Taxing speculation in the housing market

In parallel to the much discussed idea of capping house price inflation (or at least the Bank of England setting it as a policy goal and then trying to lean on the banks), there has been much concern raised about foreign investment, viewed as largely speculative, in the London market (though not just there). Some commentators have suggested we might learn from speculation taxes employed in property markets elsewhere. Andrew Heywood and Paul Hackett have accordingly published a thought-provoking discussion paper for the Smith Institute, which express these issues further (the case for a property speculation tax) (1).

Their argument is as follows. Overseas buyers are investing something like £7 billon in London’s market, the same as 2/5 of all mortgage loans made in the capital, 38% of resales and 85% of new build in central London. A property speculation tax would, they argue, be a helpful additional policy lever to dampen speculation. They envisage a new tax drawing on the features of similar provisions in Germany – essentially a high tax is imposed on sellers who seek capital gain quickly after purchase with the tax rate tapering down over time i.e. it might be set at a maximum rate (they suggest 20-30% of capital gain) for sales within two years and then fall to zero over a period of say 10 years.

To be clear, this would exclude home-owners (i.e. owners of principal residences) and long term investors would also escape it but the tax could be aimed at second homes, empty property and the like. The primary target would be short-term investors, domestic and foreign, who have only short term capital growth speculative motivations.

The authors say this is not like the mansion tax – it is aimed at speculation rather than wealth redistribution and it might replace or add to existing capital gains tax provision on property (outwith primary residences of owner-occupiers). They believe that HMRC could readily collect it (immovable property is a good tax base of course from a collection point of view) and they make something of a case for regionally varying the tax.

It is an interesting paper. It sits somewhere between trying to float the idea, recognizing some of the possible shortcomings and providing a call for further debate in this general direction. A number of points strike me.

First, we already have a tax on second properties namely the council tax and my admittedly dim recollection was that it was set slightly punitively compared to occupied levels of tax (but I may be out of date). There would be a need, over and above mansion tax debates, about synchronizing the local tax with this proposed tax on speculation.

Second, the authors are balanced in their reporting of the experience of these sorts of taxes elsewhere an in particular the less effective role they played in Asian markets like Taiwan. However, the German example is much more conducive to their case. They recognise and we must also, however, that policy transfer from one type of housing system to another is a complex business that requires a lot of study to avoid it going wrong (see the excellent new book by King and Crewe – ‘The blunders of our governments’ published by Oneworld – to see some painful illustrations from recent public policy).

Third, I am actually less convinced about keeping the tax regionally varied. I would have thought that through the alchemy of financial leverage there is as much speculative gain to be made in low value property markets as there is in the high end of London ‘s stratospheric prices. This is still dysfunctional just not in quite so dramatic a fashion.

Fourth, I think there is clearly quite a bit of modeling work to be done on the revenue and displacement effects that different versions of such a tax might have on both capital gains tax revenues (if it partially or wholly replaced that function) but also in terms of its revenues in relation to costs of collecting and setting up. I would imagine it can piggy back on stamp duty – though that will be complicated in Scotland after it is replaced with a new transactions tax in 2015.

The harder question to answer is how it will affect behavior – the second round effects.  Heywood and Hackett note that most of this speculative activity is broadly associated with: American and North American investors seeking property in London for residential or investment purposes, non-OECD investors seeking save havens and otherwise secure property in a world city  (though often hardly if at all living there); and Asian investors who seek both capital and income returns. These groups will respond differently to such a property speculation tax. And just how would it affect the buy to let sector?

It would change the incentives for second home owners and owners of otherwise empty property – but while it may stop buying to keep empty it will not help or incentivise those already holding such property other than to hold on longer and perhaps seek income returns from a tenant- but it will depend on the motivations of such investors.

A speculation tax may have a modest but helpful impact reducing these pressures. Depending on how it is designed it may be a valuable fiscal tool to add to the largely monetary policy levers open to market stability and the other levers that might support sustained increases in housing supply. There are clearly many questions and trade-offs attached to design and consequences of the tax. However, I would not see it as a revenue-raising device but more as a tool to lessen speculative pressures. I am not so keen on the London only focus (though the authors do say that they think that the argument is finely balanced). It does need to cover its costs but it sounds like it would be relatively simple and cheap to administer. I also cannot imagine it would be that hard a sell politically in the current environment.

