Just Another Brick in the Wall? The London Housing Crisis and Unfair Distribution

Written by Ben Fletcher

We don’t need no wealth taxation. We don’t need no land controls. