Fifty years ago, a group of activists occupied London’s Centre Point Tower in a fabled episode of direct action on housing. At the time, in January 1974, England was beset by rising homelessness and too many empty homes. One of the protesters, Ron Bailey, recently pointed out that this situation “was pretty much like now”.
In fact, the housing crisis is worse now than it was then. In 1974, councils were still building public housing. And house prices and rents were not running as far ahead of earnings as they are today. In the 20 years to 2022, median prices have risen from five to eight times earnings across England, and from seven to 13 times in London.
Quite what is driving this housing cost crisis is a matter of debate. Scholars and politicians agree that supply needs to increase, across the private and, particularly, the public sectors. However, the shortfalls in private newbuild housing – which are often local or sub-regional – do not explain why housing costs so far exceed people’s ability to cover them.
Along with my colleagues Phoebe Stirling and Andrew Purves, I have shown that this disconnect is due to the economic shift, in the latter part of the 20th century, that saw housing transformed from a home into an asset.
Economists, often inspired by the work of Henry George, have long proposed a solution to this problem: a regular tax on land values. Balanced by lower taxes on work, such a levy could play a significant role in easing the housing cost crisis confronting UK families.
How housing became a financial asset
At the root of the housing cost crisis is the transformation of housing into a private asset in the 20th century. Successive UK governments worked with financial lenders to activate demand for private housing and shrink the role of the state as direct provider of council homes.
Reduced credit controls in the 1970s, and further banking deregulations, made it easier for families to secure bigger mortgage loans on easier terms and with smaller incomes. Banks and building societies were encouraged to offer a wider range of products, culminating in buy-to-let mortgages in 1996.
House price growth outpaced underlying inflation and UK housing became a magnet for domestic and international investment. It was now an asset: better than a pension, and the focus of families’ financial aspirations across generations.
UK governments came to see house prices as a barometer for the health of the economy and a political goal. The underlying value of land on which housing sits is now the foundation for the UK economy.
Why we should refocus tax on land values
Homeowners have a “beneficial interest” – an economic stake – in land values, which may rise without any investment or improvement by the owner. The removal of regular tax on that beneficial interest, via the 1963 Finance Act, was one of the ways that government activated demand for private housing.
Reducing tax on earnings and, instead, returning to some form of a regular land value tax would help to solve the housing crisis. This land value tax would be fixed to ownership of any housing and distinct from council tax, as is the case in much of Europe and across the US.
This would increase net workplace earnings. It would also suppress house prices. The relationship between the two, and the extent and speed of any price adjustment, would depend on the balance of tax liability (between earnings and land value) and how quickly the shift happened: too fast and the market would go into shock.
Such a change has the potential to keep people, the over-50s in particular, in the job market. The financial reward from work would increase while the reward from just owning housing, and benefiting from rising land values, would decrease.
It would also make it nonsensical to leave homes empty. Owners would face a tax liability that could either be met by rental income from the building or avoided by selling up.
If taxes on land were to become a bigger part of a household’s liability, then keeping a second home, for amenity or investment, would effectively double that liability.
By increasing the price of luxury or speculative property ownership in this way, taxing land values would help to ensure that land, and the housing on it, is put to productive use, in the sense of being fully occupied.
Overall, it would reduce wealth inequalities centred on housing and restore the function of housing as home, as opposed to asset.
Why a land value tax is fair
A regular tax on beneficial interest in land is not an attack on aspiration. It is a means of ensuring that families have affordable access to the housing they need, by re-centering the economy away from housing-based rentierism (making money solely by owning housing).
Land values are created by the agglomeration of human activity. House prices (of which land values are the major component in the highest value areas) increase as cities grow, economies strengthen, and infrastructure is upgraded. Taxing this unearned rent (land values) is therefore fairer than taxing work.
Lots of people would of course object. Private landlords would seek to recover land tax losses through higher building rents. This would be tempered, however, by the release of empty homes to the sale and rental markets. Families would find it easier to buy the homes they need without such a strong asset motive for ownership.
The wider rentier economy, built on untaxed land values, would be floored by a comprehensive taxing of ground rents. But replacing high-land values and low productivity with a focus on productive investment, employment growth, higher rewards from work and more broadly shared prosperity, would be a positive shift.
As the economy restructures away from rentierism, lower land values would make it easier for councils, once again, able to build homes, including in new towns.
Fifty years ago, housing campaigners risked prison to highlight how desperately people needed decent places to live. Without a significant shift away from the extractive economic model that spawned the housing crisis, the country will continue to be blighted by empty homes and spiralling housing costs.