Thursday 29 September 2016

Lessons from Britain on how hard it is to get housing right

Published 06/12/2015 | 02:30

Housing is a perennially controversial subject
Housing is a perennially controversial subject
Residential property prices in Ireland and Britain

Housing is, it seems, a perennially controversial subject. Too many homes are built and then too few are built. Too many are built in the wrong places and too few are built in the right places. There are frequent laments about the decline in social housing output, but rarely, if ever, is there a discussion about what the "right" amount should be.

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Despite the importance of housing as a basic need, getting it right is hard. There are many aspects of the market - financing, building, a system to ensure standards are appropriately made and enforced, and the planning for associated infrastructure, ranging from sewers to transport connections. The State must necessarily involve itself because, as with most markets, at least some legal framework is needed to provide certainty for those operating in it.

For the unworldly who believe that we in Ireland are in some way unique in not getting housing right, one need only look across the water to be disabused of that notion. In Britain, property prices, even after having been adjusted for consumer price inflation, have been trending upwards for decades - see chart. In the south-east of England, the richest and most dynamic part of the British economy, affordability for many workers has long been a very contentious issue.

The perennially controversial subject of housing in Britain was highlighted by new government measures designed to remedy some of the problems, and by no fewer than three think tanks issuing forth on the subject - one left-leaning, one pro-free market and one non-partisan. There are lessons we in Ireland can learn from all of this.

Whether because of cultural, economic or other reasons, buying and owning property is almost as much of a national obsession among the British as it is among us Irish. In part spurred by Margaret Thatcher's 'Right to Buy' scheme, which enabled tenants to buy their council houses, the rate of home ownership across the water grew strongly from the 1980s. In parallel with Ireland, UK house prices rocketed from the mid-1990s to the financial crisis of 2008, but in contrast to Ireland, British prices fell only slightly in the slump and are now back on their long-term upward trend.

Soaring house prices and restricted mortgage credit from banks still reeling from the financial crisis has made buying a home unaffordable or impossible for many, particularly first-time buyers. Those unable to buy have been forced to enter the rental market, which in turn increases rents - developments that will be all too familiar to Irish ears.

That has had a knock-on effect on the welfare system. Britain's housing benefit subsidises rents for those on low incomes. Originally designed for social housing rents, housing benefit has increasingly been paid for rents in the private market. And with more people renting privately, the cost has ballooned, now accounting for 11pc of the entire welfare budget (the more restrictive Irish equivalent - rent supplement - comprises not much more than 1pc of Ireland's €30bn welfare spend).

Most people across the water are agreed that the fundamental problem with the British housing market is a lack of supply. Indeed, Andy Haldane, chief economist at the Bank of England has recently said that the UK housing market is "broken" because of "a lack of house building".

Identifying the problem is easier than coming up with the solutions, however. A common complaint is that planning is too restrictive and onerous in the UK. A combination of Nimbyism and a lack of political will means that development is greatly restricted in the huge 'Green Belt' that surrounds London.

While everyone agrees that more houses need to be built, the how and why usually differs by political alignment and depending on the vested interest involved.

Thus far, the Conservative government has done more to boost demand than increase supply. Its headline policy has been 'Help to Buy', an insane scheme that subsidises mortgages. Rather than encouraging new housing supply through higher prices, it appears to have resulted mainly in the latter. Recognising the supply deficit, the Chancellor, George Osborne, unveiled a number of policies in last week's Autumn Statement. He announced he would spend £7bn (€9.7bn) building up to 400,000 units over the next five years. In effect this money is a subsidy designed to get builders building homes, which will subsequently be sold at a discount to make them 'affordable'.

A more innovative policy is to encourage 'shared ownership', where people who cannot afford to purchase a property can buy part of it and pay rent on the remainder. When they can afford it, there is an option to buy in full. A small dose of harsh medicine was also doled out to buy-to-let investors- who have been blamed for house price frenzy - in the form of stamp duty premium.

Not everyone is convinced by Osborne's plans. Alice Martin of the left-leaning New Economics Foundation* believes the new policies risk making a bad situation worse. She attributes some of the house price rises to speculation and the withdrawal of the State from house building. Schemes to increase ownership will merely saddle people with large debts, she believes.

Another criticism comes from Angus Armstrong of the non-partisan National Institute of Economic and Social Research**. While writing kindly of shared-ownership schemes, Armstrong is less enthusiastic about the large subsidies for developers. He argues that it is unwise to spend more on housing that may be built anyway, and that the money would be better used if ploughed into productive investments.

Armstrong also hints that excess demand is partly the result of speculation. As well as its stability and decent return, property is taxed less than many other assets, making it even more attractive to investors.

A more radical proposal is a land value tax, as proposed by the free market Institute of Economic Affair's Kristian Niemietz***. Whereas a property tax depends on the location of the site and the buildings on it, a land value tax is levied only on the land. In other words, the buildings and investments on the plot are not taxed. In theory, such a tax ensures the most efficient use of that land. If an individual or organisation is not developing a prime piece of underdeveloped real estate, a land tax would incentivise action and disincentivise doing nothing with it.

In the run-up to the introduction of the Local Property Tax in Ireland, a land or site value tax was discussed. The Commission on Taxation in 2009 noted the "strong economic rationale" behind the tax. However, it declined to support the measure given the "very difficult hurdles to be crossed" administratively. With the economy recovering and an election in the offing, this may be the time to think again about overcoming those hurdles.

* http://www.neweconomics.org/blog/entry/why-the-spending-review-could-make-the-housing-crisis-worse-not-better

** http://www.niesr.ac.uk/blog/better-tax-system-not-subsidies-needed-solve-our-housing-problem#.VmDsZL8zpiZ

*** http://www.iea.org.uk/blog/autumn-statement-splashing-central-government-money-around-is-not-devolution

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