,000). Second-hand houses would naturally be cheaper reflecting depreciation. 

In this hypothetical world of full LVT the price of the plots of land would be near zero. Since variations in LVT reflect the community-based value created in the land, so in the Welsh valleys an LVT charge would be close to £0, in suburban London maybe £10,000 per year. ‘Average’ houses might pay about £4,000 p.a. But the price of the building—the house—remains constant. 

So buying a house would come down to TWO decisions: 

—Can we also afford the repayments on a loan of £126,000 (minus our deposit)?

—Can we also afford the annual LVT payments?  

One thing we can be sure of — monthly payments especially for the first-time buyers will be far less with LVT.