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Building blocks

4 July 2013 By George Hay

Cricket and football are not the only contestants to rank as the UK’s national sport. There is also screwing up the property market. The latest example, supported by the International Monetary Fund and opposition leader Ed Miliband, is a levy on “land banks”, housebuilders’ stocks of unused land. It’s a better idea than the government’s lunatic “Help to Buy” scheme. But that’s not saying much.

The UK housing market clearly has a supply problem. Under half of the 200,000-odd new houses a year needed to keep pace with long-term demand are being built. Blame an over-restrictive planning system. Also blame a messed up financial system and a weak economy, which have created a shortage of demand. Even after a recent spurt, housing transactions remain 40 percent below their 2007 peak. And then cast a suspicious eye on the builders who search for capital gains on land by delaying construction.

“Help to Buy”, which guarantees the riskiest 20 percent of loans, will push up already high prices and could bring losses to the government later, if house prices ever fall back substantially. It will do almost nothing to increase construction.

It might not work

A tax on the land bank would at least address one source of the underlying supply shortage, by making it more expensive for builders to hold onto undeveloped land. The likes of Barratt Developments and Persimmon hold land banks of four years and upwards’ supply. Proponents of the tax claim there are 400,000 unused plots with planning permission for construction. Cutting out social housing plots, that comes to three years of construction at the current rate.

But that number overstates the hoarding. The Home Builders Federation says 325,000 of those plots are actually being developed or are currently economically unviable. Even if the industry group exaggerates, a land-bank tax cannot have more than a marginal positive effect. And the effect could even be negative. If plots with permission are taxed, builders could choose simply to delay their planning applications. At worst, the result could be higher prices on land that has been taxed while awaiting development and lower supply caused by delayed or denied applications on untaxed plots.

Better to start again

Rather than adding a possibly counterproductive tax, why not rethink a thoroughly messed-up tax system?

Currently, British houses are taxed in two ways. Stamp duty extracts a percentage of the sale price, up to 7 percent for 2 million pound-plus houses, when property changes hands. Council Tax is an annual charge, which should vary with the value of the property. Both taxes are deeply flawed.

Stamp duty discourages efficient pricing, and hence transactions and demand. Council Tax is regressive, since all property valued over 320,000 pounds is assessed at the same rate, and valuations haven’t been updated since 1991. Worst of all is the tax that does not exist, on owner-occupiers’ gains from increased land values. That favours property as an asset, encouraging an economically useless mad scramble to get on the property ladder.

No further high-level reviews are needed to find a better system. Just turn to the 2010 Mirrlees Review from the Institute for Fiscal Studies. It proposed replacing the Council Tax with a housing services tax based on up-to-date valuations. Stamp duty should be scrapped, and a coherent capital gains tax introduced for both landlords and owner-occupiers.

Such a system would be a huge improvement. Assuming an average house value of 200,000 pounds, an annual 0.6 percent charge on each property’s value would raise the same amount as Council Tax, according to Mirrlees, so the average bill needn’t go up. Taxing unearned increases in land value would reduce the current excessive allocation of resources towards the property sector, while the abolition of stamp duty would incentivise demand and hence supply. Prices would fall, and UK housing would look more like a normal market.

The big problem is that 65 percent of UK citizens – and big UK banks that have lent high loan-to-value mortgages – don’t want normalcy. The top 20 percent of earners would pay more in housing taxes than they currently do, and low-income pensioners in expensive houses would lose out. Politicians know this.

Until the public’s mood shifts, piecemeal plans like land-bank taxes – however flawed – will continue to get the nod over reforms that actually make sense.

 

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