22 November 2017

Tory tax tinkering won’t solve the housing crisis

By

Although he avoided using the word in his Budget today, Philip Hammond acknowledged what has long been apparent: the UK has a housing crisis. The majority of young people in this country are unable to buy their own home and rents are becoming increasingly unaffordable.

Any optimism that something meaningful would be done about it, however, quickly gave way to disappointment as his policies were revealed.

His “solutions” include the immediate abolition of stamp duty for first-time buyers purchasing properties worth up to £300,000. (In London, and other expensive areas, the first £300,000 of a property costing up to £500,000 will be exempt from the duty.) The Chancellor also announced a 100 per cent council tax premium on empty properties and the compulsory purchase of land banked by developers for financial reasons.

Mr Hammond is correct to recognise the negative impact of stamp duty. Both the TaxPayers’ Alliance and the Adam Smith Institute have both recently published reports highlighting the problems it causes and calling for it to be scrapped. It’s a nasty tax that only exacerbates the housing problem:  it discourages people from downsizing which would increase supply and thus reduce prices. There are, after all, 16.1 million households in the UK which are currently under-occupied.

In a joint report, the LSE and the Berkeley Group have also highlighted the negative impact of stamp duty. And a recently released research paper from the LSE and the VATT Institution for Economic Research paper found that the rate of home moving would be 27 per cent higher if stamp duty on properties was abolished.

Stamp duty is quite obviously increasing house prices as it reduces supply. But the Chancellor’s decision to abolish stamp duty for first time buyers will only lead to more distortion in the housing market and do nothing to solve the crisis.

The OBR has already stated that this move will mean that first time buyers end up paying more as owners simply increase prices. The OBR has also pointed out that the main beneficiaries of Hammond’s reform will be those who already own their own home.

The Chancellor’s tinkering will only make matters worse; he should have abolished stamp duty completely.

Philip Hammond has, meanwhile, claimed that there is no ‘silver bullet’ to solve the housing crisis. He’s wrong here too. The solution is quite simple: we need to build more houses.

The reason why housing is so expensive in the UK is straighforwardly due to a lack of supply. And this is largely a result of the UK’s incredibly complex planning system, with its plethora of rules and regulations relating to home building.

Research conducted by Hilber and Vermeulen, found that the planning system had a significant influence on house prices. Their study found that the planning system affects property prices by up to 35 per cent. Moreover, a report published by the European Commission (hardly strangers to unnecessary and complex regulations) called the UK planning system “complex and costly” and that it exacerbates the UK’s housing crisis in the UK.

Furthermore, research by Chang-Tai Hsueh and Enrico Moretti of the University of Chicago found that housing supply constraints in the United States have a drastic impact on living standards. They found that if even modest steps were taken towards liberalising the planning system, then wages and living standards could improve by approximately one tenth.

But it is not only regulation about the amount of light or the size of rooms which decreases housing supply in the UK, it is also rules about where homes can be built. The green belt policy, for example, which the Government is so fond of, is a significant contributor to the UK’s housing crisis.

To solve the housing crisis – and stand a chance of winning the next election – the Conservatives need to bring in bold reforms. Instead of tinkering at the edges, the Government needs to completely abolish stamp duty, liberalise the planning system, and allow developers to build on the green belt. Maybe then the next generation might stand a chance of having a home they can call their own.

Ben Ramanauskas is a policy analyst at the Taxpayers' Alliance