Land Value Tax: The radical solution to the housing crisis

28^th November 2013

ResPublica's David Fagleman makes the case for Land Value Tax as a solution to our housing woes

There is no questioning that the most pressing issue in domestic politics today is housing. With millions of individuals and families waiting for social housing and many first time buyers priced out the market, it is clear that current housing policy is failing. Britain is in the depths of a housing crisis and the debate over the solution is sure to dominate the 2015 General Election and beyond.

Recognised as a basic social need, our citizens should have access to affordable and high quality housing. A steady home can have an enormous impact on individual and family life, providing the necessary stability for a job, a good base for education as well as delivering essential health, well-being and wider community benefits. Our failure to provide has left nearly 2 million individuals and families on local authority waiting lists for social housing and combined with the recession, has seen the number of homeless households rise to 55,000 in England alone, whilst nearly 1 million homes stand derelict.

The crux of the crisis is a problem of supply. The repeated failure of successive governments to engage in any substantial house-building programme has left a chronic shortage of housing. It is estimated that to meet our housing demands, we need to build 250,000 new homes a year. Yet over the last 25 years annual output has averaged at 150,000 new builds, and only once since 1981 have over 200,000 new homes been built in England. Recent figures from the Department for Communities and Local Government show that the number of affordable homes created in England fell by a distressing 26 per cent in 2012-13, while the number of new homes in the social rented sector dropped by a third. Under current building rates, Britain could be 2 million homes short by 2020.

Such scenes are a far cry from the post-war era when house building was a cross-party priority. Epitomised by Harold Macmillan’s renowned policy of building 300,000 new homes a year, the Governments of the 1950s through to the early 1970s were committed to increasing the housing supply to meet demand from buyers and those wishing to rent affordably. If we are to meet our housing needs, we need to revive this housing commitment and engage in the policy necessary to achieve it.

The housing crisis is characterised by a gleaming paradox, a shortage of supply but a surplus of land. Reforming planning regulations can only go so far and efforts to do so are made redundant if land is not made readily available to build upon. The solution rests in reconfiguring the tax system to encourage the efficient use of land, thus unlocking land appropriate for development and encouraging the construction of new homes.

Land Value Tax, taking the form of an annual levy on the rental value of unimproved land, is the radical solution to the housing crisis. By taxing the value of land as opposed to the value of the property, land will be taxed whether it is built upon or not, which will encourage a more efficient use of land by making it economically efficient to develop where appropriate.

This will unlock thousands of hectares of previous developed, unused and derelict land in both public and private sector, including enough public sector land that has been identified as surplus to requirement, to deliver millions of new homes.

A surge of available land would lower the price, enabling smaller developers and housing associations (who in the face of declining government grants, are becoming increasingly dependent on income from construction), to join established house builders in providing a plentiful supply of affordable housing. Creating greater competition will see a reduction in rent and house prices, stabilising the housing market and creating a more equal relationship between landlords and tenants.

The tax system is arguably the most powerful tool at the Government’s disposal and if used correctly, can be an enormous enabler of social change. Either working simultaneously with reduced property taxes, or outright replacing the outdated and regressive Council Tax, Stamp Duty Levy and Business Rates, a locally collected Land Value Tax would have to be phased in gradually and under the right blueprint.

Introducing such radical change is unquestionably a great task, but it will take something of this nature to solve our housing woes. The current incarnation of the housing crisis has exposed our past failures to get it right and with an ever growing and ageing population, the next path that is taken must be one that not only meets our current shortage but will also provide homes for generations to come.

To achieve this, house builders and developers must have access to land. The introduction of land taxation will provide this and meet the long term problems of supply once and for all.