The lack of affordable housing? Blame it on 12 years of interest rate-suppression

Economic perspectives 132

Photo by Gonzalo Facello on Unsplash

The other evening my wife was watching Question Time on BBC 1. I wandered into the room and listened for 5 minutes, hearing panel members pontificating on what their respective political parties would do/are doing about the desperate lack of affordable housing. Their respective political leanings forbade them to agree with anything offered by opponents. The only point of agreement was that there is a housing shortage – but since this is where they started from, their haranguing achieved nothing –  other to strengthen my longstanding resolution never to waste time watching ‘Question Time’!

My brief foray into that circus did, however, highlight things that, even to a semi-comatose politician, should be painfully obvious, starting with the nature of the problem itself – which, at root, is inequality – a phenomenon that Government always swears to erase, but can’t see that its own actions cause it. Let me describe how.

The money-printing disease and asset prices

After the 2009 financial crisis the government applied Keynes’s “one-size-fits-all” panacea for bringing a stagnant economy back to life. It’s called “demand stimulus” –  and it duly flooded the financial markets with unbacked credit. It’s easily done: the Bank of England purchases securities on the open market and pays for them by adding corresponding funds to the bank reserves of commercial banks – or “money-printing” in more familiar terms.

As accurately described by the economist Richard Cantillon 300 years ago, once the central bank turns on its printing press, the newly created money is initially trapped within the financial system, accessed by its “first-receivers”: the coterie of privileged insiders within banking circles. The deluge of low-cost credit initially inflates the prices of high-end financial assets, rather than general consumer prices. Then it slowly seeps into the wider economy, leading – unevenly but inexorably –  to the consumer-price inflation we are now grappling with and the societal inequality referred to in my second paragraph above.

Central bankers, the perpetrators of this huge Ponzi-style bubble, and their Treasury cohorts, exude an air of infallibility, blind to the reality that it is their own formulaic policy of money-creation – and its counterpart of interest-rate suppression – that initiates the rash of asset-price bubbles. These inevitably include real estate, always a safe haven for “funny-money” conjured out of thin air. The cheapness of borrowing rapidly causes house prices to rise beyond their affordability to the majority of house-seekers whose income now lags behind.

Also attracted are foreign speculators seeking to take advantage of the inflating property prices, often keeping the acquired premises empty. Why bother to get involved with tenants, estate agents, local councils and lawyers when mortgage rates are so cheap that even council taxes are peanuts by comparison with a rise in value requiring no effort at all? Islington Council is one of several who find that a high percentage of their housing units have no registered voters living in them. It blames a phenomenon known as “buy-to-leave”, whereby investors buy property and leave it empty, thus exacerbating the capital’s housing shortage. The shortage they have helped to create guarantees still higher property values, providing them with a source of wealth they have done nothing to earn but can access whenever they choose.

No wonder there’s a lack of affordable housing. Since none of the Question Time panellists mentioned any of these causes, they are presumably ignorant of possible remedies. As for the long-suffering members of the audience, they were protesters rather than thinkers.

How to cure this? Here’s an exercise in pure reasoning

Q1: What puts a house-price out of your reach?

A1: The effective housing supply in your target price-range has shrunk. The shifting demand/supply equilibrium has been distorted by government intervention, and the house you were hoping to buy is no longer affordable.

Q2: How does this happen?

A2: Initial holders of newly-printed, unbacked, money know that its purchasing power will wane. They therefore feel a compulsion to acquire something real, and property is always a safe bet. The result is that houses previously affordable to you, are now out of your reach. As prices rise, current owners can’t lose –  they grow richer while doing nothing.

Q3: What causes property prices to rise more steeply in some areas compared with others?

A3: This phenomenon is unrelated to the cost of materials used in construction. A semi-detached house in, say, Stevenage, and another semi in Hendon, North London, may be similar in size and style – but the price difference between them may be huge. Since the price-differential doesn’t relate to building costs, that leaves only the land on which the houses stand.

Q4: That is logical, but why is it so?

A4: The price differences we are discussing relate to where the respective properties are located. This covers a multitude of factors, the main ones being  proximity to shops, restaurants, schools, parks, recreational facilities, clubs, pubs, hospitals, doctors and dentists and, inevitably, public transport that provides accessibility to the city-centre and services that reach other cities. In a nutshell, these attributes exist because it’s in the nature of a local community to demonstrate an obvious need for them. A house that ticks all these boxes will command a premium.

