Hugo Dixon: How to fix the UK's housing mess

Hugo Dixon: How to fix the UK's housing mess

(Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.)

By Hugo Dixon

LONDON, May 19 (Reuters Breakingviews) - The Achilles' heel in Britain's strong economic recovery is the mess in the housing market.

House prices are rising yet again - by 10.9 percent in the year to April, according to Nationwide (LSE: CCDS.L - news) . This raises the risk of yet another cycle of boom and bust, so much so that the Bank of England recently described rising house prices as the "brightest light" on its risk dashboard.

What's more, there aren't nearly enough new homes being built to cope with the soaring number of new households created by rising divorce rates, people living alone in old age and immigration.

True, house building is on the rise. In the year to the end of March, work began on 134,000 new houses - a 31 percent increase on the previous year, according to official figures. But the number of new houses needed each year to meet demand is about twice that.

The high cost and low availability of housing is already causing political trouble. It is one of the arguments used by the UK Independence Party, which is expected to do well in this week's European Parliament elections, for pulling out of the European Union and controlling immigration.

The housing mess is also prompting Britain's mainstream political parties to come up with foolish policies. The Conservative-led government's flagship scheme - Help to Buy - helps people who wouldn't otherwise have a big enough deposit to buy a home. Its main effect will be to increase demand further, so pushing up prices, rather than increase the supply of homes.

Meanwhile, the opposition Labour Party has promised to institute a type of rent control if it comes to power. That sounds nice for tenants. But it too would rig the market, deterring landlords from building new homes to rent.

A better solution is not to distort the housing market but to remove existing distortions so that it operates more freely.

Top (Taiwan OTC: 8419.TWO - news) of the list is to free up the planning system, so that it is easier to build homes on both greenfield sites and so-called brownfield ones - former factories and the like. The current system artificially restricts the pace at which housing can be built, inflating prices and giving homebuilders an incentive to sit on their undeveloped land banks, knowing that prices will just keep rising.

London and the southeast of England are crowded. So it is understandable that people there don't want lots of new homes to be built on the patches of greenery that remain. But a better balance between the need for green space and the need for new homes needs to be struck.

The tax system also needs reforming. At present, housing is massively under-taxed compared to other assets. No capital gains tax is paid on first homes. Nor is tax levied on the "imputed income" people get from living in their own homes - essentially the fact they don't have to pay rent. What's more, the two housing taxes Britain does have, stamp duty and council tax, both have defects.

Stamp duty is a transactions tax, which rises to 7 percent for properties over £2 million. It therefore gums up the top end of the market, giving people a reason to pause before selling.

Meanwhile, the council tax is a highly regressive charge imposed by local authorities. Take Kensington and Chelsea, in central London. Residents living in the borough's most expensive properties worth over £100 million pay £2,134 a year - only three times what residents in the cheapest property pay.

Labour has promised to impose an extra charge, a "mansion tax", on properties worth more than £2 million. While that would be a step in the right direction, a better solution would be simply to change the council tax to make it proportionate to the value of people's homes - with no cap at the top.

The main effect of such a change would be in London and south-east England, where there is the biggest shortage of homes. People would think twice about whether they needed such big houses. In particular, old people, who no longer had big families, would have a strong incentive to move to smaller homes, releasing more big homes onto the market.

Another change that would help the overheated London housing market would be to change the way "non-doms" are taxed. Non-doms are people who are not domiciled in the UK but who are still living there. If they make an annual payment of £50,000, they can avoid paying tax on their foreign income. While this is a large sum for most non-doms, it is a pinprick for London's multi-millionaires and billionaires.

An alternative, fairer, scheme would be to charge non-doms who don't want to pay tax on foreign income a flat percentage, say 2 percent a year, of the value of their UK homes. That wouldn't just raise money; it might take some of the heat out of the top end of the housing market.

If freeing up planning and rejigging the tax system are the main ways of boosting housing supply, two things still need to be done to restrain the demand. The government should scrap its Help to Buy scheme; and the BoE (Shenzhen: 000725.SZ - news) should ask for the right to cap the size of mortgages relative to the value of a property.

None of these measures would be popular. But failure to act will cause much more damage in the long term.

CONTEXT NEWS

- Bank of England Governor Mark Carney gave his strongest warning to date about the risks of a housing bubble and said the BoE was looking at new measures to control mortgage lending amid a shortage of home building.

- The British housing market has "deep, deep" structural problems, chief among them insufficient construction of new homes, Carney said in an interview with Sky News television broadcast on May 18.

- Average UK house prices rose 10.9 percent in April compared to the previous year, according to Nationwide.

- Reuters: UK housing market has deep problems, says BoE's Carney

- For previous columns by the author, Reuters customers can click on

(Editing by George Hay and Carol Ryan)