07 October 2006

Land Value Tax 2 - A Panacea For The Housing Crisis

See previous post titled Land Value Tax 1 - Where's My Acre?

At a Tory fringe meeting a Northern activist stood up and said “I’m 31, I can’t afford to get married, buy a house or start a pension, what are you doing for me?” The reply was most dissatisfying. Build more houses. The response is trite and what Labour have been saying and failing to deliver on for years.

Let’s look at the usual methods of addressing the housing crisis. They don’t work and in the case of one and two are very expensive to the taxpayer.

1. Shared equity/key workers – this state subsidy merely drives house prices up for those who aren’t lucky enough to be in these groups. This is inequitable and burns public money. If key workers can’t afford to live in a location, pay them more or move the location.
2. Public housing program – traditionally pumps poor quality housing at the bottom end of the stock. Crowds out private investment in housing. V expensive and often creates sink estates.
3. Loosen planning regs - I’ll be the first to recognize the weaknesses and over-regulation in the UK planning system, but short-circuiting these procedures is not going to lead to a sufficient increase in the supply of suitable housing

If you want to radically improve the quality and quantity of housing in the UK I suggest land value tax. My vision would be to phase out tax on built property (i.e. rates and council tax) and move towards LVT. Patterns of land ownership massively influences access to housing and land on which housing can be built. Take a look at this report into private land ownership in Scotland and you have an explanation in a nutshell for why Scotland’s population has been falling. Private owners and speculators can happily sit on unproductive land with little or no cost. Phased in LVT would cause land owners to question their ownership and naturally divest ownership. This would dilute ownership patterns allowing more land for housing to become available. Also, as house ownership itself is taxed less, you'll get more of it. I make no apologies for calling this a panacea. Next post will be on the how to introduce LVT. What do you think?

17 comments:

Anonymous said...

Tax is not the answer, the market should operate to acheive balance between supply and demand, restrict the supply of building land and the value of Building land rises according to the restriction. Quality of build reduces so that developers can eke some profit out of their activity. Some developers build in a design life of 25 years into their design and build, bit of a bummer if you have taken out a 25 year mortgage. Since the 1930's the bulk of the population has shifted to a line from the Wash to the Bristol channel because that is where the work is. Government policy should be directed into reversing this trend, by putting in viable infrastructure to allow the Midlands the North and Wales flourish again.New high speed rail links as in France. Old military air fields from WWII should be designated as new towns in the South. This means taking strategic planning controls out of NIMBY councils and given to ELECTED regional Authorities. I have spent a lifetime in the industry, but have now given up any hope of change happening, and I am devoting my energies to working in countries where housing is not seen as a profit only for the haves, but a basic human right.

Praguetory said...

You say that the market should operate to acheive balance between supply and demand and that tax is not the answer. I am saying that it is the imbalances in the current system that means that you can pay £1,000 a year in council tax on a one-bed flat, but nothing if you own 10 acres of land, that is a root of the problem. As my post suggests, I agree that moving civil service out of London is a good move, but it won't change the overall situation and I don't think elected regional authorities will either. The planning system needs reform, too, but I'm going to get someone who knows more than me on that to write that piece.

John East said...

I just did some back of a beer mat calculations to get some feel for your idea as applied to the link you gave – to Scotland.

Assuming 2 million council tax payers contributing £1000 each to the coffers means we have to raise about 2 billion pounds per year. As Scotland is around 2 million acres in area, that’s £1000/acre/year. This is fine for the owner of your average semi, at 20/acre they would only have to pay £50 each land tax.

Where is the lost revenue going to come from? The 791 owners of 60% of Scottish land will be left to pick up average bills of about £1.5 million each to balance the books. Of course, this isn’t possible, and I'm not suggesting your plan calls for this, but viewing it this way gives me some feel for the problem.

The obvious solution will be to tax the majority in some other way to make up the revenue shortfall. Perhaps the average householder would pay £50/year land tax, and £900 by some other means such as local income tax. This will leave the landowners having to pay perhaps £50/acre land tax like everyone else, but land values will collapse as a result and new houses can be built more cheaply and a little larger than the rabbit hutches we get today.

Have I got it, or am I way off?

Praguetory said...

