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Could a Land Value Tax help fix the housing crisis?

By Duncan Weldon  

The politics of housing have increasingly come to the fore in the UK. 2017/18 saw 195,000 new homes built—the highest number for a decade—but in general housing supply has simply failed to keep up with housing demand. The growth of the private rental sector, very stretched house price to earnings ratios and a worrying decline in home ownership have forced all the political parties to engage in a serious way with developments in the sector.

Prospect magazine and social housing provider Home Group recently convened a roundtable session bringing together politicians, policy makers, academics, business interests and the voluntary sector to discuss the state of the industry and, in particular, the question of taxation, value capture and the land value tax.

Brian Ham, Executive Director of Development at Home Group, opened the meeting by explaining that Home Group was unusual in both being a social housing provider and also acting as a developer of private housing—which is used to subsidise the rest of the business. He noted that, despite much of the attention it receives, finance was not the real constraint for developers. Instead the primary blockage to new development was the acquisition of land. In many cases this involved dealing with multiple and overlapping local authorities, central government agencies and central government itself—each with various interests and powers.

The conversation soon turned to the use of compulsory purchase orders (CPOs) and who had the authority to use them. Many participants thought that local authorities required more CPO power. Daryl Philips, the Joint Chief Executive of Hart District Council noted that the existing powers could take a great deal of time to exercise. Conservative MP Neil O’Brien noted that the current system had proved to be a real boon for lawyers. Whilst Victoria Hills, the CEO of the Royal Town Planning Institute noted that the most extensive use of CPOs in recent decades had been in the late 1980s and early 1990s, when Margaret Thatcher and Michael Heseltine had made great use of them in redeveloping the London Docklands and Liverpool.

Conversation soon turned back to the British system of property taxation. It was widely agreed that the current system is far from ideal. It developed over decades and left a hodgepodge mixture of council tax, business rates and stamp duty that pleased almost none one. It is hardly the system one would design if starting from scratch. But creating a more ideal system would create losers as well as winners and many governments decided it was simply not worth the political fight.

One area that came to the fore was the issue of “value capture”—i.e. when a series of developments, economic changes and new infrastructure cause the value of land and property to rise, how is it taxed? Conservative MP Richard Baconnoted that the Treasury certainly believed that more taxation revenue was available form this source, and Shadow Housing Minister SarahJonesagreed.

One theoretically elegant solution—long admired by many economists—is the notion of a land value tax. Advocated since the days of Adam Smith and David Ricardo in the late 18th and early 19th century, the argument runs that as the amount of land is fixed, and its value derives from the work of others, then taxing it is very efficient. If the value of land rises due to a nearby development, then under an LVT the associated tax bill would also increase.

Whilst many have raised practical objections to this proposal to do with the problems of valuing land, they are surmountable as Ted Gwartney of the Appraisal Institute and Fred Harrison of the Land Research Trust argued.

The real difficulty is political as such a system would raise the tax bill faced by many. Tom Copley—a member of the Greater London Assembly—is a proponent of an LVT but acknowledged the political difficulties. He argued that it was important not to make the perfect the enemy of the good and at least to move towards taxation that better captured the uplift in land values.

It was widely agreed that the UK housing system still faces many issues—planning law is still not working, CPO powers and the level at which they are exercised requires more thought, land value capture is not as developed as it could be. But it was also widely acknowledged that the different parts of the UK face very different housing markets and very different housing problems.

Housing policy choices are choices about distributional settlements, creating winners and losers. There is no ideal housing policy and aligning on the right one for the UK is a question of politics.

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