There are many practical hurdles and design questions to overcome but it is definitely worth further consideration as part of a broader package.

(1) Haywood, A and Hackett, P (2013) ‘The Case for a Property Speculation Tax’. A Smith Institute Discussion Paper. http://www.smith-institute.org.uk/

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A social housing stimulus package for Ireland

The Simon community’s campaign ‘Home for Good’ is seeking to protect and grow the homelessness and social housing budgets in the Republic of Ireland. This is at a time when spending on housing in Ireland has been hugely reduced and restructured into a plethora of initiatives and a bending of resources towards revenue rather than capital.

I was in Wexford this week, speaking at the biennial Irish social housing conference, and one could not fail to be struck by the depth of the problems faced (historically high and massive levels of housing need as measured by waiting list data), as ranged against the legacy effects of the earlier boom and bust in property and the now much reduced state of public funding available for social and affordable housing.

I can make no claim to be expert on housing in Ireland but what I did in my talk was to offer experience from the Joseph Rowntree Foundation work I led on innovations in affordable housing supply (www.jrf.org.uk) and provide an overview of recent developments in Scotland as we seek to deliver 30,000 social and affordable homes over five years.

I also was asked to draw on earlier research about the possible economic and other benefits of a social housing stimulus package which could make a claim for resources freed up by the end of the Irish Troika arrangements.

The following can I think be stressed:

• A social housing stimulus will make a direct contribution to the near 100,000 housing need figures and thereby contribute to the Simon Community and wider housing sector’s core objectives.
• However, the stimulus also will serve to support economic activity and will do so primarily because of the large multiplier effects that housing construction imparts into the economy. I discuss there further below.
• But in addition to the economic effects on jobs, spending and income, there are wider non-trivial positive benefits associated with additional good housing on health outcomes, education and neighbourhoods. While these are difficult to measure and isolate, there is consensus and a literature on these intuitive benefits.
• More recently, there has been interest in Scotland in wider characterisations of wellbeing (see the Oxfam GV Humankind index – http://policy-practice.oxfam.org.uk/our-work/poverty-in-the-uk/humankind-index ). Concerned about the narrow focus on GDP as a measure of welfare, Oxfam commissioned a multi-dimensional study of the things real people think are important to their welfare, finding for instance that income security, family and security were more important than cash per se. They also found that the most important quantitative elements of wellbeing were adequate housing and the quality of life in ones’ neighbourhood.

It is worth saying that economic multipliers calculated for house building, housing construction and construction more generally do generate different numbers and consequent impacts depending on where and when they are developed. But, it is also clear that type II multipliers (including direct impacts, indirect impacts and induced impacts from further rounds of spending or production etc) do suggest that in broad terms there are relatively strong positive effects and that these seem to be generally stable over time within countries.

The evidence to hand suggests:

• Northern Irish research (Smyth and Bailey at the University of Ulster) suggested a type II multiplier of around 1.7 for the construction sector as a whole. A Scottish study for 2004 suggested a comparable figure of 1.9. The authors argued that there was relatively less leakage through imports than might be the case in GB. This means that for every 100 jobs directly created for a construction project a further 70-90 FTEs arise from indirect and induced effects of the initial stimulus.
• Work by the Cambridge Centre of Housing and Planning Research for the Scottish Government suggested that these scales of impact are broadly right (they calculated a figure of 1.93) but that moreover housing construction might have a relatively high multiplier than construction as a whole. Furthermore, repair and maintenance or improvement expenditure work such as energy-efficient retrofitting may have still higher multiplier values because of their higher labour-intensity.
• I was at another housing conference in Reading yesterday where further multiplier numbers for England/UK were reported of a similar if slightly larger scale based on recent work by Ernst and Young. Essentially, £1m of housing construction would support 19.9 FTE jobs and considerably more if spent on repairs and improvements. However, it was noted that at least in the UK there is leakage from remittances going abroad from foreign construction workers (as well as imported materials). More positively,  there is more scope for multiplier effects when there is more unused capacity than when the economy is near its limits.