First of all John, Scotland covers close to 80,000 square kilometres. There are 247 acres in a sq km so there are 20 million acres in Scotland. Therefore you're talking £100/acre to replace council tax. Admittedly, population is denser outside Scotland so the sustainable annual tax per acre would have to be large for the UK as a whole. Nevertheless the point you make underlines the risks in putting a policy like this in overnight.

The policy has to be introduced over a significant period of time to allow people to make economic decisions - that's what I plan to outline on the next post.

You got it right at the end - it is an anti-rabbit hutch policy.

Jock Coats said...

Yes, John, you're "way off" as you put it, in the nicest possible way!

Land VALUE Tax is just that, related to site value. Cruscially so, because this is what makes it a fair imposition - site value is rarely created by the owner, but by what goes on around it, what services are provided to that land, how far it is from market (be that an actual market for a product from its manufacture or a centre of employment in the case of housing land).

In fact, most agricultural (or less, in Scotland forestry, bog or upland) would hardly be of any value at all. Most of the value in farming land for example is in the husbandry rather than the location - though there are exceptions.

What one is mostly looking at are the values in developed or developable land - urban and semi-urban land in the main.

To be fair, Andy Wightman's work was at least partly focussed not on values but on inequity of ownership - on abenteeism where people wanted "their acre" and was one of the research influences on the legislation that enabled crofting and other communities to acquire their land from ansentee landowners.

Neither he, nor Kevin Cahill, who wrote a follow up book called "Who Owns Britain" on with the Peter and Dan Snow TV program was largely based, were arguing for LVT. Cahill indeed is an Irish style land reformer - everyone should get their acre and they'd be sorted kind of approach.

But Cahill's book (I've not read Wightman's) illustrates the problems just the same and illustrates that even if you look at urban areas you can still see the same patterns - much of the land by value is owned by a relatively few people.

Paul Raymond may only own 190 acres, but in the west end of London they're valued at £2bn compared with Charles Windsor's mostly rural 140,000 acres valued at around two thirds of Raymond's 190.

The problem, Guthrum, which makes tax a particularly good way of dealing with it, is that land is not an efficient market. You can't pick it up and move it, you can't or the most part (pace Netherlands and Dubai) simply create more of it. You can release more of it for housebuilding, say, through planning, but for all the demands for releasing more there are equally powerful demands to preserve undeveloped much of our countryside.

Why should someone be able to make an absolute fortune out of nothing merely by dint of a collective, community decision - planning permission?

Also, releasing more land for one use, like housebuilding does not have as much effect on other land values as you might think - after all, Mr Mittal can afford to buy whichever piece of Surrey he wants for his country pad but will still want his Kensington Palace Gardens pad as well.

Every site has the characteristics of a local monopoly. Watch the bidding rise if there's only one home for sale in the catchment area of a well performing school - probably little to do with the current owner.

Sorry - I'm going on a bit...:)

While we're waiting for LVT however, I'd like to add one other method to Dominic's list of ways of doing more affordable housing...Community Land Trusts. (Consider my interest declared!

Ellee said...

This situation worries me too. I don't know enough about LVT to comment at this stage, but I agree that George Osborne gave the wrong answer. Building socieites are now giving mortgages to multiple purchases, I'm not sure how that is working out.

During the last general election, I flagged this subject up as being one that needed serious consideration and focus by the Conservatives because it affects everybody's life, but it didn't happen. And it will only get worse, especially house prices in the Cambridge area.

Trevor Ivory said...

I have to say that I am more inclined to agree with George Osborne. As someone working in the planning system I can confirm that it is seriously defective - not fit for purpose even.

The solution, as is so often the case, lies not in regulation or taxation, but in the market. The motorcar did not become affordable by being taxed, Henry Ford simply built more of them and the same goes for PC's, mobile phones, etc.

There is, of course, a difference, between housing and these items as the land on which the houses are built is a finite resource. There will, therefore, need to be some sort of regulation and it is also vital that new homescome with the necessary infrastructure to support them, but the basic issue is that we do not have enough homes and need to be build more to satisfy the pent-up demand that is pushing up prices.

This is part of a vast problem, however, and will not be solved in isolation. For example, we need to find ways of taking some of the pressure off of the south east by making the north more attractive again. For example, why are we building another airport in the south east when we have a great (and under used) airport in Manchester? Surely a seriously good high speed ral link to Manchester wqould mean that we could use this capacity and as we have seen with Heathrow, Gatwick and Stanstead, this would act as a major spur to growth in Manchester.

