Could a land value tax ease the housing crisis?

Heather Wetzel, Vice Chair of the Labour Land Campaign, responds to the recent IF housing report, and makes the case for a land value tax


The Intergenerational Foundation’s report entitledHoarding of Housing: The intergenerational crisis in the housing market drew attention to the number of empty bedrooms in the housing stock, and the fact that 37% of houses in England are under-occupied, according the standard measurements used by government.

One of the IF’s solutions to getting more of these homes freed up is to introduce a land value tax.

Whilst I welcome this proposal and totally agree with the need to replace Council Tax (and Business Rates) with an annual Land Value Tax, I felt it unfortunate that the IF appeared to be – or at least was widely reported to be – targeting older folk who may not use all bedrooms in their house all the time.

Most older folk have an emotional and psychological attachment to the home where they brought up their family and where there are happy memories. Many older folk already move to smaller homes, of course, but that should be their choice and not because of pressure put by others.  They may choose voluntarily to move to smaller homes or sheltered accommodation better suited to their needs. Those older people who don’t want to downsize, of course, retain the opportunity to supplement their income by taking in a lodger or offering accommodation for visiting friends or family.

A fairer tax

The real cause for the shortage of homes that are affordable to rent or buy – to people of all ages – is land speculation.

Land values are created by all of society’s demand for land for homes, businesses, public services, transport, leisure etc. Yet, we continue to allow landowners take land wealth as their unearned income.

If an annual Land Value Tax (LVT) was applied to all land with a rate levied on the land value according to each site’s optimum permitted use, there would be an immediate freeing up of land that is currently kept out of use either deliberately by land speculators or through the inefficiency of landowners.

The “asset-rich, income-poor widow” argument is regularly used against the introduction of an annual land value tax because it is seen as hitting older folk unfairly – or, more bluntly, as a way of kicking them out of their homes.

Moving folk out of their under-occupied homes will not make their home – or the one they move to – more affordable. Houses do not go up in value – land does.  However, because of property speculation, land prices can go up more than the real value and it is this that needs to be addressed.

Imagine three identical new homes being built on three sites of equal size but in different locations – central London, the suburbs of Newcastle and in the Scottish Highlands. The building costs will be about the same with some small regional variance in material costs or wage rates, but the selling price of the finished homes will be widely different, with the London home selling for millions and the Scottish home for maybe a couple of hundred thousands. This huge variation in location value accrues to the landowner even though it does not derive from any actions by the landowner. It is nature and the effects of the community that gives land its value.

Even so, when selling land the landowners do not just price in the current use value of the land but create artificial shortages by keeping land out of use and buildings empty, and in addition they refuse to sell unless they can price in future increases in land value arising from population growth, increased productivity and possible changes in planning use.

So the price of a house not only includes today’s land value but also future land values.

Making homes more affordable

A positive approach to arguing for more affordable homes, for renting or buying, is to highlight the bigger issue of how most land (together with other natural resources) is owned and controlled by a small minority of the population.

An annual Land Value Tax will address a fundamental wrong in economic analysis and therefore reform the current tax system that actually encourages land speculation, empty and under-used sites and buildings, and which act as a drag anchor on the economy.

For more on the Labour Land Campaign, see www.labourland.org. This YouTube video interview offers a good insight into its proposals.

 

 

Posted on: 18 November, 2011

4 thoughts on “Could a land value tax ease the housing crisis?

  1. Franklin

    There is in fact a very substantial tax on larger developments and it is this that causes houses not to be built. There is quite rightly a requirement for developments to have associated investment in transport and community facilities. Planning authorities make planning permission conditional on this cost being met by the developers. Very often though this undermines the viability of selling the land to the developers as the price offered for the land is based on what is left from the houses sale price after the cost of building, the developers profit and the cost of infrastructure. If that falls too low the land isn’t sold and the houses don’t get built and of course as property prices drop so does the value to the landowner pound for pound. Added to that developers wont build houses they can’t sell, so if mortgage companies are cautious about lending then the developers don’t build. In terms of economic stimulus, the government could do worse than invest in the infrastructure needed for new developments and so help get new houses built. However so long as there is a myth of greedy landowners being the problem the government prefers to tinker with the planning laws and to benefit from house prices being kept high by the housing shortage. An added problem is that the planning process is adversarial and ridiculously expensive and risky with the result that landowners only go into the process if they feel confident that they have the capital to fight all the way and that in the end they will get a reasonable return. One of the side effects of this is that developments are often awful as consideration about the real livability of the houses gets lost in the process. This may be another factor to explain why so many elderly people hold on to their family homes: so much smaller housing is not what anyone would live in if they had the choice. Young families though are the losers in all this and often it is those with children who have left home that are the noisy nimbies that are effectively blocking development.

  2. William Davison

    “There is in fact a very substantial tax on larger developments and it is this that causes houses not to be built.”

    Land Tax is not a tax on larger developments, it’s a tax on owning the land, it encourages vacant or underdeveloped land to be sold to developers, as land speculation becomes uneconomic. It will cause more houses to built not fewer, as the tax forces land owners to use the land for highest return now and not hold it back for speculation. It’s basically a case of Use or lose it. In the short term, land values would be lower and supply of land for development would increase. Business models like Tesco’s that buy land to simply block their competitors would become uneconomic. Long term, as was found in Denmark, land values rise as economic activity is stimulated. There is no myth of greedy landowners: land speculation is a fact.

    Re “In terms of economic stimulus, the government could do worse than invest in the infrastructure needed for new developments and so help get new houses built. ” If you are a land owner I am sure you would think the government, i.e. the Tax Payer, should pay for the infrastructure that increases the value of your land.

    For example the Jubilee Line extension cost tax payers £3.5bn, but caused land values to rise by an estimated £10bn. Case of privatising the profits and socialising the costs, when it comes to building infrastructure land owners suddenly become socialists arguing for Keynesian economic stimulus.

Comments are closed.