The UK’s housing system has been described as “one of the most dysfunctional in the world” by Oxford academic John Muellbauer, who argues that fundamental tax reform is necessary to address chronic affordability issues.
In an academic article published in September by the British Academy, Muellbauer stated: “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.”
Current tax system under scrutiny
More than 80% of global investment is in property, with the vast majority in residential assets. The UK has seen property prices cool somewhat, but levels remain high enough to deny younger generations access to affordable housing.
Muellbauer and other academics have proposed remodelling council tax into an annual levy on households whilst abolishing stamp duty on transactions, which critics say has calcified the housing market. The Treasury and the Ministry of Housing, Communities and Local Government have considered these proposals.
The former chancellor’s mansion tax on properties valued above £2m has been described as a starting point. However, critics argue it should have applied a percentage tax rather than maintaining the council tax banding system. Under a proposed 0.5% annual tax rate, a £150,000 property would pay £750, whilst a £3m home would pay £15,000.
Market implications
The professional classes occupying £1.5m homes in London, the south-east and affluent suburbs would see council tax rates more than double to £7,500 under such proposals. Progress would require this lobby group of owner-occupiers to accept the trade-off with the elimination of stamp duty for sellers.
Recent budget measures included a revamped help-to-buy scheme for new-build homes, additional funding for council housebuilding, and increased tax on landlords. The latter measure has raised concerns about potential rent increases for tenants.
Additional challenges include the leasehold-freehold split, which creates disputes and inhibits investment in energy efficiency improvements such as solar panels and insulation. The lack of robust planning guidelines has resulted in developments on flood plains and tower blocks with inadequate ventilation.
International context
Countries including France and Germany, which previously maintained highly regulated mixes of social, private rented and home ownership, have increasingly focused on building wealth through property. Japan experienced a property price crash in the 1990s, whilst China continues to face domestic challenges after allowing a property scheme that left millions of middle-income earners in negative equity.
The UK housing market serves multiple functions beyond shelter, including funding social care for older generations and providing deposits for younger buyers. Treasury minister Torsten Bell, author of ‘Great Britain?: How We Get Our Future Back’, has described the situation as “our housing omnishambles”.
Policy experts suggest that tax incentives, rather than the centralisation or devolution of decision-making, are the primary drivers of current housing market dysfunction. Without fundamental reform of the tax landscape, the housing affordability crisis is expected to persist.