I agree about affordable housing though, it just pushes the problem higher up the income chain- another attack on the lower middle classes by Tony Blair and Gordon Brown.

Jock Coats said...

Yes Trevor, one part of the solution does lie in regional policy. National rather than just local Land Value Taxation helps to solve this problem too. If, instead of taxing incomes or profits, you make tax a controllable cost by basing it on land values (which reflect quite well the overheating of a location) you would encourage economic activity to go where tax was lower.

If you move to landing slot auctioning (also a form of Land Value Tax) you would encourage ailines and their customers to move activity to lower value areas to save on the tax and encourage growth around regional airports.

Remember, Land Values have been the favourite tax base for some of the most influential free market economists - Adam Smith, David Ricardo, Milton Friedman.

Anonymous said...

I agree with Trevor, as somebody involved in the industry for the last 25 years, the planning system is on the point of collapse, the channel tunnel link was a national embarrassment. I am seriously not in favour of another punitive tax, which will be administered, abused and cocked up by another raft of civil servants. Government should intervene were it can , by moving the great departments of state out of the capital, improve high speed rail links and create tax free zones for industry, and not just for foreign companies

Richard Bailey said...

Prague, I like your blog and look forward to reading it but this has to be one of the oddest and frankly disturbing lines of debate I have ever seen on a Conservative site.

Your proposal appears to be to tax people out of their land holdings, yes?

The right of private land ownership is as fundamental to our society as breathing air. Indeed the vast majority of this country only looks as outstanding as it does because private ownership has preserved it from public or multiple ownership.

I'm sorry but, like most things in this country, the problem has its root in over-population. Demand higher than supply. I work in this field and I can assure you there are lots of land owners who would dearly love to release land for housing but are prevented from doing so by idiots and NIMBY's.
Land owners are no less within their right to get the best value for their land as Robbie William's is to demand £100 for a concert ticket.

I would far rather see proper controls on our population than the tax system used to create a socialist system of land ownership.

I had the pleasure of demolishing George Monbiot and others in TV coverage of Who Owns Britain in the Eastern Region.
The new land laws in Scotland are vile.

Praguetory said...

Richard - at last someone has put forward the argument that I might have expected from other Conservatives. I was about to ask whether anyone had any serious objections other than the bureaucrats will cock up it up the way they cock everything else up. Richard, my proposals encourage more efficient usage of land. Although you argue that the countryside is enhanced by the small number of owners, I would argue that the small number of owners generally deprives the benefits to the wider population. I have a distant relation who can look out from his window and point to land which is his "as far as the eye can see" - well provided you're on his land, that is. A land value tax doesn't mean that landowners wouldn't be able to sell their land for a fair price - hopefully a few more of them would. By the way, your point re overpopulation is well taken and I agree.

Jock Coats said...

Adam Smith and Milton Friedman are socialists now are they?

Guthrum, I don't know of anyone who advocates Land Value Tax who sees it as "another tax". Indeed the person who did most to promote the LVT idea in the US in the late c.19th, Henry George, coined it the "Single Tax" - to replace all other taxes on incomes, capital flows, transactions, death duties, and so on.

To throw your question back at you - why should the state have any call at all on what I can make with my own hands, my income? Such is peonage. It is arbitrary. LVT is based on market values - effectively it says "what is someone prepared to pay to have the benefits of all the services and community interactions that go to make this particular unique site have value?"

As such it is voluntary - and least compared with confiscatory taxes on incomes and transactions. If you don't like paying high taxes to be able to live in Kensington, why not move a few short miles, put your money instead into sprucing up Limehouse but pay a quarter of the tax bill.

And, of course, land in land value tax is not just land as in the sod beneath your feet. There is something fundamentally different about ownership of "bits of nature" - "real wealth" - that simply exist and which we all rely on - no human being can survive without access to land, even if it is only a small amount - and ownership of "capital wealth". The latter as we are constantly told by economic liberals can be replicated, that every party to its trade gains equally by that trade, whereas in land as it is currently arranged in most of the west it is a zero sum market. If you have what I need - access to a good school, access to a good transport mechanism to get me to work, access to customers - I basically have to pay your price for it. None of these facets of its value did you especially, by dint of ownership, create. Why should you benefit from them?

