Conventional wisdom suggests that the UK has a problem with house prices – after all they have increased nearly tenfold since 1979 – twice the rate of consumer prices. But the reality is that we have a problem with land.
Land now represents over half of the UK’s total net worth. At £5trn it is worth more than all the homes, commercial property, machinery and equipment and all other non-financial assets in the UK combined. In 1995, the value of land held by households (largely that beneath people’s homes) made up a fifth (£600bn) of UK households’ net wealth. By 2016, this had risen to two-fifths (£3.9trn) and if previous trends continue, over the next two decades it will rise to almost three-fifths (£22.8trn).
Why is this a problem? Because the increasing accumulation of wealth in land (much of it through housing) amongst a dwindling group of people is bad for our economy, and our society.
First, our current system helps drive wealth inequality. The top 10 per cent in the UK own property wealth averaging £420,000 in value, compared with the bottom 30 per cent who have no net property wealth. But new IPPR research demonstrates that the vast majority of this wealth – 70 per cent – is held not in the property itself, but in the land that lies underneath.
For most people the only means of benefiting from the rising value of land is to buy a home, but home ownership has fallen rapidly in recent years, most dramatically among younger generations. Research by the Resolution Foundation has shown that in 1990, one in two people aged between 25 and 34 owned their own home. By 2017, it had fallen to one in four. By contrast, for those over 65, one in two people similarly owned their own home in 1990. By 2017, it had increased to three in four. If capital – or land in this case – were owned equally throughout the population, then the appreciation of property assets would not result in rising inequality. However, the differential rates of ownership for individuals and households mean that this is not the case.
Land is also central to the failing housing market in England. Under our present planning system, a landowner can expect a huge unearned windfall if they get planning permission to build homes on a piece of land they own. For instance, a hectare of agricultural land in South Oxfordshire is typically worth £25,000. With residential planning permission, however, the value would typically rise to £5.6m – 224 times higher. The high cost of land makes it more expensive, difficult and risky to build homes at affordable prices. This higher risk limits the rate at which new homes can be built.
Third, the speculative land market plays a key role in the UK’s woefully poor productivity. Financial deregulation in the 1980s saw banks apply a greater focus on creating credit collateralised by property (and the underlying land value), shifting away from their more traditional role of directing savings into productive investments. Today, real-estate loans to business and individuals now account for over 78 per cent of all loans to non-financial UK residents. The sheer scale of the credit directed at land and property, in the absence of appropriate regulation on either land or finance, has driven up the price of land, rather than increasing the productive capacity of the economy, or raising wages or GDP growth.
Fourth, the broken land market and high house prices are feeding macroeconomic instability. While priced out house hunters may dream of falling house prices, in reality this means reduced residential investment, and households falling into negative equity. Falling house prices also tend to have a negative impact on consumer spending, while increasing bad loans, and lowering the level of capital available to banks. With credit risk spreading, the economy can enter a disastrous cycle that eventually increases unemployment and GDP. Maintaining house prices is intrinsically linked therefore with securing macroeconomic stability, as has been consistently highlighted by the Bank of England.
To tackle this the government needs to get serious about regulating and taxing the speculative land market. There is plenty that it could do.
First, it should change the law to prevent landowners from benefiting from the unearned windfall gains that accrue to them when they are awarded planning permission. To achieve this the government should reform compulsory purchase laws to allow local authorities and public bodies to buy land at a fair value that enables the delivery of high quality development. This is the approach taken in a number of countries including Germany, the Netherlands, and in the UK prior to 1961. The government should also give planning authorities in England the powers to “zone” areas of land for development and freeze its price close to its current use value, as happens in Germany.
Second, land and property taxation should be overhauled. The government should introduce a land value tax to replace business rates. This would be the most economically efficient means of taxing commercial land: it would support, rather than deter, productive investment; it would capture some of the unearned windfalls from the ownership of land; and it would reduce incentives for further speculation. The government should also consider replacing council tax and eventually stamp duty with an annual property tax which would be far more progressive than council tax, and would effectively capture increases in land values and house prices in a way in the current system does not.
Third, the government should reform macroprudential policy, to reduce financial speculation in land. The Financial Policy Committee (FPC) of the Bank of England could, for example, be given an explicit house price inflation target, set by government. The aim of such a target would be to set property price expectations (a critical driver of house price inflation and land as the underlying asset), reduce excessive debt, and reduce capital inflows by disincentivising investment in UK property on the part of overseas investors. Measures the Bank of England could take to implement such a target could include controlling mortgage lending, in the form of limits on loan-to-value and loan-to-income ratios.
Wealth inequality, a poorly functioning housing market, an economy focused on unproductive investment and macroeconomic instability are all negative consequences of our current treatment of land within the UK economy. Our existing systems for regulating and taxing land, far from acting to curb some of the worst excesses that arise from land speculation, actively encourage it.
Greater regulation and a far more progressive taxation system focused on land, would ensure that the unearned “economic rents’ which arise from landownership are shared for the public good. If politicians want to build a stronger, more just and prosperous economy then reform of the land market is a good place to start.
Luke Murphy is Associate Director for the Energy, Climate, Housing and Infrastructure Team at IPPR. He tweets @LukeSMurphy