A housing stimulus does good both for those housed and for the economy. It does need to be put in a wider context of the broader policy framework, the vision for society, etc, and there does need to be a sustainable programme for housing over time (and not just one off bonuses) – but against that background, there is pretty robust evidence to support this sort of use of a windfall.

Is it time for a house price target?

An interesting development this morning with the RICS, flush from their Commission that reported earlier in the summer (see my post on 25 June: Does the Housing market constitute a wicked problem? https://kengibb.wordpress.com/2013/06/25/does-the-housing-market-constitute-a-wicked-problem/ ), launching a proposal for a house price cap of 5% and the suggestion that the Bank if England’s new Financial Policy Committee should use its powers to corral house prices. I have only had the briefest chance to read the report so apologies if there are errors of detail.

I should lay my cards on the table in that I have been arguing for some time that the long term goal ought to be real house price stability i.e. a target of house price inflation matching general price inflation over the piece. However, it is quite one thing to say that is what you want to see and quite another to argue that it can be done with a cap, with the instruments available and in the specific context of the contemporary UK housing market.

Tony O’Sullivan and I discussed this practical question yesterday. Before we get on to that, what exactly did the RICS Economic Research piece actually say? They want an explicit house price inflation policy wherein the BoE uses macroprudential tools such that an annual growth rate threshold for national house prices is set [at 5%] and, if exceeded, triggers the use of these ‘tools’. The objective is to ‘anchor private sector house price expectations’ and row back on excessive risk taking and consequent financial imbalances. RICS go on to say that this should be part of a wide package.

Yesterday the Governor of the Bank told a Commons Committee that he had policies to address excessive housing market activity likely to lead to bubbles and singled out 1. placing additional capital requirements on mortgage lenders for that part of their business and 2. asking lenders voluntarily to set upper limits on loan to value and loan to income ratios.

Tony O’Sullivan and I thought the following about the proposal:

• A long term policy objective of zero real house price inflation at zero is the only non-distortionary policy that can effect stability between housing and the rest of the economy. Achieving this would make a major stride to normalising the dysfunctional housing market. There should not be an arbitrary target. The BBC (Stephanie Flanders) made the point this morning that there are also blunt regional impacts of a national policy – all the more reason to seek out regional measures of general price inflation (but that is another story). RICS do look favourably on regional targets and policy responses.
• However, suggesting this policy now as a means to correct or limit the impacts of another bad policy (help to buy 2) is not good policy making and likely to have unintended consequences.
• Critical here is the ability of the banks to overcome and avoid the Bank’s pretty limited tools (as suggested above). To be fair, the RICS report is also sceptical of the Bank’s policy ‘armoury’. However, we are concerned that the prime policy levers of the capping of ratios are precisely the areas that the Governor does not want to pursue on a mandatory basis and this is exactly where lenders may find innovative ways to avoid the limits.
• There are mixed messages here about whether or not to lend more or indeed to try to micromanage the composition of total lending, which does sound like considerable optimism bias on the part of the policy designer that is 1. desirable and 2. possible in the real world. Demand management of lending in a still generally weak real economy recovery is also fraught with difficulty – the age old balancing act between recovery and unsustainable bubble.
• Finally, as RICS says, there needs to be a package of complementary policies and we would emphasis long term measures to expand and render more elastic housing supply.

So, the real question is not whether the Bank should care about excessive house price growth but how to intervene safely and swiftly. Key to this is whether capital requirements can be supplemented by measures like lending ratio caps on a mandatory but credible basis – the current tools do not look enough.  Second, there has to be a series of important supply-side measures and other policies that will stabilise the housing market on a long term path and reduce its potential attraction as a speculative asset.

The UN comes to town: to see ourselves as others see us

Earlier in the summer at a conference I met Raquel Rolnik, professor of architecture and urban planning at the University of Sao Paolo and UN special rapporteur on the right to adequate housing. I was interested to hear that she was planning a ‘mission’ to the UK. Shortly thereafter I agreed to convene and host a group of Scottish housing academics talking to Raquel and her UN colleague, Juana Sotamayor. We finally met last week and I have been reflecting on it and the wider responses that emerged.

