Council Tax and the political economy of house prices
Yesterday, Eric Pickles defended the government’s decision not to revalue homes for Council Tax. Indeed, it seems hardly anyone – not even the Labour Party – wants a revaluation. Not only would it be illiberal for the government to assess the value of houses, it would also be likely to cause significant increases in many people’s tax bills.
The implications of revaluation are problematic partly because over the last decade or so house prices have gone up faster than a Dubai skyscraper. In the 1950s, my grandfather funded the purchase of his first house by selling his motorbike. Today I can expect to spend nearly half of my income on rent. Everywhere higher house prices are seen as a good thing; possibly because most opinion formers own houses, but we need housing almost as much as we need food – and people rarely celebrate when food prices go up.
The truth is that homeowners have been one of the most successful vested interests in recent British history. The damage inflicted by unions in the 1970s was arguably pocket change relative to the cumulative cost of decades of overregulation in housing. Whereas in the USA, the trauma came from bursting the bubble, the most traumatic thing for Britain is that so far the house price boom has seemingly proved not to be a bubble at all. British house prices have recovered much of the ground lost at the height of the financial crisis. At least if house prices had fallen more steeply, as in the US, it might have mitigated the costs of recession for those on lower incomes.
There are several factors that may explain the long-term upward trend in prices. Between 2001 and 2010, the population grew by an average of 0.6% per year – twice the rate of the 1990s. Moreover, with the population marrying later and living longer, the number of people living in an average British house has been falling consistently for decades. So not only are there more people, each person takes up more space. Quite obviously we either need fewer people or we need more houses. Whilst the British National Party might like to deport our “surplus” population, clearly the only liberal solution is to build.
In the 1920s, 1930s, 1950s and 1960s, that’s exactly what happened. Many hated it but huge numbers of houses were built and the cost of housing stayed relatively low. In the 1980s, however, Margaret Thatcher decided to open up the financial sector, kicking off the Big Bang and helping to pull the UK out of the economic doldrums. But whilst more people were able to get mortgages, little was done to reform the supply side of housing. People could buy, but developers couldn’t build. As a result, land designated for agriculture now costs about £20,000 a hectare. The same bit of land with permission to build could be worth around £2 million, depending on the location.
Taking on the homeowner will not be an easy task but it is certainly a battle worth fighting. The construction industry is artificially restrained by regulations that make it impossible to build enough units to satisfy demand. The inflated prices that result not only worsen inequality; they make the UK less competitive internationally and widen the generational wealth gap. Releasing construction from the stranglehold of government would be a free market victory to match any from the 1980s. Coalition ministers often claim to be radical – here is an opportunity to do something genuinely revolutionary.