THATCHER'S BRITAIN:

If Brown gets his way, house prices will fall. Bring it on: Property taxes are political suicide - but there is a way to end the boom (Larry Elliott, August 13, 2004, The Guardian)

The assumption is that mortgage payers are so over-extended that each tiny upward move in interest rates adds to their already intolerable financial burden. Figures from the Bank of England show, however, that the group of people really struggling to keep their heads above water are those in social housing, followed by those in rented accommodation. A much smaller number of those paying mortgages are struggling. True, the value of their debts have risen during the housing boom, but so has the value of their prime asset. The poor don't have assets, just debts.

House price inflation exacerbates the social divide. It benefits those who have a house at the expense of those who don't; it benefits those who live in rich areas against those who live in poor areas; it benefits the old trading down into smaller properties at the expense of the young trying to get a foothold on the housing ladder; it benefits the rentier making money out of money at the expense of those seeking investment in new productive capacity. Rampant house price inflation is bad for Britain. Why do we put up with it when we know that each previous boom has been followed by a bust? Simple. The politics are hideous.

Suggestions for reforms that might limit house price inflation are plentiful enough. John Muellbauer of Oxford University has proposed that the regressive council tax should be replaced by a Danish-style property tax. Under the Danish system, there is a 1% tax on the market value of most owner-occupied housing, with higher marginal rates for the most expensive homes and a lower rate for those aged 67 or over. Denmark has had more balanced growth than Britain, Muellbauer argues, because there are built-in stabilisers to prevent the housing market from booming out of control.

In terms of economics, this makes sense. Politically, however, the parties see it as a suicide pill. The average house price in London is nudging £300,000. A 1% property tax would mean an annual bill of £3,000. Tax bombshell, anyone? But even if a government were to levy the tax at a lower rate, there would still be an outcry. As there will be if ministers reform the council tax to make the rich pay more and the poor pay less. As for capital gains tax on main residences as well as second homes, that is strictly for the birds. We're talking here of Basildon man and Worcester woman. We're talking swing voters in key marginals, who are worried sick sick sick about what's happened to the value of their pensions under Labour. They don't take kindly to the idea that their only other source of wealth - their home - will be subject to higher taxation.

Equally contentious is the alternative proposed by Kate Barker, a member of the Bank of England's monetary policy committee, which was to build more homes. This, she said, would help to bring demand and supply into better balance, keep prices in check and provide an opportunity for those excluded from the property market to become owner-occupiers. This was met with predictable headlines about the obliteration of the green belt and the concreting over of every field in southern England. Some of the criticisms of the Barker report were thoughtful, constructive and valid; others were plain nimbyism. The middle classes are doing very nicely, thank you, out of the current system; they don't want higher taxes, they don't want building on greenfield sites, and they don't really want brownfield development either. The hoi polloi not only spoil the view; they affect house prices.

Clearly, then, we are not going to see any radical new policies this side of the election. There are signs, however, that housing may feature in Labour's third term - if it gets one. Gordon Brown is thinking about ways in which the state could provide financial help to those on low incomes unable to buy their own homes. The plans are at an early stage, but are likely to be consistent with the rest of Brown's tax credit regime: generous but heavily targeted.

Such a proposal may be more politically acceptable than property taxes or a new mass house-building programme, and it would add a progressive tone to Labour's manifesto since it would be aimed at the 30% of people who are neither owner-occupiers nor in the process of buying a home. The roots of social exclusion lie in the lack of a job, a decent wage and a stake in the property market. Tackle those problems and you have a better chance of getting to grips with the other chronic problems, such as crime, drugs and under-achievement at school. It might do something about political disengagement too.

Does it get any more delicious than a formerly socialist party pushing private home ownership as a cure all?

Posted by Orrin Judd at August 13, 2004 8:55 AM