The rising value of land means home ownership has become the equivalent of money laundering. It's time to tax it properlyby David Cooper / October 26, 2017 / Leave a comment
In the UK, profits on selling first homes are virtually tax free—a fact which means the UK economy suffers an impact equivalent to a £100bn annual currency counterfeiting operation.
Sound extreme? Winston Churchill’s budget speech of 1909 explains the situation:
“Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the [landlord] contribute, and yet by every one of them the value of his land is sensibly enhanced.”
Homeowners, we know, can increase the value of their property by erecting new buildings or improving existing buildings. But there is nothing the home owner can do to increase the value of the plot of land on which the buildings stand.
The value per square foot of land depends on its location and its scarcity value. Is it near a fast train? An attractive park? A good school? The value of the plot results from the actions of society, not the individual actions of the owner.
Yet many homeowners in London earn as much from rising house prices as do their from their day jobs. They do not need to take any action to accrue this benefit, since house price rises are driven by increasing land prices.
According to Nationwide, over the last quarter century average UK house prices (after adjustment for inflation) have almost doubled. Halifax estimates the current housing stock is worth £5.6 Trillion: an average increase of £100bn annually since 1992. Most of this increase in value is due to increasing land prices, and this gain is very lightly taxed via stamp duty.
The almost magical ability of homeowners to accumulate wealth without any effort means they have, in effect, the same economic impact as currency forgers. A forger who prints a fake banknote does no useful work, but gets richer at the expense of society. The homeowner whose house price benefits from increasing land prices also gains from work and investment done by the rest of society. Just as the currency forger weakens the economy by reducing the real return on work and investment, so does the homeowner when accumulating wealth from rising land prices.
In the UK the scale…