Stop blaming immigrants for the housing crisis
Millennials know something’s wrong. House prices are ridiculously unaffordable in the UK. Best summed up by this graph, they’re now on average approaching 8 times earnings.
Why are house prices so expensive relative to incomes? A common (elephant in the room) belief is it is due to immigration. The hypothesis that immigration-fuelled population increases are driving up house prices is even promoted by Government ministers like Dominic Raab. After all don’t migrants push down wages and push up house prices? Many people accept this as a fact. But what does the data actually show?
Well to draw a straight line through this makes no sense. Clearly other factors are at play. Unaffordable house prices aren’t explained by the rising population. The affordability ratio stopped increasing for a while after the recession but the population of England and Wales was still increasing! Explain that Dominic?
So what is the real reason for impossible house prices? The answer is underneath our feet. Land.
In fact 90% of the variation in House price/Earnings ratio can be explained by a least-squares regression of this ratio on UK household land value! I’ve included 95% prediction intervals.
So if we really want to make homes affordable again we need to bring down the value of land.
The silver bullet is Land Value Tax, introduced as a replacement for property taxes. By incurring an annual cost to owning land as a percentage of the sites value, you make land use more efficient so developers stop land banking and start building. To find out why developers profit from not building homes watch this.
https://youtu.be/rVX3c_O3RSY?t=97
How does Land Value Tax (LVT) lower land prices and increase housing affordability?
LVT captures the economic gains from investment in a location that are not due to the landowner’s own effort. Currently this unearned wealth gain is factored into the market value of all land and property when it is sold. With LVT, all land becomes relatively cheaper because this source of unearned wealth, known as economic rent, is removed.
Imagine I had an empty mansion for sale in an ‘up and coming’ area of London. Currently, a prospective buyer knows that in good economic times its value will rise through no effort. Therefore I can sell at a price which lets me take a slice of any future gains the buyer will accumulate from this effortless process.
Under LVT this speculative value disappears and therefore the market price is lower. In addition the mansion now costs money to leave empty. As would the idle plots capable of providing a million homes on English brownfield sites in urban areas. The only way to profit would be to invest in affordable housing or cut losses and sell to someone who will.
In conclusion the next time someone starts banging on about immigrants pushing up house prices before lurching into an unhinged Brexit diatribe, please correct them. Land value is the main driver for housing affordability and Governments can immediately lower land values by taxing them fairly.
As Winston Churchill said:
“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. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”
Data sources:
House price to workplace-based earnings ratio: Table 1c
Estimates of the population for the UK, England and Wales, Scotland and Northern Ireland — MYE4: Population estimates: Summary for the UK, mid-1971 to mid-2017
Figure 2: Value of land within UK net worth, 1995 to 2017
https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/nationalbalancesheet/2018
