What to Do about London Housing
By David Henderson
James Jirtle, a long-time reader of Marginal Revolution, recently wrote Tyler Cowen and asked his views about what to do about high housing prices in London. Mr. Jirtle listed 11 proposed responses and asked which Tyler thinks “are likely to be effective.” Tyler didn’t answer with reference to any of the 11, but concluded that “marginal improvements surely are possible.” I agree, and I was surprised that Tyler didn’t say more on a blog titled “Marginal Revolution” and subtitled “Small Steps Toward a Much Better World.”
Rather than copy his whole list of 11 and then respond, I’ll list each and respond immediately after to each. I take it from the other parts of his letter that Jirtle wants solutions that make it easier for people to own and rent without causing shortages. I’ll cover the straight economics of it, not the morality of various solutions. JJ means James Jirtle and DRH is David R. Henderson.
JJ: Raising stamp duty (tax on the purchase of a home – the UK government recently raised rates on homes worth more than £500,000, and introduced punitive rates on purchases of second homes).
DRH: This will drive up prices further. The best-case scenario is where the supply is vertical (perfectly inelastic), in which case it would not raise prices at all, but would simply punish owners and reduce mobility. With any slope to the supply curve, prices would rise.
JJ: Raising council tax (property tax – where a property is rented, this is paid by the tenants).
DRH: Somewhat ditto the reasoning above. With any degree of elasticity of housing supply, this would raise prices.
JJ: “Bedroom taxes” on unused bedrooms (currently in place for social housing).
DRH: Extreme degree of government intrusion required. Makes home owning less attractive for anyone. Could cause some bedrooms to be rented out, increasing effective supply, but the more likely response would be finding uses for bedrooms. Home office or storage, anyone?
JJ: Increasing taxes on private landlords (the UK government recently removed the ability of landlords to deduct mortgage interest, and capped deductions for repairs).
DRH: Reduces supply and raises prices.
JJ: Loosening planning restrictions and taking other actions to combat NIMBYism.
DRH: Increases supply and causes prices to fall.
JJ: Building on the green belt.
DRH: If he means allowing building on the green belt, this would increase supply and cause prices to fall.
JJ: Deposit assistance for first-time buyers (the UK government currently underwrites mortgages of up to 95% LTV for first-time buyers for properties worth up to £600,000 and has introduced savings accounts where the government adds 25% to savings used to purchase a new home, contributing up to £3,000).
DRH: Makes it easier for first-time buyers to buy, but the increased demand makes prices higher than otherwise.
JJ: Punitive taxes on unused planning permission.
Reduces supply, making prices higher. Increases supply, reducing prices.
JJ: Direct price controls.
DRH: Discourages supply of new housing, causes conversion to offices, reduces maintenance on housing stock (which means an effective reduction in supply), and misallocates housing among demanders.
JJ: Restrictions on foreign ownership of property.
DRH: First-order effects on housing supply would appear to be small. Could be substantial decline in demand from foreigners, which would cause prices to fall, but one of the main effects would be an increase in the number of foreign renters, which would offset the fall.
JJ: Increasing interest rates.
DRH: Which interest rates and how? Can’t say more without knowing the policy change that changes interest rates. Remember that interest rates are an endogenous variable.
Update: I misunderstood the tax on unused planning permissions. I now understand, I think, that it means that you get approval to produce housing and you don’t use it. Bryan Caplan’s comment below made me aware of that.