Silver bullet syndrome

As Nationwide confirms that house prices across the country are now rising at a frankly unsustainable 11% per year, solutions to our housing problems are sprouting across newspaper opinion pages.

Aditya Chakrabortty says that “the problem is not primarily property”, but rather London itself. The huge gap opening between London house prices and the rest of the UK is a symptom of an economy dangerously tilted towards its capital. His solution is a national plan to re-balance the economy away from London, led by investment. For example he says that “the next Tech City should be in Liverpool” and Whitehall departments should move out of London to encourage city growth in the North.

Meanwhile, according to the alliance of Sir Simon Jenkins, George Monbiot and Professor Danny Dorling, there is no real housing shortage. The problem the UK faces is one of allocation of the existing housing stock which has more bedrooms than people, just badly distributed. All three come back to tax incentives as their method of righting this wrong. They say we should tax homeowners for their space, either through more council tax bands at the higher end, an owners’ “bedroom tax” or a full scale land value tax and then people will happily slot into more appropriately sized homes.

Finally, there are the calls from Allister Heath, the Economist and many others for a planning revolution to get us building many more homes. By increasing the supply of homes relative to the demand for them, the pressure on prices, rents and overcrowding will be reduced. The way to do this, they argue, is by “reducing red tape” on builders and/or reducing planning powers or devolving them to the most local level.

Clearly each of these arguments has merit and deserve a much fuller discussion. However I think that there is a simple common affliction running across all of them. I would call this “silver bullet syndrome”.

Silver bullet syndrome is where the problem is presented as obvious (but here, in each case different) and the solution is a radical departure from the status quo. Silver bullet syndrome usually involves proposing a bold move to either majorly reduce the size of government (scrap planning) or majorly increase the size of government (tax more, invest more).

But let’s think for a moment about why these obvious solutions to obvious problems are not happening now and probably won’t happen in the near future.

  1. Rebalancing the economy away from London to the extent that housing affordability is actually changed is difficult, dangerous and probably very expensive. Aditya admits it will take “decades”. As Daniel Knowles of the Economist points out such plans before have not always had benign consequences. Clearly, we need to grow other city-economies and create jobs across the country – but is this really a zero sum game with the Capital?
  2.  Taxing spare bedrooms in the private sector or introducing a land value tax could mean an increased tax burden on the majority of the electorate. Remember, the intention of the policy is to make the tax so onerous that people will be forced to leave their homes. While popular support can be raised for targeted council tax changes or targeted capital gains taxes on property speculators, could a punitive private bedroom tax across the population really gain political traction?
  3.  “Reducing red tape” in planning can mean a variety of things from reducing obligations to make homes energy efficient; to opening up the green belt to much more development; to localising planning powers. Major planning reform as a single weapon to increase home building would have to be radical. It would involve a massive fight with environmental lobbies, reduce house building in the short term by creating uncertainty for builders and could result in Texan-style urban sprawl with bad infrastructure and services.

I’m not convinced that any of these silver bullets would hit their target. In fact, I think some of these commentators are being unhelpful by suggesting policies that are close to impossible politically while dismissing pragmatic, socially useful things like affordable home building.

We need a practical and proportionate plan to tackle the UK’s housing problems, which combines a bold strategy to build more homes in the right places and which local people can afford with proportionate changes on the demand side. Reducing the volatility of house prices means safe mortgage lending, more home building and reducing the incentives to speculate on property through moderate tax changes. All of this should be set within a view – articulated by government – about how to grow our most successful cities, including London, through bold devolution.

So, in other words I’m saying that I think all of the commentators mentioned are right to an extent – just not right to present the answer as a silver bullet, while dismissing other pieces of the jig-saw.

Silver bullet syndrome won’t help solve the housing affordability crisis affecting 9 million private renters, millions more social renters and young families stretching to borrow huge mortgages with the looming threat of rate rises. Let’s be pragmatic, as well as bold, to actually solve this thing.

    1. More homework? Looks that way.

      ” Taxing spare bedrooms in the private sector or introducing a land value tax could mean an increased tax burden on the majority of the electorate. Remember, the intention of the policy is to make the tax so onerous that people will be forced to leave their homes.”

      “Silver bullet syndrome usually involves proposing a bold move to either majorly reduce the size of government (scrap planning) or majorly increase the size of government (tax more, invest more).”

      If the top 1% of households own 50% of Land by value, how the hell is majority of the electorate going to be worse off?! And that’s not even taking banks/landlords into account.

      LVT is a shift not an increase. By reducing deadweight costs, it also reduces the size of the State as a % GDP.

  1. Pete Jefferys might be better off asking a few questions first before pronouncing judgement. It would help get to the root of the problem and find the best solution.

    1) What evidence is there for a housing shortage?

    I’m sure Shelter knows the numbers. 25 empty spare rooms, 1 million empty homes, etc, etc.

    Is this the sign of a market in equilibrium, and if not what might be causing it?

    Freeholders do not create land values. They are created purely by the right to exclude others from a scarce natural resource. So it is the State(all of us) that creates these values by granting this right. The fact freeholders do not pay the State the full market rate for this protected privilege is therefore an implicit subsidy.

    This subsidy is currently worth around £220bn per year(depressed by the sum of taxation on Capital).

    Subsidies cause deadweight losses i.e market inefficiency and mis-allocation. So those who are net recipients of this tend to over consume property resources.

    2) If there isn’t a actual shortage of housing, don’t we really mean there is a problem with affordability?

    3) If so, what would happen if freeholders paid the State for their right to exclude, rather than the bank or previous owner?

    For sure we get “poor widows in mansions” downsizing and working families up sizing. We’d also see higher rates of agglomeration and re-cycling of existing sites. Compact urban centres with the right balance of amenities vs housing density(planners would now have a simple cost/benefit incentive to do this). All externalities in the spacial and economic environment would now be internalised. So the NIMBY problem is also booted into touch too.

    The interesting bit is the effect on the tax system. £220bn per year off taxes on Capital formation could mean we abolish NIC’s, VAT, Corp Tax, several nuisance taxes and be left with a flat 20% on all income.

    The results of this are, anyone who’s gross household income is 10% or more of their home’s value would be better off. So about 90% of the population.

    For the average UK household that equates to £11,000 in their pocket. (rising higher than that over time as taxes of Capital decrease and rental values increase).

    The de-capitalisation of the current subsidy freeholders enjoy would reduce house prices by 50%.

    The effect of this is to increase housing affordability four fold for the average UK household, as a ratio of discretionary income. So that’s sorted then.

    The regions outside London and the SE would be liable for less taxation, lowering to £100bn per year less over time. So that should help with regional inequality and we’d see cities other than London competing on a level playing field.

    The total cost of a new home would be 100% bricks and mortar value ie improvements. So we’d no doubt see the market demand better quality housing, rather than the cheap cramped rubbish we have been building for decades.

    And that’s all without the need to build a single new home on green land. Although it would certainly be likely and desirable to see more high rise buildings in our city centres.

    All valuations and receipts costed in detail here.

    Shelter has a responsibility to educate itself before making any statements on housing. It’s ignorance that is the problem, not a lack of pragmatism.

  2. Excessive claims and dismissive skepticism are two sides of the same mentally lazy attitude. However, land value tax has worked wonderfully well where it has been tried. If home owners pay more, renters certainly pay less, as all economists agree that land value tax does not increase rents, and the evidence is that it lowers rents.

    Also, you could fund a per capita dividend from land rents, and almost every working-class and middle (professional) class home owner would pay less. The great Lords would undoubtedly pay more, but we can pass the hat for them.

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