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 land and housing policy failures. The role of land is strongly dependent on institutions,
including land use regulation, financial regulation and property taxation. Transformative but deleterious changes to the institutional framework in the 1980s, that have persisted until recently, have 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. House prices are a weighted average of land prices and housing construction costs (with volatility of the former greatly exceeding that of the latter). The UK holds the record for the extent of value embedded in the underlying land rather than in buildings. 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 has recognised the relevance of the first three, but hardly 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 also discussed.