Way back in the mists of time when “Red Ed” Miliband proposed a tax on homes worth more than £2m, no less than Michael Caine considered the idea terribly unfair. “I feel sorry for all the older people who’ve worked hard all their lives and their London suburban house falls into this category,” the actor told the Daily Mail in 2014.
Sir Michael spoke for Middle England. The link between the price of one’s house and one’s personal effort in the eyes of most homeowners is as strong as tungsten.
But that doesn’t mean that the link actually exists. According to a new report by the Resolution Foundation around 80 per cent of net property wealth growth since the early 1990s has been a consequence of a rising housing market, rather than active savings decisions by households.
This equates to around £2.3 trillion of windfall property value appreciation. For homeowners born in the Forties and Fifties the average “passive” benefit is around £80,000. For those born in the Sixties the average windfall is £60,000. The Resolution Foundation report makes it clear that UK overall wealth accumulation is considerably driven by property, which has been largely inflated by a housing boom. If we’re serious about tackling high UK wealth inequality (which seems to be rising still further) we can only do so by tackling housing.
There are a multitude of reasons why UK house prices are so high relative to incomes and homeownership rates are falling. Excessively rigid supply-restricting post-war planning controls, particularly the misnamed “green belt”, around big cities, are a major culprit. Indefatigable nimby campaigns of opposition by existing homeowners when new developments are proposed also harmfully suppress supply.
Sclerotic local authorities that no longer build social housing, big corporate builders with little interest in constructing new homes in sufficient volume, a financial system set up to lend for residential property purchases but not business investment, politicians who offer cynical subsidies to demand: all these contribute to the mess.
But a significant driver is our irrational and grossly distorting property taxation system. The council tax is inexcusably regressive. Stamp duty is only levied on transactions, discouraging people from moving when they otherwise would. There is no VAT on newly built housing.
High-value property is undertaxed. Homeowners face no capital gains tax. And David Cameron and George Osborne removed family homes worth up to £1m from the inheritance tax net.
Bank of England chief economist Andy Haldane got into trouble last year for pointing out what everyone knows to be true: that you’ll tend to get better returns from property than from a pension.
Given such obvious financial incentives, it should come as no surprise that so many of us are obsessed with property as an asset class, that we are so prone to boom-bust cycles, where we bid up prices ever higher and stretch the link with economic fundamentals to breaking point.
As the Resolution Foundation report shows, while residential property wealth has been spiralling as a share of GDP, property taxes have been flat. The problem with Ed Miliband’s mansion tax is not that it was unfair, but that it wasn’t fair enough. The regressive council tax system should be reformed so that all property – not just £2m houses – is taxed at a flat rate on its market value.
The Grenfell Tower tragedy has exposed the property inequality gulf that exists in modern Britain with brutal clarity. We see unsafe, overcrowded and oversubscribed social housing lying next to under-occupied multi-million pound Kensington townhouses whose value has exploded in recent decades.
Ed Miliband’s 2015 crucifixion over his mansion tax proposal seems an aeon ago. In the wake of the conventional wisdom-scrambling following the General Election, there appears to be a healthy new willingness among the political classes to consider solutions that were for so long written off as economically logical but electorally impractical.
But as the “dementia tax” property-based backlash showed, the argument still needs to be made, the case laid out persuasively. “You didn’t build that,” cried Barack Obama during the 2012 Presidential election, making a point about the degree to which private US businesses rely for their economic success on stateprovided infrastructure such as roads and bridges.
“You didn’t earn that,” could be an equivalent progressive rallying cry when it comes to the long-overdue reform of the taxation of British housing wealth.”
There appears to be a healthy new willingness among the political classes to consider solutions that were for so long written off as economically logical but electorally impractical