Memorandum-to-the-Prime-Minister-on-Unaffordable-Housing

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organisation – <strong>the</strong> family – far from being dead is able <strong>to</strong> thrive in some surprising institutional forms. Recent UK Government statement on CLTs In his speech <strong>to</strong> <strong>the</strong> Labour Party conference in 2004, John Prescott announced his intention <strong>to</strong> use government owned land <strong>to</strong> build houses, but using a CLT approach <strong>to</strong> avoid what he called ‘an asset giveaway.’These houses would be sold <strong>to</strong> key workers and o<strong>the</strong>rs at <strong>the</strong> bricks and mortar cost, but <strong>the</strong> land itself would be kept in trust <strong>to</strong> prevent <strong>the</strong> initial subsidy being lost <strong>to</strong> <strong>the</strong> market and <strong>to</strong> keep <strong>the</strong> cost of <strong>the</strong> houses down.The ODPM is now developing <strong>the</strong> details of this scheme This initiative is <strong>to</strong> be welcomed but <strong>the</strong> CLT approach has <strong>the</strong> potential <strong>to</strong> be applied far more widely than <strong>to</strong> a few surplus government sites. By separating <strong>the</strong> land from <strong>the</strong> buildings, CLTs allow people <strong>to</strong> own <strong>the</strong>re own home without depriving <strong>the</strong> rest of <strong>the</strong> community or future generations of community-created value. Fiscal reform as a way forward CLTs are generally most applicable <strong>to</strong> new build developments: although it is possible <strong>to</strong> assemble existing housing in<strong>to</strong> a CLT, it is more difficult and expensive. As 99% of <strong>the</strong> housing supply consists of <strong>the</strong> existing s<strong>to</strong>ck this is a serious omission. Any fundamental solution <strong>to</strong> <strong>the</strong> housing problem must tackle <strong>the</strong> ongoing dysfunctionality of <strong>the</strong> market in second hand houses. The vast majority (80%) of <strong>the</strong> housing s<strong>to</strong>ck is privately owned - and 70% is owner occupied. As land for private housing is far more valuable than most o<strong>the</strong>r land categories, and land prices are driven by house prices, reforming <strong>the</strong> dis<strong>to</strong>rted land market is impossible without tackling <strong>the</strong> broader problem of inflated house prices.The only currently available public policy <strong>to</strong>ols than can have a sustainable impact on <strong>the</strong> price of <strong>the</strong> existing private housing s<strong>to</strong>ck are interest rates, benefits and <strong>the</strong> tax system. The first of <strong>the</strong>se is an extremely blunt instrument that has in any case been handed <strong>to</strong> <strong>the</strong> independent Monetary Policy Commission. House prices have boomed dramatically since <strong>the</strong>y were given control of <strong>the</strong> interest rate. So far, MPC policy has strongly favoured maintaining house prices in <strong>the</strong> interest of current owners over promoting affordability for non-owners. Benefits <strong>to</strong> homeowners have been reformed <strong>to</strong> reduce <strong>the</strong> worst inflationary effects by <strong>the</strong> abolition of MIRAS and of manda<strong>to</strong>ry urban renewal grants. But many new government programmes repeat <strong>the</strong>se mistakes by pumping more money in<strong>to</strong> an overheated market. Despite attempts <strong>to</strong> promote intermediate housing schemes like Shared Ownership, by far <strong>the</strong> most popular scheme has been Homebuy, in which key workers receive up <strong>to</strong> 25% of <strong>the</strong> price as help <strong>to</strong> buy <strong>the</strong>ir own house in <strong>the</strong> private market. It is also intended <strong>to</strong> extend <strong>the</strong> current Right <strong>to</strong> Buy and Right <strong>to</strong> Acquire <strong>to</strong> a fur<strong>the</strong>r 300,000 tenants (ODPM 2005).This form of demand side support effectively raises <strong>the</strong> price of housing fur<strong>the</strong>r as more money chases <strong>the</strong> limited number of existing homes (and repeats <strong>the</strong> self-defeating experience of programmes in <strong>the</strong> US aimed at funding ‘<strong>the</strong> affordability gap’). Housing benefit is also counterproductive: nearly £16 billion was handed <strong>to</strong> landlords in 2004/5, increasing yields and so pushing up land prices (Wilcox 2004,Table 114, see also Appendix 7). Even more perversely <strong>the</strong> tax system provides huge incentives <strong>to</strong> homeownership, which fuels <strong>the</strong> speculative pressures that drive up prices.The cost of Capital Gains Tax exemption more than outweighs Exchequer gains Zacchaeus 2000 Trust - <strong>Memorandum</strong> <strong>to</strong> <strong>the</strong> <strong>Prime</strong> <strong>Minister</strong> - May 2005 95
