The housing crisis is more than a mere shortage of houses. Too few homes is just a different way of saying too many buyers, but it has been taboo to question who buys UK homes and why. Surely the Panama Papers revelations about the London property empires of an international rogues’ gallery of crooks, despots and oligarchs is a game changer. It’s time to send a clear message that the proper use of UK homes is for UK residents to live in.
There is no doubt that the housing crisis in London has become too big to ignore, with 50 business leaders issuing a stark warning that it is an existential threat to London’s success. London is not the only place where Generation Rent faces an impoverished and insecure future because of the dysfunctional UK housing market. In St Ives, a seaside idyll to London eyes, local frustration with homelessness co-existing with darkened, empty second homes has prompted a forthcoming vote on restricting second home ownership in the town.
The stock response is “build more homes”, and of course we should endeavour to do so, but this is not going to solve the problem by itself, and it cannot relieve pressure any time soon. The causes of the housing crisis are manifold: it is a 'wicked problem'.
At a minimum any successful long-term reform must address: patterns of land ownership, lack of effective competition in housebuilding, cumbersome bureaucracy, tax policy, bank and credit regulation and social and cultural attitudes. And it must address these factors simultaneously in a holistic package of policies. Prepare the pigs for take-off.
For now, we must seriously question the most unnecessary and unproductive distortions to the housing market and this is where the Panama Papers come in.
Let’s leave aside for now how distasteful it is for UK property to be used as a store of wealth for criminals and dictators. With over £100 billion of London property purchased by foreign buyers in the last six years alone, it highlights a broader economic distortion too. The use of homes as a speculative asset for global elites stands in direct opposition of the use of homes for people to live in. This happens in two ways.
First it results in more empty homes, because such investment properties are rarely lived in as a permanent residence. This is a woeful misallocation of bricks and mortar that should be employed in its intended use as a home.
Second, it contributes to pushing up the price of all housing beyond its natural level and creates a chain reaction whereby professional workers who used to be able to afford to live in Zone 1 and 2 in decades past are pushed to Zone 3 and 4, displacing less wealthy Londoners further out and so on. Ultimately, the upward pressure on house prices ripples out down the rail commuter lines into the home-counties causing affordability problems for locals who do not earn London salaries. And although many workers choose to commute there are also many who would happily move closer to their London jobs if they could afford to, relieving the South East’s creaking transport infrastructure and releasing time for something more fun than travelling to and from work.
So if we need to choose between these two uses of UK houses – as homes for UK residents or stores of wealth for global tax dodgers – which should we choose? I hope the former is the winner but as ever the real question is the practical one. What can be done?
Here is an idea: only UK residents can own UK residential properties. Let’s look at the detail of how this might work.
Who is a UK resident?
This would include all social landlords, local authorities, UK domiciled companies and organisations and of course UK citizens. Importantly, it would also include non-UK citizens who are resident in the UK for tax purposes and those who are not ordinarily resident here but choose to make the UK their tax domicile, bringing their worldwide income and assets within the remit of UK taxation. Note that this is not ‘anti-foreigner’ or aimed at preventing non-UK citizens coming to work in the UK. Quite the opposite – it is aimed at ensuring they can find somewhere to live when they get here.
What is a UK residential property?
This should be straightforward – any property classed as C3 or C4 under the Town and Country Planning (Use Classes) Order 1987 (as amended).
What would happen?
This would mean that if ‘non-doms’ wish to own a house in the UK they will have to show their commitment by choosing to pay UK tax. They are free to choose not to, and sell their residential property.
All of the offshore-owned properties that serve as secret lock-ups for global criminals will have to be sold. As well as bringing empty homes back into use this would help end the stain on Britain’s reputation of being one of the world’s favourite money launderers.
If the legal mechanism to force sales in this way proves too troublesome, particularly if provisions on home ownership cannot be applied retrospectively, very high annual levies on land values for non-UK resident owners should achieve the same result and bring in much needed tax revenue in the meantime.
Would this cause a housing shock? Any policy proposal developed along these lines would have to assess this. Certainly luxury property prices would fall, but by the time this rippled down to the kind of 1 to 4 bedroom homes that mere mortals aspire too, the pent up demand should cushion prices from any great fall.
One other potential benefit? If the secret owners of any of these properties choose to reveal themselves as UK residents and taxpayers who have earned their wealth in an honest fashion this would be something to celebrate.
