A Political Fix for The English Housing Crisis. Land Value Tax is the answer!
Why has there been so little progress on Land Value Taxation in England? With so much impressive moral, ethical and philosophical support for LVT, you’d think that governments would be delighted to bring it in. When economists from Ricardo onwards sing its praises then surely it must be a no-brainer; politicians and administrators should be clamouring to implement it. But no; since as far back as the 1909 People’s Budget, LVT has failed to be enacted. If, as I believe, LVT is the best and possibly only way to fix the housing crisis, I am keen to explore what is preventing it. But realism dictates that any proposal to change the tax system has to pass the practical politics test. Will any politician, wanting to be re-elected, stick his or her neck out to promote even a small amount of 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! Recognising that there is a crisis, politicians love their wheezes claiming to ‘help’ homeowners, especially first time buyers. Unsurprisingly their schemes always have the same result—prices keep rising, making things worse. Most pundits use the clever throwaway line “To fix the crisis, build more houses!”. It is true that once a properly functioning housing market is established, then more newly-built houses and lots of them—millions more—will be the solution. But for now, in today’s warped housing market the ‘build-more’ solution simply cannot work. Instead, what would help the market right now would be a drop in prices. Fix that first and then, in time, as I hope to show, the other features of the crisis—shoddy, pokey little homes, and far too few of them—can begin to be addressed.
But are there any popular policy options that might appeal to politicians, which will begin to bring down house-prices? My suggestion is that replacing one unpopular tax — Stamp Duty — with a small Land Value Tax would be both politically practical and bring down house-prices a bit. Once this small change has bedded in, politicians would then feel comfortable switching yet more property taxes to LVT. The hope is that, eventually, as more LVT is introduced house-price levels should come down, so that nearly everyone can afford to buy or rent a home in all parts of England.
Of course, it’s not house prices that are rising. A house is a man-made artefact, and depreciates from the day it is built. What is going up, and nearly always faster than inflation generally, is the price of the land the house stands on.
Three possible ways to fix the cost of land for housing: If the driver of high prices is the inflated cost of the plot of land the houses are built on, how might this cost be taken out of the price of the house? As I see it there are three possible fixes which should start to take land values out of house prices:
But the one fix that I am sure will work is to introduce a Full-Value Land Tax.
This way home owners retain all their rights to use their own land as they wish, but pay an annual ‘rent’ which reflects all the value that Society has created in the plot. Land Value Tax would, of course, be used firstly, to eliminate all other property taxes.
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 the price for a house would be virtually the same in all parts of the country. Brand-new houses would have a prices which reflected their build costs (typically £120,000). Because of the normal processes of depreciation, second-hand houses would be cheaper.
But all this is only a hypothetical scenario. Is there any practical, politically savvy proposal that would be the first step towards this full-LVT world?
When asked the great British public thought that the most unfair tax of the lot is Inheritance Tax. Then going down the unfairness scale came Stamp Duty, TV Licence, Fuel Tax and VAT. Taxes on Cigarettes and Alcohol were deemed ‘fair’, as was National Insurance and Income Tax. Surprisingly, even Council Tax was felt to be fair-ish, which should be a warning of the political pitfalls in store for those wanting to switch it to LVT.
The politics of SDLT: In an odd way Stamp Duty (SDLT) is ‘voluntary’ — you only pay SDLT if you choose to buy a house. SDLT also seems ‘fair’ because it attaches to a sum of money which is changing hands. The Chancellor of the Exchequer gets away with it because, at any one time, not so many voters are hit by SDLT. Only one or two million houses are bought each year, so only about two or three million voters get hit by SDLT. Chancellor Osborne (2010-2016) was particularly cavalier with SDLT, changing the rates frequently, and gaining political kudos by imposing draconian rates on buy-to-lets and million-pound plus mansions. Unlike Thatcher’s Poll Tax in the 1990s, there were no mass protests in the streets against these steep rises in the top rates of SDLT.
“As from next May 1st domestic property transfers will no longer be subject to Stamp Duty. Instead, there will be an annual levy on the land-value of the property of one-third of one percent.”
The proposed mini-LVT replacement would, like SDLT, be a ‘voluntary’ tax, and would be a clean break with the old Stamp Duty. There would be no need for parallel trialling. So the campaign slogan to sell the change might be
“House-buyers: Don’t pay a big lump of SDLT now! Spread your payments out as a yearly charge of just one-third of one percent of the value of the plot of land your house is built on! ”
Annual Re-valuation of Land Value Politicians might give less prominence to the fact that this would be a dynamic tax. The land-values would be subject to annual re-rating. Allowing several years if not decades before revaluation has been a major failing with many previous property tax systems. Politicians, in a state of funk ‘postpone’ the re-valuation, leaving an even worse problems for those who come after them. With the help of modern computer-based valuation techniques, annual (even monthly!) re-valuations of all land-values would be easy and cheap to implement.