Q5: What, then, can be done to make housing more affordable?

A5: The wealth that resides in a property’s value was not created by its owners; they didn’t need to work for it. Scarcity of the desirable attributes listed above did it all for them. This incremental wealth has come into existence because of the community. It therefore represents a major potential source of local government finance, if it is taxed. Remember – the incremental value is based on the land, only the land, and not the developments on it. A site-value tax (SVT) would not only capture that incremental wealth for the benefit of the community that created it, but would also flatten the price-differentials by extracting unearned community wealth from private pockets, reducing house-prices to a market-based valuation model, which will always be more affordable.

Q6: But can a site be valued separately from the house, or other building, standing on it?

A6: Of course it can. After all, even a vacant site can have considerable value. As we have seen, that value depends on where it is. Conventional thinking always gets things back-to-front. People mechanically link a site’s value to what’s on it, failing to notice that what’s on a site was worth putting there only because of its location! Stand on Primrose Hill, or the terrace at Alexandra Palace, and look at the City’s skyline. What you are looking at is a “bar-chart” of site values!

Q7: But how would SVT be levied?

A7: It would be tuned to the taxable capacity of every region, city, locality – right down to every site in every street. An ad valorem charge on the stream of rental potential that can be imputed to each site.

Q8: Doesn’t Council tax already achieve what you are talking about?

A8: If only! Council tax is levied by the local authority on the entire development, including buildings. It therefore creates a disincentive for development, whereas SVT, by its very nature, incentivises development. Owners of empty sites would have to pay SVT, yet receive no benefit from ownership. It wouldn’t take them long to recognise that only by developing the site will they be able to extract a rent that makes ownership worthwhile. Seen in this way, site value represents the present value of future rental streams.

Q9: Isn’t the best way to create more housing, simply to build more houses?

A9: That would obviously create more housing – but whether or not it’s affordable, and to whom, is an economic question that goes beyond mere supply and demand. It is affected by the distortion that always follows state intervention, as is clear from the above answers. Under the current regime construction companies are tempted to worsen the shortage by building up “land-banks” of sites ripe for development. By keeping land out of use in this way they add to the pressure that pushes up prices. Depending on location, they are capable of rendering a fully-developed property affordable to the wealthiest buyers. Only SVT can prevent the market from being rigged in this way by public parasites who have stolen the community’s wealth: sitting on a land-bank that yields no return can be financially crippling to a building company that’s liable for the full SVT. Keeping the land out of use merely increases its value and hence the SVT for which they are liable.

Q10: Could the local authority help matters?

A10: They could, but in current circumstances of excessively regulated planning laws, local authorities are a large part of the problem. Town Hall employees are in a position of terrible conflict because (i) they have power to grant planning consent without which sites cannot be developed – a situation susceptible to corruption; (ii) they are aware that decisions on where new public amenities are to be located will have a significant impact on prices of nearby properties – again, inviting corruption. SVT will extract much of that latent wealth, removing the premium created by merely having inside-information.

Historic recognition and some contemporary examples

First published in 1776, Adam Smith’s Wealth of Nations outlined four “canons” of good taxation: equality; certainty; convenience; and efficiency. For “equality” (in the sense of fairness) to be achieved, the amount of tax should be proportionate to the ability of the taxpayer to meet it. “Certainty” means that taxpayers are clearly informed about why and how taxes are levied, while “convenience” and “efficiency” concern ease of compliance, costs of collection and minimising economic distortion. SVT meets all these criteria.

The potential of SVT for achieving social and economic justice was brilliantly explained by the nineteenth century American economist, Henry George, in his seminal work Progress and Poverty. There are countless examples of its efficacy – but also of the miseries attributable to its absence.

Here’s a final reminder: the Jubilee Line on London’s underground system cost £3.5 billion to construct, yet it added over £13 billion to the value of land adjoining its route. The £10 billion bonus went into private hands that had contributed nothing to its cost. Even a modest site-value tax would cure this repeating aberration at a stroke. The tax would be met out of the newly-won “taxable capacity” – the surplus-value arising from meeting a community need.

In a similar vein, the construction costs of Hong Kong’s Mass-Transit Railway system were fully met by taxing the ever-increasing value of the land close to the 13 stations along its route.

As expressed by the poet and author Victor Hugo, “there is nothing more powerful than an idea whose time has come”.

© Emile Woolf March 2023 (website)