The economics of land and what that means for Generation Rent
By Brendan Maton
A two-bed apartment in Shoreditch’s Boundary Estate, a trendy part of London, will cost £700,000. Using a conventional ratio that banks will lend a maximum three times the value of your income, not even the UK Prime Minister’s salary would secure enough for such a flat. For students coming from all over the world to study in London, this may not matter. They may simply want to rent for the duration of their studies. But more and more rented accommodation in the UK is in the private sector, where there are no legal controls on prices and consequently the monthly cost is worse than the monthly repayments on a house loan. How have things got so out-of-kilter?
Let us start on the Boundary Estate itself, a couple of miles from UCL, built in 1900 as a model of how the lives of the poor could be transformed by healthy accommodation and excellent amenities. The country’s densest slum was razed to make way for the new project, which came with bath-houses and workshops for artisan tenants. Often described as London’s first social housing estate, The Boundary remains beautiful and the majority of its occupants remain council tenants.
But tenants’ legal right to buy their accommodation at a discount explains why some flats are for private sale (an equal right does not exist in the private market). Over the past five years a thousand right-to-buy transactions have taken place in the borough of The Boundary Estate alone. Because there is a shortage of social housing in London, many properties bought under the right-to-buy are leased back to local authorities at private-market rates.
For some policy makers, this is no bad thing: housing should operate by commercial norms and good luck to those former social tenants who now earn revenue from their property. An Englishman’s home is his castle, and if he or she can make some extra income by renting it out, more power to them.
Josh Ryan-Collins, Head of Research at the UCL Institute for Innovation and Public Purpose (IIPP,) has other views. He analyses the current situation through the lens of historic economic thought, and like any good surveyor would, starts with the ground itself. Two fathers of economics, Adam Smith and David Ricardo, worried that profiting from land via rents was problematic because tenants were at the mercy of private landowners, whose greed could take capital away from productive endeavour. These fears are no different to those of young people over two hundred years later; that opportunities to improve themselves are being hobbled by the cost of accommodation.
Henry George, author of the best-selling Poverty & Progress, went further and proposed a national land tax in order to prevent speculation by private landowners. This would tax all land, regardless of claims of ownership and regardless of what buildings were constructed on the land. A watered-down version survived attacks by the nobility to become British law for the first half of the 20th century (watered down because George’s proposal was for the land tax to replace all other taxes in society). This was the period when housebuilding, especially by the public sector boomed.
But the land tax was canned in 1963, by which time landowners were permitted to sell based on the ultimate sale price of whatever property was proposed for construction. The seeds for speculation had manifested themselves in the UK market.
Importantly, discussions among mainstream economists about the significance of land had fallen away by this time — it was treated as just another factor in production, with properties not fundamentally different from capital or labour.
For those in the UK, Ireland, Spain, the US, Australia and other countries that have experienced property booms and busts, all this talk of land values and taxes might seem irrelevant. After all, property is the valuable thing, not the ground, right? Wrong. A recent study of 14 advanced economies found that 81% of the rise in house prices is attributable to land, not the dwellings that rest on it.
George had warned that land was inherently scarce and would become a source of speculation where there were no alternatives: so it has come to pass in London, San Francisco and other booming cities. The warning seems obvious but for Ryan-Collins, mainstream economists have not helped by ignoring land’s special properties.
Revisiting the issue presents vital, if awkward, questions for policy makers. One of the main barriers for building affordable new housing is the extremely high cost of land (at least in areas where people want to live). Currently rules in the UK mean that landowners are entitled to the full market value of undeveloped land — that is its value once planners have zoned the land for domestic property. The government — via the Letwin Review — is currently looking in to whether this ‘hope value’ rule still makes sense and whether the wider public should be entitled to share in this uplift.
Ryan-Collins does not go as far as Marx, whose remedy was to abolish all private property. But there is room for discussion about what a reintroduced land tax would look like. Then there is the role of industrial policy. If land values in one city are painfully high, how can the government encourage economic growth in other regions, where land is cheaper? Without bold, holistic thinking by government, current problems will simply re-appear elsewhere. Ryan-Collins is honest that right now the UK is not a balanced economy and so there is not enough demand to support regional enterprise for all the capital so willingly lent to homebuyers. All the more reason for industrial policy and housing policy to be devised in harmony.
When you look at the figures, harmony is not desirable but essential. The dizzying rise in land values and house prices has far outstripped appreciation of Britain’s entire industrial kit: factory machinery, furnaces, industrial drilling equipment, intangible intellectual property and databases, even natural resources. This ‘kit’ would be worth more if the economy were more productive. Instead, successive governments have preferred to leave wealth creation to private properties like that flat on the Boundary Estate. This laissez-faire approach perhaps helps explains Britain’s ‘productivity puzzle’: the nation seems to be richer without economic output and wages increasing thanks to spiralling property prices.
Ryan-Collins’ work stresses that this is much to do with wrong-headed policy choices such as right to buy council housing. Whether the entire nation is truly happy for its wealth to be increasingly concentrated among homeowners will manifest itself at the ballot box. An economic rethink is required for the sake of Generation Rent.
Josh Ryan-Collins is Head of Research at the UCL Institute for Innovation and Public Purpose (IIPP) and recently presented a lecture as part of of our Rethinking Capitalism undergraduate module on “Economic land, rent and housing”. These lectures will be released weekly to the public. Follow us on YouTube for more or check this page weekly.
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