One positive implication of regular revaluations of land values could be a reduction in your LVT bill if local economic conditions worsen. On the other hand, home-owners who faced a major hike in their LVT charge because a new high speed transport link was proposed nearby would be less pleased. It’s always good politics to make these changes up or down in the smallest possible steps. In this way the new LVT becomes a dynamic tax, based on the current and local economic conditions. This is crucial in sending the right market signals.
The final act: more properties to be subject to a mini-LVT, then make it all.
As the years roll by and more house are sold and bought, so yet more properties will be scooped up into this new mini-LVT net. The scope of mini-LVT can be extended in other ways too. Including property which is transferred free of charge, which at present attracts zero Stamp Duty, is one example. Then, after maybe ten or fifteen years, this mini-LVT it might apply to as many as three-quarters of all homes. It would then look odd that the remaining quarter of properties were tax-free. This would be the point when governments could include all properties in the mini-LVT net. (This was the technique used by governments to abolish tax relief on mortgage interest payments; it took more than 15 years to reduce it in slices, but in the end there was little complaint at its total abolition).
It may have taken 15 or 20 years in my scenario just to complete the final switch-over from Stamp Duty to a small Land Value Tax. Limiting my proposals to what is politically possible may seem craven, but does anyone remember all those post-WW2 attempts to capture the windfall gains from the grant of Planning Permission? The history of the Betterment Levy as it was sometimes called is instructive. First it was imposed by one government (usually Labour), then dumped when the alternative (Tory) party took power. This happened several times. All that remains now is the inherently corrupt ‘Section 106 agreements’ as a feeble attempt to capture windfall gains of landowners obtaining planning permission. By using a slow but sure means to introduce a small rate of LVT, it should stable enough to withstand changes of government.
But what of my original claim to fix the English housing market, to make houses cheap and plentiful, and of superior quality? I am confident that once the initial slice of LVT is established and its beneficial effects take hold, voters will be clamouring for the politicians to replace ALL property taxes by LVT. The housebuilding industry too will be joining in, lobbying for LVT so that they can become a bigger and more honest businesses producing a cornucopia of good quality housing that their customers crave. It may take decades to get there, but unless we find an immediate political way to start on LVT, yet another 100 years of failure is in prospect.
Conall Boyle (b. 1942) taught urban economics to surveyors and estate managers at Birmingham City University. Now in retirement in Wales has various interests, including cycling and local history, but keeps returning to the mystery of the non-implementation of land value tax.
 Danny Dorling (2015) 'All That is Solid: How the Great Housing Disaster Defines Our Times, and What We Can Do About it' gives a good account of the problems, although his ‘solutions’ are bit tame.
 If you want to know why “build more houses” is wrong please refer to : http://housescheaperbettermore.blogspot.com/2017/07/. And http://housescheaperbettermore.blogspot.com/2017/11/its-true.html
 This article is mostly about the owner-occupied market for house in ENGLAND, because it is the biggest by far on these islands and it’s simpler for me to do calculations based on one property-tax regime. Other parts of the UK have different, devolved property taxes.
 Information from BCIS Building Cost Information Services operated by RICS
 I have written this up for Positive Money http://positivemoney.org/2015/09/george-osbornes-permanent-bank-levy-is-it-seigniorage/
 Andrew Purves (2015) No Debt High Growth Low Tax : Hong Kong's Economic Miracle Explained
 NEF paper 2018 Modern Land Reform Duncan McCann
 It has been suggested to me that LVT should be set at a little less than 100% of land value so that market incentives would apply, and also valuations could be established.
 I explored this in Boyle, Conall (1992) The housebuilding boom in England in the 1930s: Lessons for the 1990s? Proceedings of IAHS (International Association for Housing Studies) September 1992 Birmingham.
 Note the irony: It was the same 1909 People’s Budget that passed both Death Duties and LVT. LVT was later dropped, but Death Duties survived.
 I know this because I was doing in the 1980s! Boyle, Conall (1984) An Expert System for Valuation of Domestic Properties. Journal of Valuation
 Detailed calculations in an article on my website http://www.conallboyle.com/housing/HsgMnyLandIndex.html of how I worked out the LVT which could be substituted for the one-off SDLT
 This idea was suggested to me by Tony Vickers of ALTER
 Centre for Economics and Business Research
 BEYOND THE CALL OF DUTY Why we should abolish Stamp Duty Land Tax By Ben Southwood. Adam Smith Institute Oct 2017 https://www.adamsmith.org/research/beyond-the-call-of-duty
 I’m assuming here that something like 3% would be the ‘full’ rate of LVT which captures 100% of the land value. The dynamic effects of LVT are difficult to predict, and the hypothetical full-LVT rate could be lower.
 A good place to start on this sorry saga is Danny Dorling (2015) 'All That is Solid: How the Great Housing Disaster Defines Our Times, and What We Can Do About it' although he does not share my view on S106 agreements.