FINANCIAL TIMES EDITORIAL:
Securing a place to call one's own is a key marker of independence, and a step towards starting a family. Yet for many young people, across many countries, a home has become unaffordable and renting is insecure, expensive, or both — especially in places where the good jobs they want are most plentiful.
Those who bought homes long ago have enjoyed the benefits of tax-free appreciation, a tax-free implicit rental income and, in the case of the UK, freedom from capital gains tax too. Meanwhile, unless they enjoy support from the "bank of mum and dad" or are exceptionally well paid, many in the younger generation are stuck as "generation rent".
This is one of several intergenerational inequities that mar today's high-income societies. Others are job insecurity, mountains of student debt, insecure pensions, inequities in public spending and, above all, climate change. The Financial Times believes it is now time for policymakers to offer a new deal to the young, whose economic prospects have taken a further blow during the pandemic. A series of editorials this week will examine housing, pensions, jobs, education, climate and tax, and how they might be reformed to help the younger generation.
When the FT surveyed young people, respondents from Hong Kong to Shanghai and London said housing costs were one of their biggest concerns. To take the UK as a case study, the purchase of a home has become exceptionally expensive by historical standards relative to earnings, especially in London. The proportion of people in England aged 35 to 44 in private rentals jumped from 9 to 28 per cent between 1997 and 2017.
While average housing completions were 325,000 a year from 1950 to 1970 inclusive, moreover, this fell to just over 180,000 from 1990 to 2019. There has been a sharp decline, too, in the supply of social housing. Much of the stock was sold off under the "right to buy", while new building fell dramatically. In February 2017, then prime minister Theresa May warned that "our broken housing market is one of the greatest barriers to progress in Britain today". She could have been speaking of many other countries.
The high house prices are in part due to the long-term decline in real interest rates. But the solution cannot be to push up interest rates artificially, in order to generate a collapse in house prices, regardless of the costs in terms of unemployment and output.
Taxation of property is incoherent, notably in the UK: the regressive burden of council tax is proportionately much higher for owners of cheaper properties than more expensive ones. Moreover, valuations have not been updated for England since 1991. Reform is urgent: this should consist of a tax proportional to the property value, regularly updated valuations and the capitalisation of the tax for elderly residents, with the balance paid out of the estate.
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Yet the most crucial issue is the inadequate growth in supply, including of affordable housing. To tackle this, governments, especially local authorities, need to be able to acquire land for development at the value determined by existing planning consents.
Local authorities should also gain the bulk of the uplift in value derived from changes to those consents. This would give them an incentive to promote development while benefiting existing residents.
There is a strong general case for taxing land values, rather than buildings. But this will be a particularly important incentive in the case of land with unused planning consents. Nothing could encourage development more powerfully than such a tax.
A significant part of the new financial resources available to local authorities should also be used to build affordable housing for less well-paid people. Large conurbations, in particular, cannot function without such workers.
Finally, the private rental sector is going to remain an important form of tenure. But long-term tenants need greater security: standard rental contracts should be extended to three years.
Housing is a complex issue, with many ramifications. But in many countries, notably including the UK, greater supply is essential, especially in the most economically dynamic conurbations. This will take some radical policy changes. It is time to embrace them.
© Financial Times