Economics | Monday, 13th March 2017

There are Two Kinds of ‘Generation Rent’

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  • March 19, 2017 at 4:25 pm
    There are two issues that are conflated, but need to be addressed separately.  Firstly housing affordability, and secondly housing supply. As location is not a produced factor,  housing cannot be unaffordable in aggregate.What makes housing unaffordable for one group in out society is the locational constituent of rent and selling prices. These act as a pure transfer payment from those that own relatively little location by value, in comparison to the taxes they currently pay, to those where the opposite is true. Typically from the young/poor to the elderly/rich. Leading to affordability issues for the former group and excessive individual, regional and inter generational inequality in our society as a whole.Solving affordability issues completely and permanently is therefore a simple matter of ending the transfer payment at source with a 100% tax on the rental value of land.  While freeholders do not pay tax for their right to exclude others from valuable locations, this can be seen as an implicit State subsidy worth £200bn per year. This not only inflates selling prices and rental incomes, but causes owner occupiers to over consume immovable property. Leading to excessive vacancy and under occupation.Thus the LVT would not only resolve affordability issues, but would allow the market to rationalise our existing housing stock, where owner occupiers currently consume an extra 12 million bedrooms in England and Wales alone compared to those that rent.The LVT would also see a change in tax liabilities between the regions, with those outside London/SE paying much less than now. So the market could then allocate resources to where capacity and the potential for growth is highest. Currently, our tax system distorts our economy towards London, which hurts GDP as a whole.We can therefore conclude that affordability is only a demand side issue. Only when that side is taken care of can the market know of how much supply is needed, and where.Building more homes without first dealing with the demand side first will only add to costs, increase existing inefficiencies, will not adequately deal with affordabilty/inequality issues. It will further increase the share of the economy captured by banks, landlords and property developers.Which is why the latter group are so keen to push for policies that blame planning regulations, and why the solution of a 100% LVT is never given a fair airing in public.