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Can we fix it? Solving Britain’s housing crisis

David Willetts, Executive Chair at the Resolution FoundationLindsay Judge, Senior Policy Analyst at the Resolution

FoundationJohn Muellbauer, Professor of Economics at Nuffield College,

OxfordTerrie Alafat, Chief Executive of the Chartered Institute of

Housing@resfoundation // #housingcrisisWifi: 2QAG_guest p: W3lc0m3!!

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Housing affordability in the UK

Can we fix it? Solving Britain’s housing crisis Lindsay Judge

April 2016

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• Housing is the subject of much political and media attention – but commentary focuses primarily on rising house prices and declining home ownership

• Our research looks at housing costs as a proportion of income over time – What constitutes a housing cost?– Treatment of housing benefit

Housing is about more than homeownership – it’s a key driver of living standards

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The average ratio of housing cost to income has risen over time

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Driven by a significant number of households spending more on housing

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Driven by a significant number of households spending more on housing

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With the increase most marked for low to middle households

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There was a clear North-South divide in 1994-95

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London is now the stand-out region (but gaps have narrowed between other areas too)

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Private renters experience highest ratios (but social renters have also seen an increase in recent years)

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• If a couple household with 1 child was paying the same proportion of their income in housing costs today as they did in the early 1990s, they would be £1500 p.a. better off

• Equivalent to a 10% rise in the basic rate of tax

• London and Scotland equivalent to 13% rise in basic rate of tax

• The wedge that has opened up between incomes and housing costs does not look set to shrink

Housing and the living standards squeeze

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Can we fix it? Solving Britain’s housing crisis

David Willetts, Executive Chair at the Resolution FoundationLindsay Judge, Senior Policy Analyst at the Resolution

FoundationJohn Muellbauer, Professor of Economics at Nuffield College,

OxfordTerrie Alafat, Chief Executive of the Chartered Institute of

Housing@resfoundation // #housingcrisisWifi: 2QAG_guest P: W3lc0m3!!

Britain’s Housing Affordability Crisis: what can be done?

John Muellbauer, INET@Oxford.Resolution Foundation talk

April 26, 2016

Housing affordability in UK, US, Sweden and Germany house price/income ratio (log scale)

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I. The UK housing market: unstable and over-priced• Rise in house price/average income ratio in the UK from 1970

to 2014 holds the G7 record.• UK ratio using median income rises even more – since

income inequality rose.• US ratio declines, flat for house prices/median income.• Since 1985, Swedish experience remarkably close to the UK.

Many similar problems.• Population densities: UK 660, Germany 593, US 85, Sweden

54 (pop/sq. mile)

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Some consequences• Huge inter-generational redistribution in the UK: the ‘lost

generation’ born after Mrs Thatcher came to power in 1979.• Home ownership for the young in radical decline.• House prices reflect access to good schools, transport, clean

environment: privileged opportunities for children of wealthy.• Macro consequences include: greater risk of financial

instability: what if interest rates rise?• lower growth rate because of weaker international

competitiveness, lower productivity growth, diversion of finance from more productive uses, less flexible economy and missing source of low-import-dependent growth from residential investment.

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Bi-partisan UK housing policy ‘achievements’ since 1997 –avoiding

supply side and tax reforms• Redistribution of wealth to the older ‘haves’.• Financial crisis worse than it need have been and

vulnerability continues.• Possessions and arrears crisis only averted by the most

dramatic monetary and fiscal interventions in history.• Falling owner occupation, lowest fraction of FTBs under

30 since records began in 1968.• Lowest 2010-2013 house-building levels since 1920s.• Large rise in housing benefit bill, increasing poverty trap.• Rising rent levels, very tight rental market (e.g. compared

to US rental slackness measures), esp’y since 2009.• Highest housing rents in Europe.

II. Supply and demand• Drivers of the 1971-3 boom: huge rise (8%pa) in per

capita real income, modest financial deregulation, foreign investors in London, low real interest rates & fear of inflation, speculative fever.

• Most of 1980-2005 appreciation in UK real house price index due to rise in real income relative to housing stock.

• The other key factors: shifts in access to mortgage credit for owner occupiers and buy-to-let investors, interest rates – both ‘user cost’ incl. expectations of further appreciation, and nominal interest rate, foreign demand for trophy properties in London and the SE, rising inequality- incl. spatial, demography, taxation, speculative fever.

