No. 2025-25 - Land, Housing and the British Economy: background paper

Abstract:

The multiple ways in which land and the economy interact underline the importance of entrenching socially beneficial policies for land and housing. Many of the UK’s current economic and social problems can be traced to decades of related policy failure. The role of land is strongly dependent on institutions, including land use regulation, financial regulation and property taxation. Subject to deleterious but transformative changes in the 1980s, and persisting to this day, these resulted in high and volatile land prices (with several booms and busts in credit and house prices). The associated speculation diverted financial flows from more productive investment, damaging growth and competitiveness, and increasing financial instability risk. The UK holds the record for the extent of value embedded in the underlying land rather than in buildings. House prices are a weighted average of land prices and housing construction costs (with volatility of the former greatly exceeding the latter). High and volatile land prices are also closely connected with the UK’s housing affordability crisis. Policy remedies require a holistic package. This includes planning reform, land value capture, expanding the social housing stock and reforming a dysfunctional property tax system. The current government recognizes the relevance of the first three, but not yet the fourth. This article details a holistic package of measures and the potential gains from a Green Land Value Tax in property tax reform. Politically feasible designs for less ambitious first steps are discussed.