How Britain’s broken housing market is crushing growth
A dysfunctional property market is excacerbating Britain's productivity crisis
Britain's economy is in the doldrums, with high taxes, high inflation, and a decline in the size of the workforce all holding back growth.
But another, less-cited factor is also holding us back– our housing market.
A failure to build enough housing has left more and more money trapped in land rather than more productive investments, according to John Muellbauer, economics professor at the University of Oxford and a former government adviser.
Whats more, the out-of-kilter housing market is stifling growth by making it difficult for people to move close to economic hotspots, says Muellbauer. It also forces people who can’t get on the housing ladder to pay more and more of their salary towards rent, harming their long term job prospects as a result.
Muellbauer has written a report for the Organisation for Economic Co-operation and Development (OECD) on the case for overhauling the property tax system and replacing stamp duty and council tax with a green land value tax.
The findings will make for unhappy reading for Chancellor Jeremy Hunt, who is desperately trying to kickstart Britain’s flatlining growth. While much of Hunt’s attention has been focused on growing the size of the labour market, Muellbauer’s report suggests addressing festering issues in the housing market will also be crucial.
The UK is more prone to credit-fuelled real estate booms than other countries, says Muellbauer, as a result of a toxic cocktail of poor Government policies, a failure to build social housing, bad taxation, our system of land ownership rights and our broken planning system, he argues.
“Compared to countries of a similar size, I don’t think any other country has more volatile house prices than the UK.”
Evidence suggests that house price booms are bad for productivity as the rising value of land sucks up funds that would otherwise be put towards more productive use.
“They crowd out more productive investment, with negative consequences for sustainable growth, as well as increasing crisis risk,” says Muellbauer.
The price of properties in Britain relative to the cost of constructing is also far higher than in any other economy in the G7. Muellbauer estimates that average house prices are over three times more expensive than their cost of construction – a home that cost £100,000 to build would typically sell for around £317,000. That means £217,000 of its market value is in the land. Read More…
