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.

8 thoughts on “Council Tax and the political economy of house prices”

  1. Posted 25/09/2010 at 12:23 | Permalink

    This is a very thought-provoking article. However, I can’t help thinking that, whilst the problem might be mitigated by some of the measures mentioned, the real cause is a deep seated cultural one. Most people expect to become owner occupiers – it is simply what one does – and the mechanics of housing systems are moulded accordingly. We live in a culture that is now almost mono-tenurial and only owning matters. It is difficult to see how this might change.

    In addition, the interests of those with housing are opposed to those seeking it, and this is something that is hard to deal with politically.

  2. Posted 25/09/2010 at 17:25 | Permalink

    Thanks. I think you’re right about it being a cultural phenomenon. In the UK and in the USA there has been this celebration of the owner occupier as a sort of ideal citizen – the man with a stake in the country. Thatcher was obsessed with the idea – getting people to buy their houses was her way to turn people middle class.

    The thing is it is probably worked – people who feel they have something to lose are probably better capitalists than people who have nothing. It’s just a shame that it gives government such a huge incentive to screw everyone over, because the real problem is that as soon as you’ve bought a house, you’re in on the racket. Time inconsistent preferences…

  3. Posted 25/09/2010 at 20:27 | Permalink

    DK, yes, amen to all that, but the bit you are missing from the Golden Age of stable house prices from 1920s to 1960s is that we used to have Domestic Rates and Schedule A taxation. So really what we ought to seriously consider is going back to basics and scrapping the Bad Taxes (income tax, NIC, VAT, corporation tax) and doing what Adam Smith and David Ricardo said and having Land Value Tax (again).

    Which would be riotously unpopular in a Home-Owner-Ist country like the UK, but it would get the economy going and dampen house price/credit bubbles at the same time.

    And yes of course there’d have to be exemptions for pensioners, that goes without saying.

  4. Posted 25/09/2010 at 23:00 | Permalink

    Mark, only one thing prevents your view prevailing: it’s called democracy. No serious politician could ever suggest it.

  5. Posted 26/09/2010 at 11:03 | Permalink

    Daniel, I’m very pessimistic about the prospects of ever changing this political culture, short of some catastrophe for the housing market (which government would naturally try to prevent in any case). What we ought to try to do is to break the link between housing as a commodity and housing as home – to differentiate between use and value (hopefully that doesn’t sound Marxist!). However, I’ve spent a lot of time thinking and writing on this very issue without getting very far as yet.

  6. Posted 27/09/2010 at 09:41 | Permalink

    Peter, isn’t “serious politician” an oxymoron? The Home-Owner-Ist policies pioneered by Thatcher, taken to extremes by New Labour and now being continued by the Lib-Cons are of course electoral gold, but economically they are disastrous.*

    I’m an economist not a politician. Further, Smith & Ricardo would have recoiled in horror at the idea of marginal income tax rates of around 50% (once you include income tax, two layers of NIC and VAT etc) as we have today. What they meant was we should only have LVT and nothing else, of course.

    * The Lib-Cons are being lauded for not rejigging Council Tax but will hike VAT and NIC revenues by £23 billion next year – as much again as Council Tax!

  7. Posted 27/09/2010 at 12:31 | Permalink

    Mark, OK, any politicians who serious wishes to get elected. The issue is the emotions – I can’t think of a better word – attached to housing. We hold property as sacrosanct in the UK and this makes is difficult to deal rationally with taxation in the round. Hence, as you suggest, it is easier to raise taxes by stealth whilst playing the populist card on council tax. Iain McFarlane wrote a wonderful book 30 years or so ago called ‘The Origins of English Individualism’, that dealt with attitudes to property. It helps to explain a lot of the politics of the last couple of generations.

  8. Posted 03/10/2010 at 11:41 | Permalink

    Peter: “The issue is emotions” – very true!

    But the wheels are rapidly coming off the Home-Owner-Ist way of running the economy – by taxing everything to death and subsidising house prices. I suspect that the mood might change in Ireland now they have been presented with a bill for the bank bail out which is approx. equal to the total rise (net of falls!) in house prices over the last ten years – they have been well and truly conned, they are living in the same houses but just have much larger debts to show for it all.

    Remember – the key part of Home-Owner-Ist propaganda is “rising house prices make us richer”, which is actually a downright lie (unless you are a banker or politician!).

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