| the ALterNAtive | AHC '04 | phOTOs | ProGrAMMe | REpOrt | cOnTAct |
| Speaker: Toby Lloyd Presentation: Taxing Land Values Website: Henry George Foundation This transcript of Toby's speech was taken when he delivered it to a commercial housing conference on behalf of the Henry George Foundation: TOBY LLOYD: It is nice to stand up in a room like this to talk about land value tax and find, first, that people already know what it is and, secondly, they are sounding positive about it. I am used to talking about these subjects to rooms full of bored and unimpressed-looking people. About a year and a half ago, I attended a similar conference, on affordable housing, also chaired by Martin, when my Chief Executive, Peter Gibb, spoke on this subject; and the reaction was rather disinterested. It is amazing how much things have come on in the last 14 months. So don't believe anyone who tells you that nothing can change on these issues - they already are changing. [Slide: Housing, subsidies and land values.] Like most people, I rather stupidly prepared a whole bunch of slides on setting the scene, which you have heard thousands of times already, so I will skip over that very quickly. Then I shall talk a bit about why I think houses are not affordable. I shall explain that by reference to land values and the theory of rent. I will look quickly at the current state of housing subsidies, and will then suggest how I think we can make housing affordable. [Slide: Housing in the UK - the situation.] The thing to note from this slide is the proportion of the housing sector that is private. We have been talking almost exclusively so far about RSLs, council housing and so forth - in fact, really just about RSLs. The vast majority of houses are private, and are likely to stay that way. [Slide: Unaffordable housing.] We all know about house price escalation and the fact that a house in London costs roughly 12 times a bus driver's salary, 11 times that of a nurse, 10 times that of a teacher. Since lenders will normally lend you 3.5 times your salary, you do not have to be a genius to work out that most houses are not affordable by most people. In fact, it is worse than that: £233,000 is the average price in London. The absolute cheapest, for a shoebox one-bedroom apartment, is about £105,000. You need a salary of £30,000 to be able to afford that. On the other hand, at the other end of the scale, if you earn less than £12,000, you can qualify for social housing; but that leaves a pretty big gap in the market where nobody can afford housing at all. [Slide: Common Ground - for mutual home ownership.] Who falls into that gap? Famously and obviously, key workers do. David Rogers mentioned the "Common Ground" report on mutual solutions to the key worker housing problem. I was lucky enough to do some of the primary research for that report, and I spoke to many key workers in London myself. Without going into the details, housing is a big problem for them. [Slide: Housing market gap.] But it is not just a public sector employment problem - it is not just key workers. Most people fall into the gap of between £12,000 and £30,000 a year. I myself fall right in the middle of it. [Slide: The deficit in housing production.] We have also heard plenty about how many affordable homes we need this year. [Slide: The housing crisis in the UK.] All this adds up to what has become known as the housing crisis in the UK. There is a chronic shortage of supply, house prices are rocketing, there is a public sector employment crisis. A £20 billion repair bill is outstanding on council housing that is falling apart. Meanwhile, we have the lowest spending on housing of any OECD country, and the highest numbers ever in temporary housing. So there really is quite a problem. On the other hand, contrary to everything you have heard so far, I suggest that it is not quite as simple as that. In fact, you could even say that there is not really a housing crisis at all. [Slide: A national housing supply problem?] Let us unpack that a little. Is there a national housing supply problem? There are plenty of houses in some parts of the country. In some regions of Britain, including England, there is no lack of housing at all - not even of affordable housing. Even in some of the highest-value parts of England, there are an awful lot of completely unused houses, or houses that are used for a couple of weeks a year. They are called second homes. So it is not necessarily a problem of an absolute lack of housing: it is a misallocation, often a geographical one. The affordable homes are not where people want them to be, or where people can find work. So we could turn the whole problem the other way round, and say that there is no such thing as an affordable housing problem in the south; there is just a shortage of employment in the north. Is there actually too little supply? We have heard dozens of figures about how many houses we need to be building, and how we are not meeting that target. Obviously it does not help, in an over-inflated housing market, to have a very low amount of new build. On the other hand, whether build 20,000 or 100,000 homes a year will not make that much difference. Ninety-nine per cent of housing supply is the existing stock. By obsessing about the 1%, we have missed a trick. The problem is that the existing stock is too expensive. I suggest that that is not just because of lack of supply but