Monday, 30 June 2014

Living off the land - why a land value tax may help solve our housing crisis

Everyone recognises the need for more affordable accommodation, but what seems to be missing in the recent debates is any focus on the number of empty properties currently existing in our area. Recent statistics on empty homes suggest there are 6,406 in Worcestershire, including 923 in Malvern Hills of which 387 are ‘long-term empty’. In Britain there are at least 600,000 empty homes, many in the North and Midlands (the result of failed and non-existent regional development policies, and one more reason we shouldn't build HS2!). At the same time, developers sit on vast land banks, create an artificial housing shortage, and blame the planning system for resulting problems. The tax system encourages land hoarding. Keeping a property empty and unused makes excellent sense to speculators as minimal tax is payable on an empty plot.

One way to tackle this would be a locally determined Land Value Taxation (LVT), based on the annual rental value of the land, exempting all buildings on it, to replace the Council Tax and Non-Domestic Business Rates. As there would be no reduction of or exemption for buildings left vacant or that have been allowed to fall into a state of disrepair, this would encourage full use of existing properties and discourage the practice of people speculating on the price of sites whilst keeping the properties empty or derelict. It would become unprofitable to sit on unused land and would incentivise productive use of land.

Over time, this would help to stabilise the property market and tackle the boom-and-bust factor that contributed towards the 2008 financial crisis – discouraging disproportionate amounts of capital from being tied up in property and excessive accumulation of debt.

Moreover, the tax system should, whenever possible, target windfalls, not effort. The value of any plot is not the result of effort on the part of the landowner but the value added by the community; any increase is a windfall. As Winston Churchill recognised in a speech in 1909: "Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced." The total value of the housing stock in the UK now stands at over £4trn, an increase above inflation since 1990 of £2trn. This £2trn increase has come through a rise in the value of land itself - not through new buildings (comparatively few houses have been built in the last two decades) but from improvements paid for by the community. Landowners have gained a windfall of £100bn yearly on average from a rise in land values to which they have not contributed. A tax levied on the value of the plot of land, without taking into account any building on it (value added by the landowner), targets this £100bn annual unearned windfall that at present is hardly taxed at all. Most goes to powerful and privileged freeloading landowners who fight to keep every penny, and in doing so harm the economy as well as damaging the environment.

The Green Party have developed a coherent LVT strategy:

LD400 The Green Party proposes introducing LVT (previously known as Community Ground Rent) as a tax payable on the annual value of land. The valuation would be of the land alone, exempting all buildings on it, recent and future improvements to it, or minerals extracted from it. LVT would therefore not be a tax on the rent of buildings, the value of crops, manufactured products or the product of other forms of work. (Minerals extracted from the land would be taxed separately - see NR423 & EC710s)

LD401 The proposed LVT would be levied by the local community at rates to be agreed amongst Districts and Regions. Any necessary redistribution between Districts and Regions would be undertaken by agreement between local governments in accordance with the principles agreed in EC551.

LD402 The level at which the tax would be levied would be based on the full value of the current permitted use of the land. Permitted use would mean, for example, that the taxable value of land which is deemed by the community to have special amenity or habitat value, thus inhibiting use for possible greater financial return , would be reduced. When it is considered desirable to change the use through the land-use planning framework, this new permitted use would then form the basis of the assessment.

LD403 Assessments would be reviewed automatically on change of use and every few years, or more frequently, on request. An arbitration process would be made available to provide compensation for those adversely affected by permitted use, and provision made for appeal against assessment.

1 comment:

  1. There are two issues surrounding housing affordability that a LVT would solve.

    Firstly, lands rents capitalised into selling prices can be thought of in two ways. Either monopoly rent/imputed rent, or as an implicit state subsidy. This is worth £220bn per year net to freeholders.

    Monopolies and subsidies both cause deadweight losses. In layman's terms they cause inefficiency and mis-allocation. Not only does this shrink GDP, but results in empty, under-utilised and slow re-cycling of property assets. 25 million empty spare rooms for example.

    By ending this, LVT ensures land(and therefore housing) is always put to it's most productive use in as short a time frame as possible.

    It's highly unlikely that building on greenfield sites would take place for generations to come if LVT were adopted tomorrow, as we don't have a shortage of housing, just a monumental mis-allocation.

    Secondly, and more importantly, is the effect on discretionary income and house prices.

    Under LVT, the average UK household would be over £11,000 better off in their pocket. If house prices also fell to the value of their improvements, housing affordability as a ratio of discretionary income improves four fold.

    That's not just a solution to our "housing crisis" but our "cost of living" one too.