UK housing crisis demands overhaul of tax system, experts say

The Resolution Foundation described Healey’s budget as politically motivated rather than economically driven.

Housing represents a complex issue, acting as both a driver of economic growth and a source of instability. Globally, over 80% of investment is directed towards property, with residential real estate dominating. Countries like France and Germany, which previously emphasized mixed housing models, have increasingly embraced property as a wealth-building tool.

Despite past economic downturns, such as the Japanese property crash in the 1990s and the ongoing issues in China stemming from property speculation, the UK’s housing market remains problematic. Property prices remain high, hindering younger generations’ ability to secure homeownership and financial stability. The market is also intertwined with issues like intergenerational financial support and the controversial leasehold/freehold system.

Developers are often incentivized to prioritize profit over quality due to a lack of robust planning guidelines, leading to construction on unsuitable land and poorly designed buildings.

According to Oxford academic John Muellbauer, who has studied the UK’s housing system for nearly 40 years, the system is “one of the most dysfunctional in the world.” In a recent article for the British Academy, Muellbauer attributed current economic and social problems, including the housing affordability crisis, to decades of policy failures, emphasizing the critical role of land markets and taxation.

Proposals to reform council tax into a fairer annual levy and abolish stamp duty have been considered by the Treasury and the Ministry of Housing, Communities and Local Government. While a mansion tax has been introduced, critics suggest it is insufficient, arguing that a percentage-based tax applied to higher-value homes could generate significant revenue. A potential database of homes valued above £2 million could facilitate a broader revaluation process.

While the wealthiest homeowners would be impacted, the most significant short-term effects would be felt by professionals owning homes in London, the southeast, and affluent suburbs. A shift in tax policy, coupled with the elimination of stamp duty, could encourage homeowners to sell and downsize.

Despite some recognition of the need for fundamental change, such as from Treasury minister Torsten Bell, policy has largely remained unchanged. Healey’s budget included revisions to the Help to Buy scheme, increased funding for council housebuilding, a tax on landlords, and measures to address homelessness.

Ultimately, a reformed tax landscape is seen as essential to discourage housing as a store of wealth, facilitate property transactions, and support the construction of affordable homes.