because of excess demand. Demand for housing can be excessive, no matter what conventional economists may tell you, mainly because it is fuelled by huge amounts of debt. The majority of the UK economy - the majority of the money stock in this country - is mortgage debt. It is as simple as that. So high house prices do not reflect what people are prepared to pay. The price mechanism does not work quite so simply with houses. House prices represent what people can be persuaded to borrow, which is a very different thing. That leads to excess demand and thus very high prices. Should we be focusing our efforts on building more houses at all? Perhaps we are looking for solutions in the wrong place. Even if there is a crisis of housing supply, maybe the best solution - perhaps the only one - is not just to look at building more houses. Remember: the social housing sector is that tiny slice at the top of the slide. Nearly 80% of the housing stock is in the private market. Private ownership is what most people aspire to. Yes, I accept what Michael Newey said - that the British people have a cultural problem with home ownership; we are obsessed with it. But there are good and rational reasons for that. It is also true, as he said, that, even if your house doubles in value, you cannot capitalise on that until you downsize. But still, homeowners whose houses have doubled in value do have that option. Homeowners have more options: they have the potential to make that sort of profit on their houses. So it is perfectly rational for most people to aspire to home ownership. Also, as various people have said, the private rental sector, though small, is an extremely important part of the market, providing flexibility and an intermediate market. I therefore suggest that we should not focus our efforts on the tiny slice that is social housing: what we really need to fix is the private market in houses. It is not just a supply problem we face, although I am prepared to accept that that is part of it: the real problem is the nature of the housing market itself, and its relation to the wider economy. [Slide: The affordability problem.] This is how I see the affordability problem. The economy is geographically distorted. It is not a problem simply of the supply of cheap housing. It is very simple: if there is an affordable housing problem, it is because houses are too expensive. That sounds incredibly obvious, even blatantly tautological - yet no one actually says it. If houses are not affordable, it is because they are too expensive. Why is this such a dangerous or politically subversive thing to say? As Gideon Amos said this morning, there is very little political appetite for lowering house prices - but I really think that we are going to have to bite that bullet at some point. The next question, then, is, why are houses so expensive - and more importantly, who do they always rise? They are not like anything else. We take it for granted that house prices always go up. Nothing else does - except possibly fine wines. [Laughter.] I recently looked into buying a houseboat. Being in that interim market and wanting somewhere to live in London, I was trying to find a cunning way out of the housing trap. It was remarkably cheap compared to a similar sized flat, but I was informed that it would almost certainly lose value quite fast - within about 10 years, it would have lost half its value. That seemed strange to me: a flat would not have lost half its value in 10 years. Why does a houseboat depreciate in value through wear and tear, whereas bricks and mortar do not? It is not as though they do not age, and suffer wear and tear. It is obvious, isn't it - it is because bricks and mortar are sitting on land, and the part of housing that gains in value is not the house at all but the land it is sitting on. [Slide: House prices and land values.] This is obvious when you look at some of the data. The red line here is the price of residential building land over the last 20 years. The blue bars represent house price fluctuations. You can see that, although house prices are fairly unstable, they are nothing compared with residential building land prices, which are all over the shop. You can see from this shape how the residential land market drives the booms and busts in the housing market. [Slide: Henry George Foundation land value index.] This is the same thing in a bit more detail. This is our index for land values over the last three years, showing an inexorable rise during the housing boom. [Slide: Removing the land cost.] This is from the "Common Ground" report, showing various attempts to bring down the cost of housing to within the band that key workers can afford. The two red lines represent the upper and lower limits that we estimated a key worker in London could afford to pay annually for housing. You can see various methods of trying to bring the cost down. They have not a hope in hell of a full-cost mortgage - it is well out of their league. If the purchaser installs the kitchen and bathroom, it makes almost no difference. Sweat equity brings it down a little, but the real drop comes when you can take the land cost out of housing. [Slide: Portrait of the housing market.] Given all that, I want to paint a picture of the housing market as I see it, and as we probably do not see it enough. Why does land continue to rise in value? It is not construction costs - they fluctuate, but