from stamp duty and council tax (Lloyd 2004). At present <strong>the</strong>re is a negative user cost of owning housing that inevitably encourages speculative behaviour.This adds <strong>to</strong> <strong>the</strong> destructive confusion between a home as a place <strong>to</strong> live and a house as a speculative capital investment. Rebalancing <strong>the</strong> tax system <strong>to</strong> end <strong>the</strong> perverse incentives <strong>to</strong> land holding and hoarding and encourage <strong>the</strong> productive and sustainable use of land would do more <strong>to</strong> address <strong>the</strong> problems of <strong>the</strong> land market than anything else. By extension, it would have a positive effect on <strong>the</strong> affordability crisis. The benefits of a land value tax Beyond <strong>the</strong> various supply-side solutions that have been proposed, it is clear that some demand-side measures need serious considerations. It is essential <strong>to</strong> reform <strong>the</strong> tax system <strong>to</strong> remove <strong>the</strong> dis<strong>to</strong>rting incentives <strong>to</strong> landownership that drive up prices.The most effective and efficient way <strong>to</strong> do this would be <strong>to</strong> develop an annual tax on land values consistent with <strong>the</strong> evolution of policy on council tax reform. It has long been noted that taxes on land rents have <strong>the</strong> least dis<strong>to</strong>rtionary effect.Working <strong>to</strong>wards <strong>the</strong> combining of current property taxes with a genuine land tax would <strong>the</strong>refore enable <strong>the</strong> housing market <strong>to</strong> function more efficiently. It has long been noted that taxes on land rents have <strong>the</strong> least dis<strong>to</strong>rtionary effect. Replacing <strong>the</strong> current property taxes with a genuine land tax would <strong>the</strong>refore enable <strong>the</strong> housing market <strong>to</strong> function more efficiently. An annual charge levied on <strong>the</strong> unimproved site value of landholdings would also address most of <strong>the</strong> issues raised by <strong>the</strong> Barker Review. It would remove <strong>the</strong> incentive <strong>to</strong> hold underused land and encourage its release in<strong>to</strong> <strong>the</strong> market for more productive use. It would increase <strong>the</strong> cost of landholding, <strong>the</strong>reby removing <strong>the</strong> potential <strong>to</strong> make supernormal profits from speculating in property. It would rebalance <strong>the</strong> tax burden, ending <strong>the</strong> perverse tax advantages of landowners over occupiers. All <strong>the</strong>se effects would, in turn, reduce <strong>the</strong> speculative pressures on land prices, which would decrease <strong>the</strong> volatility of <strong>the</strong> housing market dramatically and would ultimately lead <strong>to</strong> lower house prices in general.Taxing land values makes land cheaper <strong>to</strong> buy but more expensive <strong>to</strong> hold.This would encourage a more liquid market and greater allocative efficiency. A recent article on this issue (Huhne 2005) concedes that <strong>the</strong>re are formidable practical and political difficulties in <strong>the</strong> way of implementing site value taxation but also argues that such a measure would address <strong>the</strong> root of <strong>the</strong> landflow and land speculation difficulties. A sensible way forward, advanced as Recommendation 6, would be for <strong>the</strong> Government <strong>to</strong> undertake a feasibility study of <strong>the</strong> practicalities and of <strong>the</strong> benefits <strong>to</strong> be derived from taxing site values. Previous development taxes Although <strong>the</strong>re have been repeated attempts <strong>to</strong> capture land rents for <strong>the</strong> public purse, <strong>the</strong>y have all been seriously flawed.This is widely interpreted as a sign that land rent cannot be captured. But in fact <strong>the</strong> his<strong>to</strong>ry of failure represents merely <strong>the</strong> overly complex, confused and compromised nature of <strong>the</strong> particular legislation enacted. The three attempts at land taxes by Labour governments since 1945 have all targeted <strong>the</strong> profits made by 96 Zacchaeus 2000 Trust - <strong>Memorandum</strong> <strong>to</strong> <strong>the</strong> <strong>Prime</strong> <strong>Minister</strong> - May 2005
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Z2K ZACCHAEUS 2000 MEMORANDUM <stro
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2 First published in Britain in 200
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Introduction The Prime</str
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6 Zacchaeus 2000 Trust - Me
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8 Zacchaeus 2000 Trust - Me
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Recommendation 2 Policy should buil
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Recommendation 10 Increased resourc
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The shaded boxes along the<
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RSLs have no direct electo<
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4. Of the
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Similarly in urban regeneration sch
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3. Increases in the</strong
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There may be some inconsistency in
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(a) producing units of a quality su
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28 Zacchaeus 2000 Trust - M
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Fund they stress t
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homeless by local authorities (itse
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compared to 46% in
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approximately threefold rise in rea
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End of 1998 28,700 End of 2000 120,
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Page 105 and 106: healthy living. Poverty happens und
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Memorandum-to-the-Prime-Minister-on-Unaffordable-Housing

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