Housing crisis and land values - tax change needed to deal with trade cycle

This letter to the editor, only slightly edited, appeared in The Herald 7.1.08
An Aberdeen estate agent [House prices in Scotland see fastest rises in UK - Herald 5.1.08] says the housing market "is still very healthy and still going up." Surely this just shows that property owners and sellers have one view while the struggling first time buyer has quite another. In short, property owners want rising prices to enhance their 'investment' potential, first time buyers want stable lower prices.

At the same time Scotland as a nation loses many young and able families who just can't afford to live here. As we ought to know the housing boom eventually leads to a crash every 18 years or so. 1992 was the last nadir full of negative equity and repossessions, and yet Gordon Brown tried to ignore this iron rule and merely promoted the consumer boom to mask the underlying property crisis. Subprime has bitten him on the backside along with other 'prudent' economists across the globe.

Here in Scotland we have to address this mess. I would suggest we go to the heart of the matter: too little land in favoured locations for new builds and too high of prices near work for most people while meanwhile the price of farm and estate land soars to an all time high despite the credit crunch. With the cost of bricks and mortar rising on a far less inflationary curve the issue boils down to land availability.

Our planning system has enriched landowners in the favoured zones for development, but there has never been a serious attempt to levy land rent since Lloyd George's People's Budget of 1909 to support the less wealthy. A land reform review due in the Parliament is very urgent and the ongoing Scottish Government consultation on the Future of Housing in Scotland must address these issues. For a start far more land must be freed for building sustainable and affordable homes.

New studies on water needs and simpler utility servicing should point to ending the ban on appropriate housing development in the countryside. If existing land holders are short of cash then site sales can help, but if a far greater number are put on the market by changes in the law the prices of plots will naturally fall. There's been far too much speculation in housing in these past decades. Now is the time for bold action to make it possible for Scots to live affordably in their own land and for landholders to contribute - through a levy on land values - to local councils who have to deliver the planning and infrastructure.

RG

Commentary -

Three months have passed and the depth of the shock to world banking is plain. Sub-prime bank losses are slowly and painfully revealed leading to a credit squeeze that hits first time buyers hardest. But keeping our heads down is no responses. Nor is criticism of small countries like Iceland targeted by speculators, or Ireland whose phenomenal climb to GDP levels higher than the UK is based on inflated property values for most of its better off citizens. Ireland still has a growth rate above the UK's sluggish performance. So when the richest economy in the world shivers in a global market we all catch cold in different ways.

Gordon Brown, when New Labour Chancellor, said "Most stop-go problems that Britain has suffered in the last fifty years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market."

What jumps out from the financial pages and newscasts is the pain and attempted adjustment - not a deeper analysis of a recurring problem that used to be specific to each national economy but since the end of communism has become truly worldwide. Fred Harrison is Director of the Land Research Trust in London. His work on tax reform in favour of a land value tax is long recorded. Perhaps most urgently, his book Boom Bust - house prices, banking and the depression of 2010 published in 2005 by Shepheard Walwyn Ltd caught the crisis we are living today most graphically and accurately.

He traces the 18 year cycle back to the time it took a 17th century artisan to build and pay for his home at around 14 years, the average working life of a man in these days. With some modern tweaks that trade cycle is around 18 years - 1992 being the last deep depression. (Read the book to glean the arguments) However he also shows examples of how some fiscal regimes have weathered the storm better than others. Various states in Australia did far better than others when Land Value Tax was adopted.

So what is going on?

Rent for assets is extracted by landlords, speculators and, occasionally as in the case of London, congestion charging by public bodies. It is that rent which we all should be paying to allow good government, not speculation. Making profit from an immovable asset, land is at root self-defeating. Harnessing the power of rental value from scarce land in desirable locations is the theme of real tax change. Henry George campaigned for it to be a single tax in the late 19th century. He witnessed a property boom in San Francisco that penalised the poor who were nevertheless essential to the functioning of the city. His ideas were hugely influential but opposed tooth and claw by landed and property owning classes. A good set of examples show the principles at work as mentioned in Australia, Pennsylvania and Denmark to name but three.

Small and large nations, municipalities and regions can all apply the principles if they have fiscal powers. What has to happen is to empower the people through reducing the speculative value of property. I have watched land prices rocket on farms and in cities. I know many are perplexed but we need a radical tax change to capture that rental value for the common good. I'll be glad to share more details with the growing band who see LVT as the next big tax reform.

RG 7.4.08