Breaking the housing logjam: why tax reform matters most

We spend a lot of time poring over figures showing declining housing delivery nationwide and an outright collapse in London, the engine of the national economy. There are all sorts of solutions that we and others identify, but they span tax, policy and regulation, which are difficult to tackle simultaneously for a government that finds itself backed into a fiscal corner.

Two new policy papers, one from the Centre for Policy Studies called "Breaking the Cycle" and another from Public First called "Building Prosperity", track the alarming decline in housebuilding and offer policy levers the government could pull to trigger a reversal. The solutions these papers offer also span tax, policy and regulation, but both leave you with a clear impression: starting with tax reform is the most powerful lever to unlock housebuilding. Economist Gerard Lyons, author of the first paper, gets to the nub of the issue:

"The present Government has demonstrated a number of errors to be avoided: an obsessive focus on fiscal headroom; raising taxes in ways that have damaged the economy rather than curbing spending; a failure to retain flexibility (in particular, needlessly boxing itself in with mistaken commitments, such as not to raise one of the major taxes); and an excessive emphasis on redistribution at the expense of productivity and growth."

Lyons points out that the top one percent of earners contribute around 28% of income tax revenue "and can probably not be squeezed much further...the prevailing assumption that taxes must rise to fund spending creates a self-defeating loop, since if spending keeps rising then higher taxes follow, damaging incentives and ultimately reducing the amount of tax paid."

Pragmatic decisions

Breaking the loop would be a huge step and seems unlikely, which explains the sense of foreboding over the November budget. Still, it's hard to ignore growing calls for targeted tax cuts that would likely increase the overall take via boosting activity. Lyons puts forward cuts to stamp duty on shares and housing as "justified immediately and can achieve wider goals." The current council tax system is "outdated and regressive" – improving it would increase fairness and improve incentives to move. "Overall, property should not be taxed more, but taxed better," Lyons adds.

This is not to say policy should be ignored, but the government has shown a willingness to make pragmatic decisions and has some momentum on this front. Still, it could go further: the green belt cannot be protected at all costs – such an approach ignores economic and social realities, Lyons says. Too much focus on brownfield sites "ignores the scale of the challenge." Development needs to be sequenced more intelligently, too. The current approach of adding homes in locations where infrastructure is already overstretched is counterproductive and builds opposition. Putting the infrastructure in place first "acts as a magnet for private sector interest".

The 68-page paper is heavy on suggestions, but Lyons reserves space for one thing the government "absolutely should not do": introduce wealth taxes that often fall disproportionately on those who are not internationally mobile – retired savers, small business owners, or households with illiquid assets.

Spades in the ground

The Public First paper, which is supported by Berkeley Group, British Land and Landsec, points out that, despite collapsing delivery in London, larger parts of the city – particularly brownfield sites – remain ripe for development. However, they require the right planning, policy and tax framework to bring them forward: "at present, the barriers to bringing land forward for housing and getting it through the planning system are too numerous, and the risk of building the resulting development at a loss is too high," the authors say.

Taxes on development like the Community Infrastructure Levy, the Building Safety Levy, and the Residential Property Developer Tax could be reduced or removed, or tax incentives for investment into new housing delivery introduced to facilitate more investment. We've talked before about heavy taxation of overseas investors, which in many cases prevents developers from securing the off-plan sales required to put spades in the ground. New taxes and regulations — like the Future Home Standard, the Building Safety Levy and Residential Property Developer Tax — complicate the picture further, while second staircase and dual aspect requirements reduce the area of new residential buildings that can be used and sold for housing.

Again, the government could build on policy reforms it's already made. National planning policy could emphasise the importance of housing delivery of all types and create more reasons to say yes to development, the report notes. Design guidelines and related policies could be relaxed to allow buildings to be built more efficiently and to deliver more homes. Lastly, the amount of grant funding available for Affordable Housing could be increased, or the proportion of Affordable Housing expected on each development could be reduced to increase overall delivery.

Productivity gains

The government's room to manoeuvre is so tight that it's looking for peripheral, easy or short-term wins, but this strategy ignores the long-term potential, which is massive. Delivering the Mayor’s target of 88,000 new homes per year by 2028 would generate a powerful economic uplift, according to Public First. By 2034, the total annual impact would peak at £40.4 billion, equivalent to 6.5% of London’s GDP and 1.6% of UK GDP.

This is split across four areas; housing output at target level would deliver construction-led growth of £14.8 billion of annual GVA from 2028. That represents a 2.4% boost to London’s GDP in that year, sustaining tens of thousands of jobs in construction and supply chains.

More homes would ease pressure on rents, too, delivering up to £607 million of annual rent savings by 2035. Larger housing stock would allow more working-age people to live in London, deepening labour markets and driving productivity gains. By 2035, this could generate £3.7 billion of additional GVA annually. Finally, lower housing costs make London more attractive and accessible to younger, highly productive workers from across the UK. By 2037, this could add more than £30 billion per year to London’s economy - about 5% of London’s GDP.

In other news...

AI data centres will take 10% of power demand increase, says BP (Times), London’s ‘accidental’ landlords are a growing sub-genre (FT), and finally, Saudi Arabia freezes Riyadh rents for 5 years as property costs soar (FT).