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In his recent article “How to Fix the Housing Crisis” in Prospect Magazine, Andrew Adonis argues that the public sector must use its underdeveloped land to provide new housing which is badly needed. He concludes his article: “It is bold state action—central and local government leading development in partnership with the private and voluntary sectors, not abdicating its responsibilities to them—which will resolve the housing crisis. With its vast ownership of land, and its powers to plan, develop and finance, government can get the job done, and it has no one else to blame for inaction. It’s simple, really.”
This is a topic which caught the attention of our latest author, Andrew Purves. Below we outline his key arguments and how they relate to the premise of his new book. To read his full response in the comments section click here online.
Purves argues that the problem with the housing crisis is one of price rather than supply. In the private sector prices are very high and the cost of Housing Benefit has risen significantly in the last decade to subsidise the population forced to rent. “What then are the primary causes of the high price of housing? At number one, would be the high price of land. At number two, would be the easy availability of money (from the banks) to make those purchases.”
“How, therefore could we reduce the price of land?” Purves continues, “For the last several decades, anyone living in London could point out great swathes of undeveloped, in some cases derelict, land lying out of use: the 13 acre Battersea Power Station site, for example, or the stretch along the river from Kew Bridge to Syon Lane in Brentford, stretching north to where it meets the M4, both of which are only now being developed. What prevented this from happening earlier, was the ease with which developers can hold land out of use at no cost to themselves.”
Purves proposes that a simple land value tax, based on site value would provide the incentive to maximise the development potential for all pieces of land. A tax on land would have the added advantage of bringing down the price of land, so that the cost of housing would better reflect the cost of building it, rather than the cost of the land on which it is built.
Andrew’s book, published September 2015 is No Debt High Growth Low Tax. It outlines how the governments of Hong Kong and Singapore have used the revenue from leasing land to avoid the enormous debts which other countries have suffered from since the latest financial crisis on 2008. Purves explains how his research can give further insight to the problems and solutions surrounding the housing crisis.
“Adonis makes an interesting point about Hong Kong’s underground railway operator (MTR), which is as much a property developer as it is a railway company. However, he does not explain why this is the case – development and sale of buildings in Hong Kong in fact pays for the railway, and retaining ownership of the station infrastructure allows the MTR to benefit from ongoing rental income to maintain the railway in the future. ”
“Hong Kong provides over 30% of the public with housing at low rents, while in Singapore, 90% of the population lease their property from the publicly owned Housing Development Board, which could provide a useful template for redevelopment in all those land rich London Boroughs.”
So, Adonis’ suggestions of using existing public land to build housing is a good one. However, could this not also be improved by ensuring private owners of land are suitably taxed to ensure that property is made available to those who need it? You can read more about this proposal in No Debt High Growth Low Tax.
‘At the end of the nineteenth century’, wrote the former Governor of the Bank of England, (The British Tax System, Mervyn King and John Kay, OUP, 1990 5th ed.) ‘a movement led by Henry George argued, vigorously, that … land should be the principal tax base. This tradition still survives, although it is apparent that the total economic rents, of all kinds, is not now a sufficiently large proportion of national income for this to be a practicable means of obtaining the resources needed to finance a modern State.’ This is a commonly held idea, even by those who are sympathetic to the idea of taxing economic rent. The authors began their next sentence with: ‘But the underlying intellectual argument for seeking to tax economic rent retains its force’.
Having been convinced of the efficiency and justice inherent in Henry George’s proposal for a Land Value Tax (LVT) to capture the economic rent, the author of No Debt High Growth Low Tax sought to find an example of where it was put into practice. As a frequent visitor to Hong Kong over many years, he became aware that its thriving economy, which had had to cope with housing millions of immigrants fleeing mainland China, was based on a system of leasehold, rather than freehold, land tenure. This means that a substantial part of government revenue is in fact raised from economic rent.
Just how substantial that is, is indicated by the fact that the Hong Kong government is able to fund major infrastructure projects, such as its underground railway and new airport, and education (free from 6-16, with subsidies for Nursery Schools, and higher education through a system of loans/grants for those who cannot afford it) without incurring the high levels of debt burdening most modern economies.
The curious thing, the author points out, is that very few people are aware of how it works, least of all those people who reside there and live with the consequences. The particular form of raising such revenue in Hong Kong is neither a complete system, having been introduced over the years in an ad hoc manner, nor one which has eliminated high levels of inequality.
However, what the system demonstrates is that economic rent is an enormous source of public revenue only partly tapped by the government, which only collects 3% of the rent on an ongoing basis, although it collects more in up front premiums for lease modifications, and new leases. The author outlines some of the features of the system in Singapore which also enjoys/relies on economic rent for a considerable part of its revenue and has no debt.
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