The balance of power between owner-occupiers and renters is shifting
If the recent housing white paper told us anything, it was that the crisis it addressed is one on which politicians hardly know which way to turn. There are too many conflicting interests with too much to lose for any decisive break in a new direction. And so, rather than a bold strategy with clear objectives to redress the balance of power in the housing market, came a brainstorm of ideas to tweak the present system — many quite good, but few if any that will seriously shift the dial. Ministers accept that the market is broken, but there was little evidence in the white paper’s policy proposals that they are serious about fixing it just yet.
There are in truth still too many homeowners, even if their numbers have fallen in recent years, for the government to be compelled to take a different path. Or, to put it more essentially, there are still too many landowners. The significance of this point is captured in a new book by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane, Rethinking the Economics of Land and Housing, which makes a major contribution to the housing debate by showing how the distorting effects of land, and also finance, need to be at the centre of the story.
Land occupies a unique position in the economy because it is essential for any activity and, given its fixed supply, an increase in demand for it can only increase its price. Meanwhile finance, which facilitates that demand, has been available in ever-greater abundance since the deregulation of mortgage lending in the 1970s and 1980s. The interaction between the inelastic supply of land and the highly elastic supply of mortgage lending lies at the heart of the house price boom over the past few decades.
But while the finance part of the story is relatively new (before the 1970s mortgages were harder to get and lending restricted by the conservative practices of the building societies), the land question has been around for centuries. Ever since Henry VIII seized the monastery lands in the early 16th century a market has been evolving in land as a privately-owned tradable commodity. What is crucial to the contemporary housing debate, and what this book illustrates brilliantly, is how the control of land is, or has at least been allowed to become, fundamental to economic and political power relations.
Because land is permanent and immovable, those who own the exclusive rights to its use are able to siphon off the value of any economic output that is dependent on it. The value of a piece of land therefore reflects the level of activity conducted on or around it, as well as any speculation arising from expectations about its potential future use. This price does not reflect the efforts or ingenuity of its owner, and so it does not reward productive activity but rather penalises it in the form of rent.
This ability of landowners to extract economic rent from productive activity, or the unearned increment, was once at the centre of political discourse. It was an issue that troubled classical economists ranging from Adam Smith to Karl Marx. As the industrial revolution advanced in the 18th and 19th centuries, productivity levels improved, and so the owners of land began to enjoy the fruits of the community’s labour. A land reform movement gathered momentum towards the late 19th century and the writings of the American economist Henry George advocating a land value tax attracted a following. In 1909, a young Winston Churchill (then 35, and a Liberal) decried the land monopolist’s free ride in what remains one of the best descriptions of the dilemma:
Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced.
Churchill was careful to stress that it was the system he was attacking not the landowner himself (‘We do not want to punish the landlord. We want to alter the law’). But the law was as it was because landowners controlled parliament and indeed the Liberals’ plan for a land value tax in the People’s Budget, in support of which Churchill had been speaking, was thrown out by the House of Lords. This is where the economics merges with the politics. As Ryan-Collins et al point out:
Property owners have often sought to control or limit the power of the Crown or state over them, by seeking to control the state itself. Once they have achieved this, typically through the development of parliamentary systems designed to represent the interests of property owners, these owners tended to use the law to privilege their wealth and expand their estates. They reduce the tax burden on their property and exclude others from land ownership, economic freedom and political power.
What is described here is what the new class of 20th century landowners — otherwise known as homeowners — have achieved over the past 40 or so years. But by then the problem of land and the unearned increment had receded from the political debate, marginalised by neoclassical economics, even though it remained central to housing. The land question had begun to align more closely with the housing question in the 19th century as Britain’s towns and cities absorbed greater concentrations of the population, all in need of dwelling space close to the new centres of economic activity. At that point the vast majority of the population paid rent (in the more common use of the word) to landlords who owned something like 90 per cent of homes. That all began to change after the First World War, as homeownership began to spread. By the 1970s a majority of households were owner-occupiers with a stake in the land.
That this process followed the advent of universal suffrage, and the end of property qualifications to the franchise, is no coincidence. The mass dispersal in property ownership was underpinned by a series of policy initiatives, including rent controls that caused landlords to disinvest and support for building society lending to a new generation of homebuyers. By the 1960s measures were being introduced that gave homeowners preferential treatment in the tax system. These included the abolition of Schedule A income tax (the tax on imputed rental income), the exemption for primary residences from capital gains tax when that was introduced, and the introduction of mortgage interest tax relief. In the following decades council housing was sold off at enormous discounts under right-to-buy legislation and, what has enabled house prices to spiral in the past few decades, housing finance was liberalised giving aspiring buyers much greater purchasing power in an increasingly competitive market.
Politics reflected the economic interests of the centre-ground voter, who by the late 20th century was a homeowner, and so house price growth would not be challenged by policymakers even though it contained the seeds of the demise of home ownership itself. Housing wealth reached £4.43 trillion in 2014, or 58 per cent of the entire net wealth of the UK. The consequences of rising house prices combined with a falling number of homeowners have been enormous for wealth inequality and, just as the classical economists explained, for productive enterprise. The authors use Thomas Piketty’s data (graph, below) to show just how much of the rising ‘returns to capital’ he describes as taking place since the 1970s comprised rising asset prices, mainly in the form of residential land. When that ‘economic rent’ is removed from the picture, we see that the returns on the productive uses of capital have been falling as a proportion of national income since about 1980.
The mounting problems that have been created in this process are now widely acknowledged but for policymakers one suspects they remain too frightening to do anything about. Not only are homeowners still the priority at election time (for now), but most of the banking system is dependent on keeping house prices, and land prices, at present levels. The authors warn, rightly, that ‘financial chaos’ would follow any fall in land values without measures in place to deal with the inevitable ricochet on the City — and what such measures might be, few seem to have addressed to date.
But this is not the end of the story, because the political scales are shifting and sooner or later, unless something interrupts the present trajectory, the non-landed class of renters will be in the majority once more. In London that is already the case. And as Ryan-Collins et al say, there will come a point when it is more rewarding for politicians to support measures that disperse homeownership than concentrate it:
As house prices keep rising relative to incomes, a tipping point will eventually be reached when the majority of populations in Western democracies will favour policies that reduce the concentration of wealth in property.
What you get a sense of in the arc of this narrative is just how much of a man-made disaster the present housing situation is — the direct (if unintended) consequence of pandering to one group of people, albeit a majority. The answers to this problem — the fundamental ones if not the technical ones — are really not that hard to discern. What is lacking is the political will to put housing policy on a different path. It may be a little while yet before the tipping point is reached.