Liberating the housing market through fiscal decentralisation
The mere fact that such a tool exists says a lot about how mad the housing market situation has become. But it is not the starkest symptom. What is even more telling is the fact that even anti-development campaigners now feel obliged to pay lip service to the need for more housing. Subtly, their rhetoric has changed from ‘everything is fine’ to ‘we recognise the need for more houses, but…’. This is quite a PR U-turn. Just a few years ago, when the Barker Review made the modest case for building more homes, the Campaign to Protect Rural England responded:
‘[W]e disagree with her [Barker’s] review’s central conclusion – that there has been a serious and chronic under-supply of market housing across the country […] [T]he supply of new housing for sale is adequate and there is no overall housing shortage.”
Building more homes was presented as not just unnecessary, but actively harmful: ‘[T]here is no chronic, nationwide undersupply of market homes. It follows that implementing the findings of the Barker Review would lead to excess housing.’
The British economy is facing a formidable set of challenges and risks, but we can probably all agree that ‘excess housing’ is not one of them. The British housing stock is seriously inadequate. In terms of residential floor space per household, the UK lags well behind any other country in Western Europe (see Figure 1).
Figure 1: Average residential floor space per household in m2
But the housing problem is far worse than such aggregate measures suggest. Overall levels of housing development have been far too low for far too long – the lowest in Europe for over three decades – but to make matters worse, what little development we have is skewed towards those regions where the housing shortage is least bad. As the LSE’s Paul Cheshire points out, ‘twice as many houses were built in Doncaster and Barnsley in the five years to 2013 than in Oxford and Cambridge’. The places where housing demand is highest also account for a disproportionate share of greenbelt land, and it is in these places that resistance to development is most ferocious. We are building too little everywhere, and we build least where it is most needed.
The housing crisis is often presented as a conflict of interest between homeowners, who benefit from the housing undersupply because it inflates their property wealth, and non-owners. There is some truth in this, but homeowners do not generally benefit from the status quo either. More precisely, they may benefit in their role as home owners, but they suffer in their role as taxpayers. The housing shortage has made more and more people reliant on financial assistance to cover their housing costs, at a huge cost to the taxpayer. In 2009, nearly one in five people in the UK lived in a household receiving Housing Benefit, a higher proportion than in any other developed country for which we have comparable data (see Figure 2). This is all the more remarkable when keeping in mind that the UK also has one of the world’s largest social housing stocks, which should actually lower the need for cash transfers.
Figure 2: Percentage of the population receiving housing benefit, 2009
– based on OECD data
The case for liberalisation
The reasons are not far to seek. Quite often, bad policies result when we underestimate the complexity of a subject area, demanding simple solutions where none exist. Housing is the one policy area where it is exactly the other way round. We imagine the subject to be highly complex, multi-layered and multi-faceted, but it isn’t. Droves of empirical studies from around the world show that the issue is much simpler than you probably think. Short-term fluctuations aside, house prices are ultimately determined by land use policies. Places that release enough land for development manage to keep house prices stable; places that unduly restrict land for development experience house price inflation. By pretending that housing policy is rocket science when it is not, our housing debate drifts off into all kinds of fringe issues (foreign buyers, empty homes, the Right to Buy, the allocation of social housing…) and loses track of what really matters (see here). We need to release more land for development. The rest will take care of itself.
Top 5 policies
The solution to the housing crisis is a liberalisation of land use policies. However, this can mean many different things in practice, and those who agree on the general thrust do not necessarily agree on the details. But the following five points are examples of what a market reform agenda could look like:
- Abolish greenbelts. Decisions to keep land undeveloped should always be based on innate properties of the land under consideration, i.e. on its the environmental and amenity value. Development bans ought to be used intelligently and selectively. Greenbelts do the precise opposite. They are indiscriminate bans on development, completely unrelated to any features of the land they apply to. The introduction of greenbelts was a historical mistake that should be reversed.
- Relax height restrictions. Towns and cities should be allowed to expand upwards as well as outwards. Demand is highest in urban areas, and meeting it will often require a densification of existing settlements. Building more multi-storey buildings will enable a more efficient use of inner-city land, thus accommodating demand without sacrificing inner-city green spaces.
- Fiscal localism. ‘Localism’ has become a popular buzzword, but there can be no genuine local autonomy unless local authorities are also responsible for their own finances. Fiscal decentralisation, as practiced successfully in countries like Switzerland, could have the nice side effect of going a long way towards solving the housing problem. Local authorities should be able to keep most (or all) of the revenue raised from income tax, capital gains tax (especially from the sale of land and property), stamp duty, inheritance tax and business rates. Permitting more development would then become a way for local authorities to broaden their tax base.
- Decentralise government spending. If such a large proportion of the tax base was decentralised, important policy areas would also have to be devolved to the local level. Infrastructure, welfare, and anything to do with housing would be the most obvious candidates. If Housing Benefit and social housing subsidies were paid from locally raised taxes, permitting more development would become an easy way to save expenditure by making housing more affordable.
- End ‘town centre first’ policies. Forcing large retailers into town centres, rather than allowing them to open ‘superstores’ on the edge of town, reduces retail productivity. It prevents retailers from exploiting economies of scale, and often forces them into premises that simply do not suit their business model. Allowing them to move further out would liberate space in inner cities, which could, among other things, be used for housing.
Development will never be popular with everybody. Reaching agreements that the vast majority of stakeholders find advantageous, or at least acceptable, will probably always be a messy process. But even the messiest process has to be preferable to our current status quo, which is a housing policy that is mainly about appeasing the professional obstructionists. This has produced decades of underbuilding, for which we are now paying the price: an explosion in house prices, sharp increases in rents, a Housing Benefit bill that is out of control, overcrowding, higher levels of poverty, a growing share of young adults with no prospect of leaving their parents’ home, and a general decline in labour market mobility. It is about time to break the stranglehold of the obstructionists, and get the country building once more.
The way forward, however, is not to impose housing targets or similar measures from above; it is not to replace one top-down arrangement with another. Rather, the way forward is to create the right incentives on the ground, and then devolve power from the centre to the local level. Public finances ought to be reorganised in such a way that local communities reap the benefits associated with development, and bear the cost of blocking it. This would pave the way for a genuine localism. Local communities should then be given full autonomy over the level, type and precise location of development. We would get a much greater diversity of approaches to land use planning, reflecting the diversity of local circumstances and preferences.
The general population is not hostile to development. According to the British Social Attitudes Survey (BSA), nearly half of all respondents are in favour of development in their area, another fifth are indifferent, and just under a third are opposed. Importantly, this latter group can be further subdivided into ‘conditionalists’ and ‘fundamentalists’: The more detailed BSA questions show that when the right conditions are met, a lot of opponents of development are quite prepared to change their minds. The ‘anti-housing Taliban’, i.e. those who would not change their minds under any circumstances, are not that strong in numbers. Their strength is that they are by far the most vocal and active part of the community when it comes to housing matters – indeed, they are usually the only active part. This is why it is important to get the incentives right. The point of honing fiscal incentives is not to assuage the fundamentalists. The point is to persuade the ‘conditional opponents’, and to give the current and potential supporters of development some skin in the game. There is already a broad, latent coalition in support of development. With the right incentives in place, that sleeping coalition would awaken.
This article was originally published in the Housing Market Intelligence Report.