Order and the British Housing Market

by Ken Gibb

Yesterday’s FT ran a lengthy editorial on the woes of the UK housing market (‘Britain needs to set its housing market in order’), following earlier analysis on the same subject. The discussion leads onto other linked analysis yesterday by the BBC News on house building [1] and a blog by Gavin Smart of the CIH on private renting [2].

The FT argument runs something like this. Rising house prices, despite the great recession, have pushed stock housing values to nearly a trillion pounds, much of this accruing to existing owners or landlords, at the expense of tenants and would be buyers. And ‘there is nothing illusory about the divisions this creates’. They do not lay the blame at faulty monetary policy regarding interest rates or indeed wish to overstate the role of oligarchs holding their savings in the form of London homes; instead the problem is lack of housing supply and fiscal policy that provides tax breaks to private landlords, the absence of capital gains taxation and Housing Benefit maintaining rents in the private rental market. They are critical also of Help to Buy and Funding for Lending (the latter described as a ‘vast credit subsidy’ for buy to let landlords). Guarantees for housing construction on the other hand have remained ‘in the pipeline’. The FT argues that policy has been more successful relaxing the planning system but that political will is receding with economic recovery and as the election nears. So, both the priorities for housing and the lasting commitment to see it through have been lacking.

Looking forward, the editorial argues that (1) HM Treasury should scrutinise all forms of support (including one presumes implicit tax breaks) to home owners; (2) local government should be free to set property taxes; (3) the planning system has to favour those in housing need and seeking new homes rather than the ‘comfortable homeowners’. They conclude: ‘What Britain needs is a government brave enough to trumpet the virtue of falling house prices, and to make it happen’.

The BBC News magazine story by Tom de Castella asks why it is so difficult to achieve the Labour party’s 240,000 UK housing supply figure. Along with Government proposals to help, the main supply suspects, largely based on the Lyons Review analysis, are set out in summary. The planning system and local opposition to development; lack of available land; the slow build out of land held by builders with planning permission, the fact that the state no longer builds to scale and social housing is financially constrained in different ways, supply capacity shortages in terms of labour and materials and the decline of small builders.

Turning to the private rented sector, Gavin Smart presents an array of surprising numbers. He quotes the recent Savills figure that private landlords have enjoyed an increase in capital values of £177 billion in the last five years during a period when the rental market stock grew by 57% in the UK (2009-14) and as noted by the FT private tenants pay 2/5 of their income on their housing, yet one in three rental market homes would have failed the English decent homes standard if applied to them in 2012. The issue of the moment seems however to be the fiscal one. Private landlords receive of the order of £7 billion per annum in tax allowances (manly mortgage interest tax relief and allowances for repairs and maintenance). Gavin notes the current debate regarding whether these should be halted or moderated and argues instead that they ought to be targeted more effectively incentivising landlords to sign up to accreditation, carry out repairs and improve management in return for the tax breaks.

My thoughts? First, as I have written before I would on balance favour a long term target of stable real house prices but to pursue that in a context of a concerted long term uplift in housing supply, fairer and more efficient housing taxation, more lending intervention and support, probably along the lines suggested by CIH, for a higher quality private rented sector (and by setting these ground rules, this may also hasten rather than further impede more institutional investment).

Second, I am a little wary of tax tinkering and second best solutions. Yes, there may be significant tax allowances going to the rental market but Gavin is right to stress the open-ended nature of the repair and maintenance allowances – these do need to be incentivised and linked to standards. The loan interest tax relief on the other hand is after all an offset for businesses that pay income and capital gains tax (unlike those other ‘asset speculators’, our nation of home owners). The problem at one level has been the previous fiddling with housing taxation (going back to the 1960s) that has broken what was once a relatively consistent treatment – taxing the housing income of home owners and offsetting with mortgage interest tax relief alongside a local property tax. Schedule A income tax was abolished followed later by the Rates and mortgage interest tax relief, without anything comprehensive taking their place. And viewed as an asset, owner-occupation of a main residence remains very lightly taxed with all the bad things that flow from it for the economy and society.

That is where the main inconsistency primarily lies in this second best world, not with the business taxation of private landlords. But I am the first to recognise how difficult it is to buy an argument of taxation principle in an ongoing context of austerity, welfare reform and housing market failure.

[1] ‘Why can’t the UK build 240,000 homes a year’ http://www.bbc.co.uk/news/magazine-30776306
[2] ‘A chance to boost standards in the private rented sector’ http://www.cih.org/news-article/display