Six solutions for the UK housing crisis
06-10-2014
Hugo Dixon
By Hugo Dixon
Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
Britain’s main economic problem is that the supply of homes isn’t rising nearly as fast as demand. This doesn’t just create the risk of a new housing bubble; young people are finding it increasingly hard to find places to live, especially in crowded London and southeast England. So I make no apologies for returning to the topic after only three weeks.
The solution isn’t mainly to build new homes on greenfield sites. It is understandable that Brits don’t want to concrete over this green and pleasant land. Rather, the thrust of policy should be to use existing housing stock much more effectively, while building new homes in cities.
Look first at the existing stock. It’s not quite as tight as people think, but a lot of it is under-occupied or some even unoccupied. Rich people, including foreigners who buy houses and sometimes leave them empty for large chunks of time, have lots of spare space. So do many old people, who are often living in homes that suited them when they had large young families.
There’s nothing wrong with people wanting to have big houses. But the government shouldn’t be encouraging them to do so. That’s precisely what the current tax system does. Not only is housing woefully under-taxed; expensive homes are taxed much less as a proportion of their value than cheap homes. Effectively, the poor are subsidising the well off.
This is why the highly regressive Council Tax should be reformed so it is a flat percentage of the value of each home. About 1 percent a year would probably be the economically sensible rate – meaning somebody with a 1 million pound house would pay 10,000 pounds. This would give people who are rattling around in big houses a powerful incentive to move somewhere smaller. The extra money raised from this tax, and it would be a lot, could be recycled into the economy via lower income taxes. The stamp duty on house transactions should also be cut, especially at the top end of the market where it reaches a punishing 7 percent, to lessen the overall cost of trading down.
There is no chance of such a radical change, even if it was phased in over several years, as it should be. The politics would be horrendous. That said, something more modest on these lines may be politically feasible.
By contrast, the politics of another tax idea – imposing an extra annual levy, of say 2 percent, on homes owned by “non-doms” – is attractive. Non-doms are people who live in the UK but are not domiciled there for tax purposes. There is a widespread feeling that London, in particular, has become a playground for the rich and famous from abroad.
Again there is nothing wrong with this, so long as non-doms pay a fair chunk of tax. At present, they can pay 50,000 pounds a year to avoid tax on their non-UK wealth and income. With a “non-dom dwelling” levy of 2 percent, an oligarch with a 50 million pound home would instead be paying 1 million pounds. That wouldn’t just be popular. It would raise some money and take the heat out of the top end of the London market.
A third option, which also might be popular, would be to tax empty properties more. At present, they enjoy a Council Tax discount. Taxes could also be imposed on undeveloped land. That would encourage developers to get a crack on and build homes rather than sitting on land banks and just waiting for prices to rise.
So much for using the existing housing stock and land banks more effectively. What can be done to build more homes in cities, especially London?
One big idea is to build upwards, with more skyscrapers and extra floors on existing buildings. At the moment, this is difficult because of a cat’s cradle of planning constraints. Why not give the Mayor of London the right to determine the height limits allowable in the nation’s capital? He or she is in a good position to trade off the costs and benefits.
Another radical suggestion, which some government officials are keen on, would be to make more efficient use of state property. Nobody has done a comprehensive survey. But there are thought to be hundreds of billions of pounds worth of real estate owned by the army, health service and so forth. Much of this is underutilised.
The solution would be to take away the ownership of this property from the current occupants and charge them a market rent for using it. They would obviously have to receive an extra budget to pay that rent so there would be no benefit in the short run. But, over time, the occupants would have an incentive to release property they didn’t need – which could then be redeployed for housing development.
The state could even privatise its property holdings. That would have a further benefit: cutting the national debt.
Finally, there could be great efforts to clean up “brownfield” sites – plots of land that used to contain factories, petrol stations and the like. It is partly because such land is contaminated that developers prefer to build new homes on greenfield sites.
Industry should pay the cost of cleaning up its own mess. The government could impose a general duty to do this, dealing with future contamination. Meanwhile, it could impose a tax on industry to pay for cleaning up existing brownfield sites.
In the past week, both the International Monetary Fund and the European Commission have highlighted Britain’s housing problems. There are solutions. Politicians just need the guts to grab them.