Despite income inequality falling over recent years, and huge levels of revenue being transferred through our taxation system, the control of wealth and business equity has become concentrated in the hands of fewer and fewer individuals. The most conspicuous and worrying expression of this phenomenon is the UK housing market.
The UK home ownership rate has fallen from 73.3 per cent in 2008, to just 63.5 per cent in 2016. Young people, in particular, are now finding it almost impossible to clamber onto the property ladder.
This is something that should worry everybody, but particularly those of us on the liberal-right of the political spectrum. This is not just because we wish to help people who work hard and aspire to own their own homes and businesses, but because we understand that economies and communities function best when everyone in society has a stake in them, and when people are not reliant upon the state for subsistence.
Now that an election has been called, political parties are bound to present the electorate with solutions to these particularly troubling problems. In order to do so, politicians need to understand that the housing and equity markets do not typically follow the simple demand-supply pattern you find with a normal product.
For example, if we experienced a good harvest and the supply of potatoes increased by 20 per cent, you would expect the price of potatoes to fall by a similar measure to help entice people into buying more potatoes.
Housing and financial markets, however, are different. If the expectation is that an asset will increase in value, investors flock to buy them in the hope of making a profit. As more people buy, demand increases, which pushes up the price. In a crash, the reverse happens, as people sell in the belief that the price of the asset will fall, increasing supply on the market and reducing prices.
These markets, therefore, have a pro-cyclical character where prices don’t reflect the actual number of properties or assets coming on stream through the construction sector or via securitisations, but are instead largely fuelled by future price expectations and the ability to borrow.
There are various reasons for the spike in house and asset prices and the subsequent widening of the wealth gap since the financial crisis. Chiefly however, low interest rates and quantitative easing have made borrowing cheaper – making it easier for people with capital to access cash – while simultaneously making saving an almost pointless exercise.
Young people trying to save for a home often receive interest rates on their savings which are negative in real terms, making the dream of property ownership virtually impossible for those without recourse to the “Bank of Mum and Dad”.
Indeed, the average age of a First Time Buyer (FTB) in Britain is now 30, requiring a deposit of £33,960 (£95,693 in London). According to the Social Mobility Commission, in 1990, 39 per cent of 20-24 year olds were able to purchase their own homes. Only just over 10 per cent of this age bracket managed to do so in 2015.
Perhaps unsurprisingly, 34.1 per cent of FTBs benefited from parental assistance when finding a deposit, and 9.6 per cent used inherited money. Individuals from poorer backgrounds are unable to obtain deposits and must forfeit the security of home ownership.
Because of the nature of the housing market, increasing the supply of houses is absolutely no guarantee that prices will become more affordable. Before the financial crash, Spain increased its housing stock by 5.7 million dwellings, the equivalent of an almost 30 per cent increase in supply. Yet house prices actually increased by an astounding 175 per cent between 1998 and 2008.
In Ireland, between 1992 and 2006, the stock of housing grew by 150 per cent. At the same time, new house prices rose by a cumulative 300 per cent in real terms, with prices in Dublin increasing by 408 per cent. The private rented sector also continued to expand, with average rents in Dublin increasing by a staggering 53 per cent between 1998 and 2001 alone.
So, given the idiosyncracies of the housing market, what can be done to reduce inequality and widen home ownership?
A reassessment of the balance between income and wealth taxes – taxing income less and wealth more – is a strong option. This would have the added benefit of encouraging aspiration and improving Britain’s poor productivity levels.
Governments tax products such as tobacco, alcohol, and now sugar because they think it will discourage people from consuming them. The exact same logic can be applied to income. The more it is taxed, the less likely people are to want to earn it. People should, instead, be allowed to earn as much as possible without it being taken from them by the government. This would allow people to save more of their earnings and encourage them to work harder, boosting productivity.
It would also see a reduction in demand for ways in which wealth is stored – typically property and stocks – which would reduce their value. Some argue that such a tax would reduce investment, but this is debatable, since any income generated through investment would be taxed less. The onus would simply be on the holders of capital to use it constructively to generate income, rather than simply speculating on assets and waiting for prices to rise.
In the housing market, “land banking” would become a thing of the past, and landlords would be forced to treat their tenants like customers, rather than temporary occupiers of a financial asset.
A wealth tax would reduce the need for income and national insurance taxes, and could even permit the offsetting of things such as mortgage interest repayments and student loans. Taxes on wealth also have the added benefit of being more difficult to avoid than income taxes. Whereas income taxes can be circumvented by taking payment in cash or simply by not being declared, it is harder to disguise the ownership of property.
Any political party that wishes to attract votes from “hard working families” or the “just about managings” and to be seen as a vehicle for aspiration would be wise to address the issue of declining home ownership, particularly among those without wealthy parents, as a top priority. Adjusting the taxation balance from income to wealth could be part of the solution.