The UK economy is teetering on the brink of recession. Banks are reluctant to lend to stimulate business and the Government’s min priority is reducing its deficit by cutting public spending. It’s great fear is that it will be perceived to have borrowed too much, its creditors will lose faith and the cost of its borrowing will soar. But by cutting public spending it is in danger of contracting the economy reducing the tax base and making the deficit worse.
Certain sectors of the economy are crying out for stimulus. In particular there is a housing crisis. The shortage of housing, particularly affordable housing is acute. Debate rages as to how to get house-building started. One of the largest voices is blaming planning restrictions and calling for relaxation of regulations but will that be enough?
The National Trust and CPRE have claimed that there is already around 300,000 sites available with planning permission sitting in “land banks”. Why are they not being put to use? The problem is that the main priority of the large firms that own this land is not building houses but making a profit. If they started to build and increased the supply house prices would start to drop. But it would not just be house prices but the value of their land banks that would drop. The decrease in the value of the companies’ assets would affect their profitability.
What is needed is a stimulus that makes it more profitable for them to use the land than hold onto it. A simple solution that could be practically implemented over a short time scale would be to extend business rates to include unoccupied land. The previous extension of NNDR to cover unoccupied buildings was effective in bringing more existing buildings into use. If un-occupied commercial land, which would include the land banks, was subject to business rates the cost of holding it out of land would making it uneconomical not to use it. Once houses were complete and occupied they would no longer be subject to the business rate. Not only would this measure stimulate house-building but it the extra jobs and trading would simultaneously increase Government Revenue. There would be knock-on effects. Banks would have something worthwhile to lend against. A drop in house prices caused by the increase in supply has beneficial effects. They become more affordable, particularly to first time buyers and as housing costs decrease there is more disposable income to be spent on other things.
1 Comment
I welcome this proposal as an attempt to find new “low hanging fruit” in the policy debate. The proposal focuses on two problems:
1) The housing problem – shortage of affordable housing
2) The government deficit
Housing is not affordable (for purchase) because many people have little or cash saved, but bank lending criteria have tightened dramatically. Banks would lend 100% of purchase price five years ago might be comfortable lending only 70% now. So people who needed 0% of the purchase price in savings now need 30%.
The consequence is that houses will not be “affordable” for large demographic groups, even if the price were to drop dramatically. If prices were to fall 50%, banks would still be demanding unaffordable deposits.
The real “housing problem” is always one of distribution, finance and affordability, not quantity. Building new houses unlikely to help.
Applying Business Rates to unoccupied land will have rather significant effects. The problem is I can’t be sure what. And other people would have their own ideas
about the possible effects. This poses an immediate political challenge, to say nothing of the opposition by vested interests.
My hunch is that it would bring the land onto the market, bringing prices down and impairing the solvency of the house builders. Not much new building will occur at this stage. The opposition parties will announce they would
reverse the legislation, and the government will relent under irresistible pressure. Decision making will be comatose until the political situation is unanimous.
We’ve seen this with much of the previous land tax legislation in the 20th century.
I don’t think the price of houses will be affected much, because the quantity will be almost unaffected, and the demand will be unaffected too. Same supply, same demand -> prices unaffected. Remember, 300,000 sites represents only around 1% of the UK housing stock.
A key problem with the UK economy is excessive levels of debt (private+public). Building and selling 300,000 new houses on credit would result in *more* total debt,
even considering the lower debt from the new NNDR, Stamp Duty, Income Tax and VAT. And the government will be pushed into spending on roads, schools, community centres, exacerbating the debt problem further.
I think any effective solution must affect the main bulk of housing and associated debt, rather than just working at the economic margins.
Unfortunately, for the above reasons, I cannot recommend the proposal as financially, economically or politically sound.
I wrote a paper for Prosper Australia’s Progress magazine explaining how to solve the housing and financial crisis. An abridged version was published here. I will email anyone a copy on request – land at adrianwrigley.com