nothing like that red line I showed you. The problem with debt-driven inflation is an issue, certainly. I will not go into this in any depth, but I personally believe that intelligent monetary reform would go an awfully long way to solving our housing problems. The conventional answer is that it is because there is a fixed supply of land. As Mark Twain said, "Buy land - they ain't making it any more." But I do not even agree with that. I do not even think it is a problem of an absolute shortage of land, even in this crowded country, as it is constantly described. There is plenty of land around. Only 8% of Britain is urbanised. Even in England, the vast majority is rural land. There is one acre for each person in the UK, which is quite spacious when you think about it. The problem is scarcity of the right bits of land, in the right locations. The obvious question is, what are the right locations in this market? The first thing to point out is that they are not the most productive ones. Housing land does not double in value so quickly because it has suddenly become twice as productive as it was a couple of years previously. The best place to buy property, as any estate agent will tell you, is where it is likely to go up in value, regardless of the use you put it to - regardless of whether you want to turn that land into a block of flats or leave it as a derelict car park. In other words, the incentive is to buy property where you can sell it for more in future - whether you can use it productively or not. In other words, the right locations are those where you can make super-normal profits from property speculation. In economics jargon, super-normal profits from landholdings are known simply as economic rents. British people are obsessive rent seekers, unfortunately, and this is not to be wondered at. With only a few small dips, the property market has risen inexorably for decades, to the extent that we see nothing odd in the fact that houses can make more money than people can from working. Yet that is very odd - that something can earn more by just sitting there as bricks and mortar than you can from working. Why should those who happen to own property make huge fortunes for doing nothing? Unlike production and other areas of economics, property speculation is a zero-sum game. For every winner, there has to be a loser. Every £10,000 that your house gains ultimately has to come from somewhere else in the system. Soaring house prices do not create any wealth; they simply represent the channelling of wealth into the hands of those who own property. Whether they realise it or not, the homeowners of middle England are permanently demonstrating what is known as Ricardo's law of rent. In the 19th century, Ricardo showed that, in any decent functioning market, super-normal profits can only be made in the short term. If you come up with a new product that no one has thought of before, you can charge more or less what you like for it, because you have no competitors. But, no matter how good your business, no matter how smart your idea, sooner or later someone will copy it, and competition will kick in and erode your profit back to a normal rate of return. Ricardo said that the only way to preserve excess profit was to control an artificial monopoly and thus distort the price mechanism. Ricardo's law says that all landowners are effectively location monopolists, and can therefore make super-normal profits indefinitely. The law also says that, as a result of this effect, the gains in productivity made elsewhere in the economy will not be returned to the workers or to the providers of capital, because a growing economy simply allows the land monopolist to charge higher rents, extracting all the surplus that has been generated by workers and capitalists, who must ultimately pay to use the limited supply of land that the monopolist owns. That is exactly the experience that Julia was describing. This is what developers face every day. They find their profits being constantly squeezed. Developers are not the villains of this piece. And it is what we all see every day in our own neighbourhoods. At any middle-class drinks party, all people talk about - obsessively - is the property market. Everyone know what increases house prices in their area: the state builds a new rail link or opens a Tube station; the local authority builds a new park; someone starts a decent business in the area to provide employment; a bunch of artists move in and start making it fashionable to hang out there; or a new headmistress turns the local school around into a model comprehensive. All these things make house prices rise dramatically. All these examples have happened recently where I live in Hackney. When any of these things happens, people who own houses make money. But they are not making that money out of thin air. They are extracting the value created by the community through the mechanism of the housing market. The consequence is that the employees of the new railway cannot afford to live there; nor can the teachers in the model school, let alone the artists who made it fashionable - and let alone lowly think tank workers. [Laughter.] In this context, with a highly rapacious housing market that sucks value upwards into the hands of landowners, it is not surprising that we get a heavy amount of state intervention. Unfortunately, the state makes the entire problem worse. [Slide: Housing