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+

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Mortgage credit liberalisation, poll tax switch, lower interest rates

Mortgage credit liberalisation and lower interest rates, foreign and financial sector demand, rising inequality&mis-match

credit crunch

credit crunch, higher int. rates

III. Demand: Council tax is regressive and inefficient

• Council Tax retained some of the highly regressive features of the poll tax: the highest tax rates for the poorest housing, marginal tax rates of zero for the most expensive housing – UNIQUE IN THE OECD, discounts for second homes.

• Zero marginal rate encourages inefficiency of use of space in the most desirable locations; encourages conversion of multi-family dwellings into single luxury mansions –reducing supply.

• Also tendency for poorest local authorities to set highest tax rates – central gov’t support is being phased out and business rate redistribution will shrink.

• Supplemented by Council Tax Relief – but with major poverty trap problems for low income families.

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Council tax is regressive and inefficient• “Council Tax has overtaken credit cards as the most common

debt problem in Britain”…say Citizens Advice.• From April 1 2013

hundreds of thousands of people became liable for council tax for the first time, after the government decided to cut by 10 per cent the amount available for relief and localised eligibility criteria.

• Within the same LA, family just on top band pays only 30% of the rate of family just on bottom band. At around £5m, rate is just 7.5% of the bottom band rate.

• 25% single person discount discourages down-sizing.• Ch. 16 of the Mirrlees Review sets out reforms for efficiency and

neutrality (http://www.ifs.org.uk/mirrleesreview). Close to www.nuffield.ox.ac.uk/users/Muellbauer/PROPTAX-MAR06.pdf

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Is reform politically feasible? cash-poor widows in expensive homes and

elite power.• Adding bands at the top & (phased) revaluation- RICS and

BPF proposals) are absolute minimum – though wd. preserve regressive structure below.

• Solve problem of cash-poor/asset-rich by offering everyone a tax deferral in return for an equity stake in their property. Those paying cash would be offered a small discount since managing deferral incurs costs: FT 6 April 2015

• The discount and the prospect of having to share capital gains would ensure many chose the cash option.

• Option to buy off the politically powerful domestic elite by making CT deductible expense for income tax.

• Property tax is key for taxing foreign ‘buy-to-leave’ investors.22

Joint property-tax/carbon-tax reform?

• Reform property taxes as part of a wide-ranging tax reform to address climate change issues.

• The globe needs to reach zero net emissions of greenhouse gases to stabilise global temperatures or risk mass species extinctions.

• Carbon taxes (and building regulations) part of the solution.• Taxing domestic fuel use is one way.• But emission bands of annual road tax could be copied for

housing, if every house had an energy efficiency certificate.• Site value tax plus energy efficiency discount would favour

wealthy owners with large gardens –could play well politically.

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SDLT

• ‘Slab’ structure of Stamp Duty Land Tax was, at last, reformed in 2014, and made into a tapered and progressive tax (12% on excess of value over £1.5).

• SDLT taxes mobility -reduces flexibility of the economy.• 15% SDLT rate for properties worth more than £0.5m bought

through corporate vehicles. But can be by-passed by buying shares in an existing company.

• While property taxes on value improve resource allocation, transactions taxes worsen it- reduce property release.

• Rise in SDLT for BTL and second home investors and lower BTL tax relief should somewhat curtail demand, previously increased by pension reforms.

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Taxing/restricting foreigners• Capital gains tax exemption for principle residence. CGT

applies to investment properties and to post April 2015 gains for foreign owners (Why not on earlier gains?).

• Was easy to ‘envelope’ property into a foreign company and escape tax-net by selling shares in the company.

• ATED (Annual Tax on Enveloped Dwellings) was 2013 attempt to capture residential property related revenue.

• Has raised 4 times as much revenue as HMRC expected.• ‘Empty-property’ tax on buy-to-leave investors? • Restrict foreign ownership? e.g. 1 new build per owner http://

www.bowgroup.org/policy/restore-sanity-residential-housing-market-argues-bow-group-discussion-paper

How to prevent company structures by-passing restrictions?25

Development taxes, IHTTaxes on development:• CGT (28%) applies to planning gain but if a farmer sells the

whole farm, Entrepreneur’s Relief implies 10% tax rate on the first £10m.

• Section 106 agreements (extracting social housing, land or cash from developers) widely used as a form of development tax. But can take years to negotiate and slows the process of bringing land into use. 2015 relaxation for sites under 1000m2

• Community Infrastructure Levy takes less time to negotiate.Inheritance tax: as is well-known, the wealthy have many ways round –including tax breaks on agricultural land - and tax take is remarkably low. Favouring housing for IHT raises prices.

