James Jirtle writes to me:
I am a long-time reader of your blog (and your books!) and hugely enjoyed your recent interview with Camille Paglia.
I was wondering whether you might consider writing a post about potential policy responses to the housing crises in many major cities, perhaps nowhere as acute as in London where I live.
London is a bit of a perfect storm: (i) restrictive planning regimes, preventing the building of new homes; (ii) a strictly-enforced “green belt”, limiting the physical expansion of the city; and (iii) huge inflows of both people and capital (both foreign and domestic, in the form of buy-to-let investors) driving up demand.
The average London house price passed £500,000 last November (http://www.telegraph.co.uk/finance/property/house-prices/11959731/Average-London-house-price-hits-500000-as-capitals-housing-market-shows-no-sign-of-losing-steam.html) and average rents for a 1-bedroom flat now exceed £700/month (http://www.workgateways.com/working-in-the-uk/cost-of-living).
Various policy responses have been proposed, including:
- raising stamp duty (tax on the purchase of a home – the UK government recently raised rates on homes worth more than £500,000, and introduced punitive rates on purchases of second homes);
- raising council tax (property tax – where a property is rented, this is paid by the tenants);
- “bedroom taxes” on unused bedrooms (currently in place for social housing);
- increasing taxes on private landlords (the UK government recently removed the ability of landlords to deduct mortgage interest, and capped deductions for repairs);
- loosening planning restrictions and taking other actions to combat NIMBYism;
- building on the green belt;
- deposit assistance for first-time buyers (the UK government currently underwrites mortgages of up to 95% LTV for first-time buyers for properties worth up to £600,000 and has introduced savings accounts where the government adds 25% to savings used to purchase a new home, contributing up to £3,000);
- punitive taxes on unused planning permission;
- direct price controls;
- restrictions on foreign ownership of property; and
- increasing interest rates.
Which of these (if any) do you think are likely to be effective? Are there other policies which might be beneficial that I haven’t listed? Politicians here have spent a lot of time bemoaning the crisis, but I don’t have much confidence that the solutions currently being proposed are likely to help. Ideally, I think the goal should be to enable those who live and work in the city to live in reasonable, affordable comfort without causing those currently on the housing ladder to lose significant amounts of money. But maybe we’re already beyond the point where that’s possible?
TC: I say we are probably beyond the point of fixing it, though marginal improvements surely are possible. Here is a good feature story by The Economist on the problem.