Britain’s housing crisis won’t be fixed without a new tax landscape

We need policies that stop treating property as a store of wealth and that allow people to move home cheaply

John Healey’s critics on the right and left accused him of dodging the big questions in his first budget. The chancellor failed to announce reforms that might tackle some of Britain’s chronic problems, they say.

Healey’s scatter-gun budget, as the Resolution Foundation called it, was more about politics than economics, and unapologetically so.

Housing was one area of policy that took up a considerable chunk of his speech. And yet the measures amounted to very little, if a test of his policy changes was to ask how different will the UK be at the next election. Or, as that date is only two and a half years away, 10 years from now.

Housing is more than a single element of a complex economy. It is both its driving force and a disease eating its way through the body, from the inside out.

More than 80% of global investment is in property and the vast majority of that is in residential. Countries that once had a more communitarian approach, such as France and Germany, with a highly regulated mix of social, private rented and home ownership, have succumbed to building wealth through property.

It doesn’t seem to matter that Japan was ruined in the 1990s by a vicious property price crash. And China is still suffering domestically after Beijing allowed a property Ponzi scheme to develop that enriched the already super-wealthy and left tens of millions of middle-income earners in negative equity.

Nowhere is the situation worse than in the UK, where property prices have cooled somewhat, but remain at levels that deny younger generations the chance to find a home at a reasonable price and some financial security.

UK property has also become the method by which Gen Xers pay for social care for their parents and release housing deposits for their offspring. Then there is the debilitating leasehold/freehold split that is both a source of angry disputes and stymies investment in solar panels and insulation (who should pay?).

The lack of regulation and ill-thought-out subsidies affecting new private housing means developers are incentivised to enter an arm-twisting contest with local authorities. Without robust planning guidelines, developers champion building on flood plains or erecting tower blocks that are later dubbed ovens for their lack of ventilation in hot summers.

And all the while the tax system is working to make the situation worse.

The Oxford academic John Muellbauer has spent almost 40 years researching the UK’s housing system. He calls it “one of the most dysfunctional in the world”.

In an academic article published in September by the British Academy, he says: “Many of the UK’s current economic and social problems, including its housing affordability crisis, can be traced to decades of land and housing policy failures. The role of land markets is strongly dependent on institutions, including land use regulation, financial regulation and property taxation.”

The Treasury and Angela Rayner’s Ministry of Housing, Communities and Local Government have considered proposals from Muellbauer and others that remodel council tax, turning it into a fairer annual levy on households and using the reform to abolish stamp duty on transactions, which has calcified the housing market.

Rachel Reeves’s mansion tax is a good start. It is only a start though, because the former chancellor was persuaded to keep the council tax banding system when she should have applied a percentage to the 150,000-odd homes valued above £2m that will be captured by the new policy.

There was the potential for a database of homes valued above £2m to be the beginning of a revaluation process, carrying on until all homes were logged. With a percentage tax of, say, 0.5%, applied to all homes, a £150,000 property would pay an annual tax rate of £750 while a £3m home would pay £15,000.

Of course, the real problem is not the £3m homeowner for whom policymakers will have little sympathy – it’s the professionals occupying £1.5m homes in London, the south-east and affluent suburbs around other big cities, who will see council tax rates more than double to £7,500.

The professional classes will be the worst affected in the short term. Yet there will only be progress when this powerful lobby group of owner-occupiers – working and retired – are prepared to accept the trade-off with stamp duty, which would disappear for those who sell.

There are plenty of people in government who understand the need to resolve housing market issues in a more fundamental fashion. The Treasury minister Torsten Bell is one. His book, Great Britain?: How We Get Our Future Back, talks about “our housing omnishambles”.

However, they have had little influence on policy in this area so far. In his first budget Healey revamped a much-discredited help-to-buy scheme for new-build homes, which will only boost prices and line the pockets of developers. He also gave some more money towards council housebuilding, slapped an extra tax on landlords (that will probably push up rents) and promised to tackle homelessness.

Healey and Andy Burnham put all their revolutionary zeal into a long, and possibly tortuous, process of devolution from London to the regions to kickstart growth.

However, it is tax incentives that are causing the problems, not whether policy decisions are made locally or centrally. Bad policy decisions can be made locally just as much as centrally. What makes the difference is a permanently reformed tax landscape that discourages treating housing as a store of wealth, allows people to move home cheaply – especially older homeowners who want to downsize – and supports the building of more truly affordable homes to buy and rent.