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 examines the potential solutions
Summary
The report proposes a number of reforms deal with the issue of housing being used as an investment. Four main areas are identified – planning use classes, overseas buyers, the mortgage market and property taxes. These are outlined below.
The proposals
Planning use classes
It is suggested that new planning use classes could be introduced with control over these by local authorities. “For example, an owner occupier who wished to sell their primary residence to an investor or landlord, or who wished to convert from owner-occupation or long-term letting to short term letting, could have to apply for planning permission to do so in designated ‘higher pressure zones’.”
Overseas buyers
Overseas buyers have played a role in pushing up house prices so controlling these sales could also be introduced. Such policies have been introduced elsewhere. “For example, in 2018, as part of a policy to curb rising house prices, New Zealand banned the sale of homes to many foreign purchasers and Switzerland has had restrictions on such purchases for many years. Australia has rules preventing non-residents buying existing dwellings for residential purposes.”
Mortgage market
Previous reports have indicated that reforms to the mortgage market would be a useful approach. “A recent reform proposal by the Tony Blair Institute for Global Change argues that by making mortgage insurance compulsory and permanent, rather than voluntary, and simplifying the credit risk mitigation framework, it should be possible to lower the cost of higher LTVs, as is the norm in other countries.”
Property taxation
Property taxation reforms are also suggested. The basis for this is that increases in land values represent an economic rent. The report states that “there is a strong economic argument for the imposition of a holding tax on property value to socialise such rents. If the tax was set at a high enough level, it should substantially reduce speculative mortgage lending and cash investment into housing, with other assets more attractive, even under conditions of very low interest rates.” It is considered that such a change could increase supply and reduce prices. The report points out that the current system of property taxation comprising Council Tax and SDLT, is both regressive and inefficient.
They propose that “there is a case for a major one-off reform that would align tax more closely to the rental and capital values of property (net housing in wealth in the UK has increased by 700% since the early 2000s, whilst taxation on property has remained around 4% of GDP). In doing so, such a reform would redistribute the property tax burden from poorer to wealthier areas and enable a more efficient distribution of the housing stock aligned more with housing need.” Options include a flat rate of 0.48% annual tax on the current market value with a surcharge on empty and second homes. “Modelling of the policy, which would be fiscally neutral at the 0.48% rate, suggests 75% of households would be better off as a result, in particular poorer areas of the country outside the South East that have not seen rapid growth in house prices.”
Other organizations are cited where options including a land value tax have been proposed. These include the Resolution Foundation, the IPPR and Bright Blue think tanks., and Professor John Muellbauer for the OECD in recent years. “The new tax liabilities would be partly or wholly capitalised into house prices. This would result in prices falling in expensive areas and rising in cheaper areas.” The benefits of this policy would be to assist first time buyers in London and the South East and might encourage higher levels of house-building in some areas.
Other proposals include equalizing Capital Gains Tax rates with income tax rates; ending the exemption for landlords of National Insurance Contributions; giving local authorities the power to increase Council Tax on properties used for second homes or short-term holiday lets; raising Stamp Duty on purchases by foreign investors; and, enabling local authorities “to 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.”
Conclusion
So we have four areas where it is suggested that reforms would offset the impact of dwellings being used for investment. The next post will evaluate these options.
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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