The UN seeks an invitation from governments – so this ‘mission’ was an officially sanctioned one that involved meetings with organisations, academics, politicians, public servants, citizens and communities. This is an important point, as when they went round England, Scotland and Northern Ireland, they were accused of meddling in UK housing; yet, they were here by invitation. We will see what the report says when it comes out and what sort of response follows.

Although I think they would agree that one function of such a visit is to allow comparative policy analysts look at our housing system afresh and objectively but also to, as a result, ‘shake things up’ in the host country. Apart from questions of housing need, housing adequacy and the rights of minorities, The UK was of material interest to Raquel and the UN because of its status as a key source of the Global Financial Crisis, its financialised housing and mortgage markets and the apparent fact that the housing system had not collapsed in quite the spectacular way that was found elsewhere (indeed it had shown a degree of surprising resilience). Thus, they were interested in the causes of the 2007-08 crisis and the extent to which (and why) we have managed to apparently do a little better than anticipated in the most recent bust of the housing system.

A second reflection is that in the media spin world we live in, a structured and analytical focus on a range of topics (as Raquel intended to work through) can be somewhat lost in the froth of the major political debates of the moment. Perhaps it is therefore not surprising that the mission was to an extent overtaken by the housing sector’s antipathy to the bedroom tax (as opposed to the mid-range tabloid support of the policy).

I want to focus on a few of the general themes that emerged in the Glasgow meeting three days ago in an unattributable way. We did talk about welfare reform and the bedroom tax but more in the wider context of the fit into how the housing system integrates with welfare benefits i.e. we have spent so much money on housing benefit because (a) the private rented sector has grown in an uncontrolled unregulated fashion, (b) social security in the UK has been long premised on rather miserly general cash support because HB paid most eligible housing costs for the poorest and (c) in-work benefits like HB help to support low wages and maintain high levels of relative poverty internationally in the UK. This is a poor all-round background to the reforms underway.

Second, we discussed at length the new force of the private rented sector, its aforementioned lack of standards regulation, the consequences of higher rents and, in particular, the desirability of moving away from standard 6 month tenancy agreements.

Third, the Scottish homelessness policy and its implementation featured prominently, as you might expect. This is of course not independent of the changes to the rental market and the lack of sufficient new social and affordable housing given the financial constraints facing investment in the housing system in recent years.

Fourth, the rise of asset-based welfare through home ownership housing equity and its link to rising house prices and their societal and wider damaging effects was also thoroughly rehearsed. The case for a more balanced housing system, house price stability and more progressive subsidy and more investment also flowed – though I recognise that these questions raise important public policy opportunity costs – under austerity or certainly tightly constrained shrinking budgets, which other departments will pay for more housing funding, even if the case is objectively strong?

There was a final thing that struck me as our conversations widened into broad questions of funding and supply, levels and nature of material poverty and a long term view of housing in an urban setting like Glasgow . This was how much fun and how rare was the opportunity for housing academics across Scotland (and disciplines) to have this sort of roundtable free for all. I was a little anxious before the meeting about whether it would work or not – but it was a wholly worthwhile exercise that whetted the appetite for more of the same. I don’t think I was alone in reaching that conclusion.

I for one was therefore pleased to take part in this exercise and will be look out for Raquel’s report and in that way see ourselves a bit more as others see us.

On Demolition

Anderston Glasgow September 1 2013

I was at a multi-storey demolition in Glasgow today (see story on BBC News page: http://www.bbc.co.uk/news/uk-scotland-glasgow-west-23921636 ). My housing association is redeveloping a large part of Anderston just west of the city centre and the M8 and key to the programme is the clearance of a large property in the middle of the estate. We watched it come down this morning from a hotel on the other side of the motorway.

It got me thinking about a lot of things, notably when and when not to demolish but also the realities and complexities of area regeneration, especially when you have a stake in it.

This is the third Scottish blow down of a multi I have witnessed as a board member or chair of the housing association. The other two were a few years back on the Ardler estate in Dundee. The Dundee case involved the transformation of an entire neighbourhood and the development of mixed tenure terraced and semi detached housing following a stock transfer and design competition for remaking the area. Not only has the Ardler been completely transformed physically, it is a great sight to behold, demand for its housing is now very high and voids are few and far between. Moreover, the owner-occupied segment works well.  While local residents do on occasion remark with some fondness about the multi storey flats, the new housing is extremely popular.

