Submission to Policy Commission on Economy and Welfare
House Price Inflation
Gordon Brown stated in his Budget speech that curbing house-price inflation was a government objective. Since then little has been done by the executive arm of government to secure that objective. The recent decision to raise interest rates to deal with house prices was taken by an independent committee of the Bank of England, though falling outside its terms of reference.
Meanwhile this form of inflation leaves young people without housing: the root cause of successive social evils. Those who do succeed in obtaining mortgages are so hard-pressed by the repayments that they have little to spend on goods and services, when their particular need for furniture, children’s clothing, white goods, etc. should provide the motive force of a well-ordered economy (while the more elderly, who may be beneficiaries of house price inflation, have long ago set up homes which now need only occasional replacement items).
Uncontrolled house–price inflation, being regional and unequal, leaves people unable to move from relatively depressed areas to where there is high-paid work because they cannot afford the higher house prices. (London no longer works as the economic capital of the UK because the working-class cannot afford to move there, as they did in the Thirties.)
While steeply rising property prices in Australia and the US give every indication that the problem is becoming global (probably reflecting a fundamental flaw in modern capitalism whereby Keynesian demand management sets off house price booms instead of the intended increases in production), only in Ireland has a government body, the NESC, taken the logical step of looking at Land Value Taxation (LVT): a logical step, since the alternative of over-extending interest-rate policy is dangerous economically, risking industrial slow-down, even recession and may not work anyway.
At the time of drafting this submission, we have high interest rates, which injure business, and continuing house-price inflation: a real double whammy which the Tory Party are, fortunately, not in a position to exploit. We would contend that interest rates are not appropriate to the task of curbing house-price inflation; that they cannot be low (to suit business) and high (to restrain the property market) at the same time equally; that to curb property inflation they would have to be set so high as to prejudice the interests of business.
The alternative to interest rates is to tax house price increases - something
which would effect the necessary macroeconomic shift without being unpopular,
if other taxes are reduced proportionately on a revenue-neutral basis. As
well as being comprehensive, so that investment would not be hedged into
commercial or agricultural land, as might happen with a housing-only tax,
LVT passes the test of fairness, since it taxes not the fabric of the house,
which the owner may have improved, but the land underneath whose value has
increased from society’s efforts in improving local infrastructure
and increasing the money supply.
In this way the levy is, in fact, a system of compulsory repayments of government
money that has sunk into land values as into a sump.
Therefore, while a typical young couple may pay a £700 a month mortgage, approximately half of this goes to paying for bare earth buried under the building - a literal waste of money, which people abroad with less challenging geography escape paying. People here are already paying a levy on their land; we are simply saying that its product should not remain in private hands when its yield would transform the national finances by a system that would run on simple valuations on broad district lines.
Another approach to house-price inflation is the supply-side method adopted by John Prescott of building a huge number of houses in the South-East. The problem here is that it will take decades for its benefits to work through and the growth areas look like they will become commuter dormitories for London, not the sustainable communities he envisages.
Since gradually lowering the proportion of incomes taken up by mortgage repayments, which is one of the objects of the exercise, will release a lot of extra purchasing power into the non-property / more productive sectors of the economy, it is altogether possible that this will support not only the new cyber-industries so often adduced, but also the revival of older industries producing furniture, toys, shoes and clothing, presently obtained as cheap imports (under arrangements dependent on cheap, foreign labour which look suspiciously colonial). Should there be such a revival, it would most probably centre on the old locations where the necessary skills remain, in the industrial north of England and the Midlands, for instance: miles away from the Prescott growth areas.
It would be better to deal with the house price inflation first by LVT and once it has been removed from the system, develop communities around existing nuclei.
The Labour Party has to make up its mind about its identity: whether it exists to distribute wealth in return for work or to reward owner-occupiers by the current £150 a day for doing nothing.