subsidies - £21 billion in 2001/2.] We keep saying that we need more subsidy, but we already spend £21 billion a year of taxpayers' money on housing subsidies. Admittedly, only 4.3% of that is on social housing programmes. About £2.9 billion is in effect taxes forgone by not charging capital gains tax on houses - a figure arrived at after a reduction by inheritance tax and stamp duty. That £2.9 billion is effectively a subsidy in taxpayers' money for homeowners. Then there is £2.7 billion in council tax benefit; that goes to local authorities. But most of it is £12 billion in housing benefit, and that goes to property owners. So the vast bulk of all this housing subsidy from the state goes straight into the pockets of property owners. Don't get me wrong - many of those are RSLs. But they give it straight to the banks. That is why no one can touch the housing benefit system. [Slide: Housing subsidies.] To put that in context, this is what we spend on some other subsidies: £6.1 billion is spent on jobseeker's allowance, which has been savagely cut. No one can touch housing benefit because the RSLs have borrowed huge amounts on the strength of their future housing benefit income streams. [Slide.] To really put it in context, here is another one for you. All this £15 billion is effectively going to drive up prices further. It is being pumped into the market to raise house prices even higher. The same is true of various home buy schemes. If you give a nurse a £16,000 loan to buy a house, all you do is drive up the price of houses further. So I do not agree with Julia that we need more subsidy; I think that we need a different system completely. We need to stop throwing money at the problem, and reform the structure of the system. [Slide: The argument.] The most important part of the housing sector is the market in existing privately owned houses. The problem is that they are too expensive, and it is the value of the land that goes up, not that of the property. This is because people make excess profits on land ownership and state subsidies actually worsen the situation. The tax system rewards speculators and distorts the market. That is not just the housing benefit I have already talked about. Stamp duty clearly lowers the liquidity of the market, making it less efficient. Council tax is hugely regressive - a very bad tax. The uniform business rate is perverse. We charge uniform business rate at full whack on productive businesses. We charge a half-rate if they sack all their workers and declare themselves bankrupt; and nothing at all if they break the windows and call it derelict. This is a perverse incentive to do nothing with land. The solution is to reform the tax system to make the market work as it’s supposed to do. We should remove the distorting incentives to make excess profits: we do that simply by taxing land values. You levy an annual charge on a percentage of the unimproved site value of landholdings. This is generally known as land value taxation, site value rating or location levies - they all mean more or less the same thing. [Slide: Taxing land values - practicalities.] It is an annual charge on the unimproved site value. It is not a development tax - that is very important. The three land taxes that various Labour Governments attempted after the war were all basically development taxes, and they failed. The whole point is that this is a tax on unimproved landholdings. You pay no more for your land if it happens to have a highly thriving business or a block of flats on it than if it is a derelict car park. It is also not a transaction tax. You are paying for the privilege of holding on to locations - monopolising them, in effect. You are not paying for selling or buying them. It is not a building tax: you are not being charged on the value of your house, only on that of the site it is sitting on. All those would penalise good things and distort the market further. As with any tax change, I suggest that it should try to be tax-neutral. It should not be a revenue raiser for the Chancellor. You can take your pick of taxes you could offset against it: I personally would go for council tax and the UBR, and I would do it gradually, but these are technical issues. You may want to do it gradually to lessen the shocks, but over a fairly few years you could probably offset the whole of council tax and uniform business rate and replace them with a tax based purely on land values. What do you need for it? You need annual assessment of pure site values. Many people will tell you that this is very difficult and complicated. It is not. Insurers and surveyors do it all the time. Estate agents do it continuously - it is their job. There is a problem with land registration in Britain, although the Land Registry assures us that a complete gazetteer is coming shortly. It is also much simpler in many ways these days, because mapping data, specifically computer-aided geographical information systems, really help. In many ways, of course, it is far easier to assess land values than property values. You can do it from a map; you do not have to go and poke around in people's houses trying to band them for council tax. It is a location tax. As Merron said, Denmark has a land value tax. So does Hong Kong. Increasingly, many cities in the US are adopting land value taxes as a way of reviving their decaying urban cores. There have been many successful examples in