Anderston is a high amenity location with the housing originally split between council and the Scottish Special Housing Association (later Scottish Homes). Via Glasgow Housing Association, part of it is now managed by a local housing association. The rest was the last ever Scottish Homes stock transfer, sold to my association (Sanctuary Scotland) and was again organised as part of a regeneration programme to rebuild the homes of more than 440 tenants and RTB owners. In both Anderston and the Ardler there has been extensive local consultation on the form of redevelopment and this was intimately connected to the transfer ballots.

Anderston has several important features. One is that there is an effort being made to reinstate the original streetscape lost in the 1960s comprehensive development. Another has been the use of shared equity models to allow RTB owners to move into new homes in the redeveloped neighbourhood – an opportunity that they have now all taken up.

I was delighted that my mother was able to be present today and see the blow down. She grew up in St Vincent Street in Anderston between the wars and her parents were eventually forced to move as a result of the comprehensive redevelopment of the area in their retirement to a pretty dreadful interwar scheme in Yoker.

So should demolition be used as extensively as it is (particularly in Glasgow)? It is controversial and I have colleagues who are in general dead set against closing housing stock in a period of need and when socio-technically the properties have years of potential useful life ahead of them. It is also well-known that local politicians and community leaders can see symbolic political capital in the demolition of ‘notorious’ buildings (as was the case in my home town of Motherwell recently). These, of themselves, are not very convincing arguments though one can see how they can be seductive.

What are the issues? First, does the cost-benefit analysis that gives appraisal advice add up to a demolition and redevelopment decision, and, within that, does this take sufficient account of the interests and preferences of residents and the local community? Capital costs, expected life of the property, life time running costs, discount rates and many other factors have to be assessed as well as important intangibles. Of course, there may be straightforward financial reasons that make in some cases refurbishment and in others redevelopment impossible. Of course, the CBA may not stand up but it at least exposes the key assumptions and arguments.

Second, the loss of net social units is a material consideration i.e. where the redevelopment is mixed tenure, at lower density or reduced numbers. This does need to be put in a context of long term reduction in Glasgow’s high rise flats and disillusionment with what comprehensive redevelopment produced, as well as the city council’s and GHA’s long term plans to reduce provision overall over a now 30 year period. Some of this is really about gentrification and what goes in its place and the extent to which new and different households are able to earn capital gains from the regeneration at the expense of local residents being displaced  (as well as the controversy as to the necessity or sustainability of mixed tenure redevelopment).

It is worth saying however, third, that it is not necessarily the case that all of these high buildings are being removed. GHA have come up with an innovative affordable renting solution to an Ibrox multi-storey block and other buildings remain popular and successful across the city (e.g. Anniesland and London Road). Equally, agencies across the country are seeking to maximise the re-use of empty properties including offering homesteading packages.

As far as the high flats go – there is clearly nothing definite about their future (or lack of it). Where there are no technical problems and where residents are happy to live in such a way that seems eminently reasonable. We know well that it does not always work for young families, and that there may be inadequate or insufficient supporting community infrastructure, shops and services in some areas. But if people want to remain and to find solutions that do not involve demolition where it makes for a sustainable solution, fair enough. What has always seemed wrong to me is that professionals or local politicians determine what should happen without resident consultation or involvement in alternative solutions.

Clearly there can be technical reasons for demolition and replacement with new homes.  We should also be aware of the beneficial value of new supply. While there may be a debate about injecting mixed tenure into an area, it does seem to be stronger ground to argue that new high quality social housing does have a positive impact on residents and wider neighbourhoods – we have seen that very clearly in the Ardler and throughout the community-based movement in Glasgow.

I don’t want to get into architectural debates. For me the key issues are financial and economic on the one hand and, from within the set of feasible solutions, making sure that residents have real control over decisions made in their name and have a voice in design solutions that follow. Obviously, that has not always been the case but equally ruling out any demolition or saying it always makes sense cannot be right. In my pragmatic way I would suggest that these are and should be decisions based on the views of those who matter, the underlying economics, what is really sustainable and making sure there is a proper debate around the competing visions for the future of neighbourhoods in question.