Cut stamp duty and ease green belt rules

There can no longer be any doubt about it: Britain’s housing market is broken. The consequences of this dysfunction aren’t just falling home ownership rates and eye-watering rents. It’s making our commutes longer as we move ever further away from employment in search of affordable space, our homes smaller as we are increasingly priced out of homes once considered normal, and our taxes higher as high rents push up housing benefit bills. It’s even reducing productivity, employment and incomes as people fail to take advantage of job opportunities because of high housing costs.

The Government has been taking measures aimed at fixing the problem by adjusting tax rules to give owner-occupiers an advantage with lower stamp duty and limiting the deductibility of landlords’ interest payments from the tax they pay on rental incomes. That sounds fair and reasonable, given that owner-occupiers don’t enjoy the same tax relief on their mortgage payments. But these measures do not just represent yet more complexity in our tax code, they also fail to stand up to scrutiny on the grounds of fairness and proportionality.

There’s a rational economic reason why owner-occupiers can’t deduct mortgage interest from their income tax: they don’t pay any tax on the benefit they draw from living in their homes, a concept that is known by economists as “imputed’ rental incomes. Abolishing tax on “imputed” income distorted housing markets in favour of owner-occupancy, albeit with good tax design reasons in the form of administrative transparency and simplicity. However, this is one reason why it is not true to say that landlords enjoy tax advantages over owner-occupiers. Others include the exemption from capital gains tax and the higher limit on inheritance tax for main homes.

Landlords aren’t the only ones likely to lose out, either. Tilting tax rules further in favour of owner-occupiers will switch some property ownership at the margin from tenancy to owner-occupancy. In the cases where this directly leads to a tenant converting into an owner-occupier, the policies will meet their objective. But in some cases, tenants hoping to buy the housing their landlords sell may find themselves being outbid by existing owner-occupiers taking advantage of the lower sales market prices to trade up. This means more housing supply in the sales market, lowering prices. But it also means reduced supply in the lettings market without a corresponding reduction in demand. That will push up rents, which are typically paid by younger people with lower incomes.

As Kristian Niemietz, of the Institute of Economic Affairs, points out: house prices can fluctuate for all kinds of reasons, but in the long term, the decisive factor is the severity of restrictions on development.

All regulations have costs which are borne either by landowners or passed to tenants and buyers, but the most harmful types of restrictions are those which ration the availability of land in places where people want to live.

The green belt, which limits land available for housing, is the most obvious type in this category, but height restrictions and other regulations which limit the density of housing in urban areas have the same effect. The problem here is political. The solution requires allowing more homes to be built on green belt land, taller buildings in cities, more in-fill and bulkier development. Sadly, Mrs May has already ruled out meaningful change on the green belt.

But such a shift could have a substantial effect on housing markets for a relatively small impact on rural and urban areas. Land covered by green belts, for example, has swollen by 127pc since 1979 and the one surrounding London now covers a vast 514,000 hectares. Declassifying just 10pc of it would allow room for the city to grow by an astonishing 33pc.

The Government should rethink its whole approach, ditch the fiddly fixes on landlords’ mortgage interest deductibility and stamp duty surcharges, and instead make meaningful changes to planning rules which will allow more homes on the green belt and taller, bulkier buildings in cities. And it should slash (or ideally abolish) stamp duty.

If it doesn’t, housing will continue to gain salience as a political issue with increasingly unpleasant consequences.

Rory Meakin is research fellow of the Taxpayers’ Alliance

‘The most harmful types of restrictions ration the availability of land in places where people want to live’