Pennsylvania – in Harrisburg, Pittsburg, Philadelphia and so on. Some trials are going on in the UK. Both Liverpool and Oxfordshire are currently looking into the practicalities of assessing land values and taxing them accordingly. The Scottish Parliament passed a Bill last year calling for a thorough investigation of replacing council tax with land tax. A Bill will be introduced shortly to make it happen. It is from the Green Party, so it is unlikely to succeed, but things are moving. [Slide: Taxing land values - the impact.] First, such a system would reduce the speculative pressures on land prices. Remember my red line curve: land prices are incredibly volatile. If you are taxed every year just for holding on to land, it would really damp down the speculative pressures. It would also encourage more productive use of land. You are not going to sit on a site that you cannot use if you are paying tax every year. It would have the knock-on effect of lessening the pressure on greenfield sites. It would rebalance the tax playing field. It would end the perverse tax advantages of property owners as opposed to renters. People have said that we need to persuade people that renting is not such a bad thing. One way is to make it less tax unfavourable than property owning. It is also a progressive tax shift - a Labour Government should like that. It is about removing the tax burden from the poorest, the property-less and productive businesses and putting it on to the rich, those who have made windfall gains and those who cannot use their sites productively. In housing, the first thing it would do is reduce volatility. This will make the housing market much more stable and flexible. As a consequence, it would stabilise the wider economy. At the moment, the UK economy is incredibly prone to housing shocks: you only have to look at how obsessively the Bank of England Monetary Policy Committee watches the housing market. This is the key thing, not just for the housing market but for the wider economy. Ultimately, if we want to join the euro, we are going to have to sort this one out. In the longer run, the big effect is that house prices would be much reduced. Obviously the process will have to be managed carefully, but it is incredible that no one has ever said, "We need to reduce house prices." [Slide: Capturing the community's wealth.] Is it fair? Well, is it fair for homeowners to make huge amounts of money off the backs of the rest of us? Secondly, it is fair because land value is not wealth created by the holder; it is just wealth that they hold. Landowners as landowners do not enhance the locational value of their sites at all. It is fair also because it is not taxing people's houses or businesses. We are talking about removing those taxes. It is a liberal tax. If you improve your house or make your business thrive, that is your value - you have created it and you should keep it. It is also about connecting with the circle of public investment. When the state spends a lot of money on building a Tube line such as the £3 billion to stick the Jubilee line extension through south east London, private landowners see an absolutely colossal windfall gain. We estimated that that £3 billion investment by the state created a gain of £13 billion for private landowners. Everyone knows that being in the catchment area of a good state school will increase your house price by between 10% and 30%. Ask yourselves: how many bad schools would there be if every school was given 20% of the land value of every house in its catchment area? They are creating that value: connect the circle between where the value is created and how it is paid for. It is about capturing the wealth of the community. Ultimately, it would give everyone a chance to own their own house, but what it would not do is give everyone the chance to own the land underneath it - or rather, in technical terms, to monopolise the rental income stream of that site. So it would reduce the incentive for what we currently call home owning and would encourage people to look after their properties a bit better. [Slide: Winston Churchill quote.] I have included this quotation not just because it was in the FT on Friday but because of the sense of righteous anger that Churchill is conveying. Whenever people talk about the housing market, there is a lot of hand wringing, but not a lot of outrage. I think that we should be outraged at the situation we have created. The housing market as it stands is a brilliant device for channelling wealth away from those who do not have it and from those who created it, into the hands of those who occupy the most privileged positions in society. It is a disgraceful state of affairs, and I think we tolerate it only because we hope to get ourselves on to the exploitative side of the equation if we are not there already. If we are to solve the housing problem, we have to stop being complacent about the nature of the housing market. We have to admit that the whole system is inefficient, deeply iniquitous and ultimately completely unsustainable. We have to stop tinkering with the edges of the market, and tackle the fundamental issues head on. We have to accept that affordable housing requires house prices to come down. Taxing landowners for the unearned profits they make would be the simplest, fairest and most effective way to make all our housing permanently affordable. Thank you. [Applause.] | |