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Interesting article that highlights a serious problem with property availability in the UK. We must accept that this is a greater problem in London and the South more than in other regions.
There are two draw backs to the proposition made to restrict property ownership to UK domiciled or taxed persons.
First, the flow of investment funds into the property market is not an altogether bad thing as it helps many sectors of the economy.
Second, whether UK domiciled or not, a non resident person does not have the automatic right to choose to be taxed under UK tax rules or not. This depends on the country they are residing in and what double taxation arrangements are in place with the UK.
I believe, there are less dramatic actions that can be taken to reduce the lure of purchasing properties by the corrupt that can be started easily. First, is that we need to classify properties as residential or commercial.
Second, that we have real beneficial owners names on the title deeds. The use of off shore or shell companies to purchase properties allows the corrupt to hide their money. We should no longer accept that we have a company name registered as owner of residential properties. The true owner and not their solicitor or other facilitators should be on the register.
While some of the problem relates to offshore owners, the real problem is that homes have been turned into investments rather than places to live. I became the national hobby back in the seventies when mortgages were relaxed. A deliberate policy of keeping housing supply down while pouring money into the buyers hands, created a phoney 'value' for housing. We feel like our properties are 'worth' more than they really are, while the mortgages have been a way for the banks and wealthy to syphon money from the system. The result we have now is that housing 'costs' much more than the bricks and mortar it represents. Our own greed has created has created this problem, our children now have the problem this has caused. We need to stop the cycle, not add taxes.
This seems a sane proposition but seems a bit london centric. Part of me says forget London, go and live somewhere where you can at least breathe the air. More seriously, it would not solve the speculation by UK residents and building the wrong types of homes elsewhere. Is there scope for councils to use publicly owned land more sensibly. I've seen this sold with only standard 'percentage of affordable housing' being the only criteria. Could we not develop leasehold models to retain a level of control and whereby you share ownership of communal rooms, office space, heating systems even spare bedrooms. This could provide attractive homes to live, develop community space that it is the interest of residents to maintain and reduce footprint but I would imagine pretty hard to speculate on.
As it happens I moved out of London to live in Devon a long time ago, Mary! But the London market corrupts so many others. The huge affordability problem in the Southwest is fuelled by inflated London property prices driving up the price of property here through second homes and Londoners moving down with pockets bulging with the untaxed gains on their London houses.
But on your second point, I completely agree that we should encourage innovation in forms of land ownership, financing, building and management of homes and I hope the RSA can look at examples of this over the coming year.
I have two concerns here. One is that many people who create the wealth for the UK (if not the City of London) do not always live in any country long enough to be a tax payer (which means you have to stay in the UK 183 days per year or more). These people still add to the economy, and its not always foreigners who buy UK property but also UK Expats who work abroad but will retire to the UK at some point - perhaps reduce the number of days you are living in the UK to be eligible to pay tax perhaps?
Secondly, this article seems to be doing the same as the UK press in saying that only crooks and tax evaders are using offshore jurisdictions eg Panama. Global trade would come to a grinding halt if there were not ways and means to create offshore companies for cash raising for e.g. Hinkley Point Nuclear Power station. Under the Common Reporting Standards under the OECD that will come into law in 2017, all offshore jurisdictions of any merit will require to share information on foreign nationals investments - and the days of hiding money in Switzerland or even Panama are coming to an end - that does not however mean offshore companies are bad and as evil as suggested here.
Thanks Callan. In working through the detail of such a policy I would envisage an exception for entrepreneurs who are bringing direct investment to the UK. I don't mean purchasing financial securities but directly financing companies to fund new investment.
For others, I don't see why they can't rent. It's good enough for the Governor of the Bank of England.
Your point about tax havens is interesting. Many of the worst abuses happen onshore in places like Delaware, USA, so we should not get distracted by the cliche of the tropical island. I accept there might be a useful role for small neutral territories to act as hosts for multi-national investment partnerships but this feels like a small part of the business that actually flows through them and it certainly does not require secrecy.
Unless addressed this problem is only going to get worse. I think this article advances a very interesting proposal. Even though there may be practical hurdles to overcome in its implementation, it would be great to see further research or even a pilot.
Thanks Andy. We certainly would like to do more at the RSA to help find solutions to the housing crisis.