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Other demand-side policies

• ‘Help-to-buy’ mortgage guarantee and new ISA fuel demand.• Push to home ownership is likely to raise demand and add to

household sector vulnerability– better to improve rental contracts and professionalise rental sector.

• Shared-equity schemes may marginally reduce household sector vulnerability but do nothing for demand/supply balance.

• Past experience is that shared equity is vulnerable to major unexpected relative price changes: ‘mis-selling’ law-suits.

• Previous governments’ subsidies for key workers worsened demand/supply balance.

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IV. Reforming the supply side: 5 key elements• Housing supply reforms need to include (1) national (or

regional) land bank(s), (2) better fiscal rules, (3) building programme for social housing, (4) better incentives for LAs, (5) relaxation of planning rules.

• South Korea is a fine example of effective supply (and demand) management: the Korean Land Corporation’s national land bank allows most of planning gain to accrue to the nation, solving both supply and funding problems. http://www.voxeu.org/article/six-fiscal-reforms-uk-s-lost-generation : Expand role of UK’s Housing and Communities Agency (GLA

• In Germany, income relative to the housing stock has trended down since 1980 as far more housing land has been released –so stable real house prices.

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UK vs. S Korea and Germany

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(2) Reform fiscal rules

• Shift measure of debt relative to GDP from gross debt to net debt, where net debt subtracts easily valued components of the government’s balance sheet from gross debt.

• Then government land bank (HCA, GLA and regional equivalents) could buy land without residential or commercial planning permission for its potential for future development. This could be a source of land rele0ase for housing and other development, capturing most of | the ‘planning gain’ for the taxpayer.

• Future revaluation gains would bring down net debt relative to GDP, while the cash-flow from land sales would lower future government deficits.

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(3) Social house-building programme

• Between 1960 and 1979 the social sector contributed between 30 and 50% of annual completions; since 1997, between 8 and 15%. Explains most of the decline in house building.

• With much lower land costs, the affordability of a large ‘affordable housing’ programme would be much improved.

• Missed opportunity in 2009-2013 to support building industry supply chain – lost skills, lost capacity are now constraint on recovery of house building.

• Increasing RTB and extension to social housing – funded by council house sales- risk loss of affordable housing: note H of Lords resistance.

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(4) Shift incentives for LAs: give LAs share of planning gain

• link directly to the operation of a national land bank (or regional/local land banks): LAs organise the local land auctions in which the national (HCA) or regional land banks (e.g. GLA) would purchase land for future development.

• Measure eventual planning gain as sale price for development minus the price at auction. Paid only after development.

• Not to discourage building of affordable homes, adjust land provided at below market prices to market equivalents.

• No Section 106 delays.• Incentivises effective land auctions, funds LA-provided

infrastructure, funds local expenditure on community projects to compensate losers from development.

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(5) Revise planning rules to fit land bank proposal

• Land acquisition on the open market of land (without consent) has to be on a large scale to make subsequent switch of planning consent viable-otherwise nearby land owners will demand (via Judicial Review) equal grant of consent.

• Use the New Towns Act (including compulsory purchase for hold-out land parcels) on a far larger scale. Town and Country Planning Association (2015) suggest some updates.

• Expand current brownfield focus of, e.g. the Old Oak Common and Park Royal Mayoral Development Corporation (MDC), Ebbsfleet Urban Development Corporation (UDC) and Regional Housing Zones, to greenfield development.

• Selectively relax height restrictions in central cities.33

(5) Revise planning rules to fit land bank proposal

• Land acquisition on the open market of land (without consent) has to be on a large scale to make subsequent switch of planning consent viable-otherwise nearby land owners will demand (via Judicial Review) equal grant of consent.

• Use the New Towns Act (including compulsory purchase for hold-out land parcels) on a far larger scale. Town and Country Planning Association (2015) suggest some updates.

• Expand current brownfield focus of, e.g. the Old Oak Common and Park Royal Mayoral Development Corporation (MDC), Ebbsfleet Urban Development Corporation (UDC) and Regional Housing Zones, to greenfield development.

• Selectively relax height restrictions in central cities.34

Opposition to house-building has softened in recent years

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Source: British Social Attitudes Survey 2014

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Can we fix it? Solving Britain’s housing crisis

David Willetts, Executive Chair at the Resolution FoundationLindsay Judge, Senior Policy Analyst at the Resolution

FoundationJohn Muellbauer, Professor of Economics at Nuffield College,

OxfordTerrie Alafat, Chief Executive of the Chartered Institute of

Housing@resfoundation // #housingcrisisWifi: 2QAG_guest p: W3lc0m3!!