Why we don’t have a Housing Crisis.

If there is one thing that unites everyone in the UK, it’s that we have a housing crisis. The reasoning behind this consensus goes something like this:
a) Too many households cannot afford to buy their own home and many are struggling to pay the rent.
b) This must be down to excessive demand and a housing shortage.
c) This shortage is all the fault of those meddling planners, NIMBYs and/or net immigration.
d) We need to build at least 300,000 new homes per year to keep pace with growing demand.

Unfortunately, this reasoning is based on a fundamental mistake that land has a net cost, like capital does. As land is everything not supplied by human effort, it cannot by definition have a net cost.

1. We do not have thousands of families sleeping rough. Yes, tens of thousands may technically be “homeless”, but barring a few thousand rough sleepers, everyone in the UK has a roof over their heads. Furthermore, we have over half a million empty homes and tens of millions of spare bedrooms.  We certainly do not have a shortage of physical housing in the UK.

2. We all know that due to the rabbit hutch rubbish our highly profitable property companies have been peddling for decades, the cost of the actual buildings has fallen. What has gone up is the selling price of the location that housing occupies.

3. Unlike capital (the building), location (the land) has no cost of production. The rental value of the location is capitalised into selling prices and mortgage interest is only a transfer, not a net cost.

4. If rents and mortgage interest are not a net cost, then the high price of location cannot make housing unaffordable in aggregate. If there is a net transfer of wealth and welfare, then housing may well be unaffordable for one group, but this transfer will act in an equal and opposite way as a subsidy for another group. To say housing is unaffordable due to the high selling prices/rental income of locations is therefore utterly fallacious.

5. If we are concerned about affordability for one group vs another, we should first define how we measure this. House prices as a ratio of gross income do not reflect true affordability as this does not take into account taxation. The better measure of housing costs is annual rents or mortgage interest as a proportion of post-tax income. Similarly, “gross income” or “total asset wealth” are poor measures of inequality or poverty; the better measure is “net disposable income after tax and housing costs”.

6. There will be a net transfer and inequality if two groups (A and B) have similar gross incomes and pay similar amounts of tax but Group A owns little or no land by value and Group B are owner-occupiers and/or landlords. Group A will have lower discretionary incomes and group B higher discretionary incomes. There is a net transfer from A to B, directly via the rents they pay and indirectly via the taxes they pay.

If Groups C and D each own the same amount of land but Group C has higher earned income and pays more tax, then although there is inequality there is still a net transfer from Group C to Group D via the tax system.

7. It is widely believed that the best way to deal with this transfer that makes housing unaffordable for group A, is to lower aggregate selling prices by building more homes. But because our current system of taxation is essentially flat, to end this transfer the value of all land would have to drop to zero. Or the equivalent of a two-thirds fall in house prices. While this is desirable, it is unimaginable this could be achieved by changes to planning, unless we plan to irradiate our urban centres with nuclear fallout, which would certainly outweigh any benefits.

8. It is a commonplace that building extra housing will lower aggregate house prices. As the value of location is derived solely from agglomeration effects, it can be argued that adding capacity where demand is highest will simply suck in more people, increasing aggregate land values in that area (prices will only fall in the areas with no new construction and net emigration). This will also tend to increase the rates of under-occupation and vacancy, particularly in already marginal locations. This is the very opposite of The Northern Powerhouse policy, as it will only further distort our economy towards London and the SE.

9. In short, while the impact on affordability of building extra housing is questionable, the fact that it will simply be adding to our already inefficient land/immovable property market and exacerbate our excessive North/South divide is not. The only groups like to gain from “build, build, build” policies are the usual suspects - banks, landlords and those who make windfall gains when planning consent is granted (agricultural land owners in outer-suburban areas and home builders who between them own land with planning or near planning for half a million homes).

10. If our so called “housing crisis” is actually a “transfer of wealth” crisis, caused by taxing earned income and return on capital instead of using land rent for public revenue, then changing our tax system is surely a simpler, more efficient and more certain way of ending that net transfer.

11. For a typical working UK household, a shift away from taxing income/capital to taxing land would result in them being around £11K a year better off. If land was always taxed at 100% of its rental value, its selling price should drop zero. The resulting fall in mortgage payments for a typical new buyer would see them save a further £6.5K per year. Taken together, housing affordability as a ratio of house prices to discretionary income for a typical household increases four-fold.

12. If everyone paid rent for the land they occupied, instead of enjoying it tax-free as owner-occupiers do now, we would see optimal allocational efficiency in the land and housing market, reducing vacancies and under-occupation. To what extent this would nullify the need to build extra housing to deal with a rising population is unknown, but without doubt we wouldn’t need 300,000 extra per year for the foreseeable future.

13. Taxing wealth creation instead of land rents not only produces inequality on a societal level but a regional one too. Those regions outside London and the SE, like individuals in group A, are overtaxed.  A tax shift as described above levels the playing field for all participants so for those regions, their tax liabilities would be far lower than today; around £100bn per year lower. This would attract investment and demand to exactly where capacity for it is at its highest.

To summarise; High land values reflect the efficient exploitation of the agglomeration effects that lead to high wages and high amenity levels in preference to private capital. Any planning restrictions that lower agglomeration effects will negatively impact aggregate land values. High land values are thus a positive indicator of wealth and economic welfare. High land values only have a negative impact when they are capitalised into selling prices and lead to transfers of earned income. This causes distorted incentives and excessive inequality. The main symptom being our so-called Housing Crisis.

But, as I hope I’ve argued above, our “Housing Crisis” is in reality a “Transfer of Wealth Crisis”. Or a crisis of basic economic justice to be more accurate, which in the long run makes us all poorer, not just excessively unequal.