As Richard Cobden pointed out:

"For a period of one hundred fifty years after the [Norman] Conquest, the whole of the revenue of the country was derived from the land. During the next one hundred and fifty years it yielded nineteen-twentieths of the revenue. For the next century down to the reign of Richard III it was nine-tenths. During the next seventy years to the time of Mary it fell to about three-fourths. From this time to the end of the Commonwealth, land appeared to have yielded one half of the revenue. Down to the reign of Anne it was one-fourth. In the reign of George III it was one-sixth. For the first thirty years of his reign the land yielded one-seventh of the revenue. From 1793 to 1816 (during the period of the land tax), land contributed one-ninth, from which time to the present [1845] one-twenty-fifth only has been derived from the land. ...Thus, the land which anciently paid the whole of taxation paid now only a fraction. ...The people had fared better under the despotic monarchs than when the power of the state had fallen into the hands of a landed oligarchy who had first exempted themselves from taxation, and next claimed compensation for themselves by a corn law for their heavy and peculiar burdens. [from a speech delivered during the Parliamentary debate on the Corn Laws, 1845]"

Just keep asking Winston Churchill's question when harangued about the sacredness of land rights and the benefit of land values "where did you get [that value] from?"

If I suggested to you that by replacing all other forms of taxes with tax only on the economic rent of the products of nature we all rely on you could halve the national tax take, would you reconsider?

CityUnslicker said...

LVT is a sound idea, but as ever the devil is in the detail. You would need to re-assess every acre in UK to come up with a fair systm. If you did not landowners would take you to court to challenge the government line.

The buggered planning system would be easier to reform.

Of more import is over-population, so I am with Richard Bailey. All econmists are obsessed with growth, but at some point we will have to limit the population and make do with productivity growth alone. Otherwise we enter a distopian nightmare of an ever denser population, richer in money but constantly degrading the environment. What is the point of that?

Jock Coats said...

Not really, CityUnslicker. In Denmark I think it is they do self assessment of land values. Incentives are provided by some clause that says if you deliberately undervalue you can be CPOed or its equivalent at that lower value (and, I blieve, vice versa)!

In practice of course what is needed first is a complete land registry. That is one course for, as I understand it, about 2012. There is also a lot of work been going on about "landvaluescaping" and in the paper based study we did in Oxfordshire a couple of years back we proved that you would probably need to value about one in ten sites to get reference data to extrapolate others from. Sites are less variable than individual properties.

Let's face it, most home owners are only too happy to watch the house price indices to see what their little castle might be worth to them. I even hear they trust estate agents and valuers more than politicians now! And it is expected I think by most involved that you would in fact PFI the whole process if it were a national level tax - and we know that several of the big chartered surveyor firms are on for that.

LVT gives planning teeth and vice versa. So a "community" decision to rezone something need not be a "vague hope" that someone will come along and do what the local plan wants there - there will be a real financial incentive for the owner to do so because his tax will be based on the site value for the optimum planning use type of a site.

Just as importantly, as someone mentioned "NIMBYism" preventing rezoning in some places - when the NIMBYs realise in their tax bill what the exclusivity they are trying to maintain costs them, they will be more likely to compromise. Together with the lower costs for developers operating in an LVT based world, one would expect that compromise to result in better design/build qualities than sometimes arise today where the planning process is one of winners and losers.

Praguetory said...

Jock/all, have you seen the fresh comments from John Burns on my LVT 1 post? Very interesting stuff.

Anonymous said...

I just visited your site at Laban's suggestion and came across this post.

I do not often agree with Richard Bailey but I entirely agree with him on this. The protection of private property is fundamental to freedom, democracy, capitalism and conservatism. The idea of a land value tax is morally repugnant. I we do not have enough houses the solution lies in the market being freed up and not in further penalising people who have managed to retain assets despite the predations of socialist and successive wet so called conservative governments. In fact the market already appears to be predicting a solution with regards land prices. Agricultural land near where I live is already fetching prices which would have equalled prices for development land a few years ago. I entirely agree with the other posters who note this is a complex problem. We do need better infrastructure including access to the regions of our country. We also need a simpler planning system. We also need to free up land. To an extent this is already happening. In the area where I live councils are already allowing in fill housing with what feels like every Tom Dick and Harry flogging their back garden to build a house or houses. A Land Value Tax is not the answer to our problem. BTW and slightly off topic if interest rates really reflected the cost of living we might see cheaper property prices.

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