The EU commission has made some policy recommendations for the UK economy. Here we focus on the comments on housing.
The United Kingdom has taken both demand and supply side measures in the area of housing. Although the supply of new properties has risen, it remains low and has fallen short of demand by a considerable margin. This has combined with low
interest rates and easier terms for mortgage lending (such as higher loan-to-income multiples) to push up house prices in certain parts of the United Kingdom particularly in London. A shortage of supply has long been a structural phenomenon
and is likely to extend into the medium term. Action is needed to further boost the supply of houses – by creating appropriate incentives to raise supply at the local level. The authorities should continue to monitor house prices and mortgage
indebtedness and stand ready to deploy appropriate measures, including adjusting the Help to Buy 2 (loan guarantee) scheme, if deemed necessary. There is a need to
increase the transparency of the use and impact of the macro-prudential regulation of the housing sector by the Financial Policy Committee that could be deployed to address excessive house price rises and increases in mortgage indebtedness.
Reforms to the taxation of land and property should be considered to alleviate distortions in the housing market. At the moment, increasing property values are not translated into higher property taxes as the property value roll has not been updated since 1991 and taxes on higher value property are lower than on lower value property in relative terms due to the regressivity of the current rates and bands within the council tax system.
Comment Another day another contribution! But are the suggestions workable or desirable? We question the sole focus on supply with the consequent ignoring of demand factors – what about the role of investors in London – many from abroad who see London as an investors paradise? what about the extra demand created by population inflows?
As for incentives at the local level – what more do they think we need? They seem to have taken on board the assertion that developers find it difficult to get permission for developments! Not something we had noticed in Cornwall.
As for property taxes while it is true that the owners of higher value properties pay less proportionately than households with lower value properties we are not convinced that a simple change to council tax banding would resolve this. In essence property taxes are regressive as they take no account of income. Property owners in London who have seen values rise but not incomes would not gain from increases in council tax. A better approach would be to create a mixed system based on house value and income.
Even this would probably not cut demand as much as is implied by supporters of higher council taxes. It is hard to envisage higher council taxes that would actually deter the very affluent from buying property. How much council tax would the EU suggest that Michael Bloomberg (former New York Mayor) pay on his £20 million London home? He’s a billionaire so its hard to imagine he would have a problem stumping up the cash!
The other defect of focusing on property taxes is that for some they are regarded as a good source of income, house values rise and tax returns rise. But that does not solve the issue of housing affordability or availability! What we really need is a system which restricts ownership of property, but the EU is wedded to the free movement of money and people – an approach which some may see as a virtue others as a fundamental error of the European project.