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Housing as investment – a review of the proposals




The report authored by Josh Ryan-Collins, looks at the role that housing as an investment has played in pushing up house prices. The report outlines the factors behind the rise in prices and outlines potential options to resolve the issue.  This blog reviews the report, examining and critiquing the potential solutions
 
Summary
Four areas for reform are outlined. Changes to planning use classes and the role of overseas investors are welcome yet are probably not robust enough. The proposed reform of the mortgage market is both sensible and long overdue. New forms of property taxation are questionable because they do not look at the crucial role of income in local finance affordability and are insufficient to deter and reduce the impact of investors on the housing market. However, the report makes a useful contribution to the debate on housing issues and provides a basis for further work.
 
The proposals
 Planning use classes
The proposed changes are a step in the right direction, yet a stronger change is probably desirable – requiring existing second home and holiday let properties to obtain a temporary use class with the intention to eventually transfer such properties to permanent use.
  
Overseas buyers
The proposal to ban the sale of properties to foreign purchasers is to be welcomed. The question is what to do about properties already owned by foreign purchasers? 
 
Mortgage market
Previous reports had indicated that reforms to the mortgage market would be a useful approach.  This policy change is to be welcomed.
 
Property taxation
The property taxation ideas, which are outlined in the report, are probably not the way forward.  Firstly, council tax is to pay (to some extent) for local services and using a surrogate value/wealth tax is not ideal.  Households in areas with higher house values and on lower than average incomes would effectively lose out.  Far better if a charging system based on household income were to be introduced.  This would be fairer and could be adjusted with say a surcharge on second and holiday home owners. 
 
Another defect of a simple property tax based on value is that while having an adverse effect on those on lower incomes, investors and owners of second homes and holiday lets who have higher incomes are unlikely to be deterred from buying or owning property.  To deal with this a more appropriate action would be to charge a property tax based on the value of the property in addition to any earnings based local services tax. 
 
Equalizing Capital Gains Tax rates with income tax rates and removing the exemption for landlords to pay National Insurance could be part of a policy reform package. The suggestion that local councils should “… levy Council Tax and business rates on sites with planning permission as if the property had been built and occupied, allowing a suitable grace period for construction, for example, 18 months.” Is unwise as this could result in more properties on the market, which are not needed for housing people and could instead be purchased by the various categories of investor.
 
Conclusion
The four areas for reform are a useful starting point.  Changes to planning use classes and the role of overseas investors are important issues to explore, but the proposals do not go far enough. The proposed reform of the mortgage market is both sensible and long overdue. The most difficult element is that of new forms of property taxation.  It is more appropriate to differentiate between paying for local services where a surcharge on earnings is fairer and some form of property taxation to reduce the number of properties owned by investors. Options include a tax based on value and the advantages of charging inheritance tax on those receiving an estate taking into account their current dwelling status.
 
Overall, the report makes a useful contribution to the debate on housing issues particularly in terms of why housing, as an investment is detrimental to the use of dwellings for residential use.  It should be used as a basis for further work and policy formulation.
 
Source
Ryan-Collins, J., (October 2024), The demand for housing as an investment, Report —Drivers, outcomes and policy interventions to enhance housing affordability in the UK, UCL Institute for Innovation and Public Purpose IIPP Policy.
 

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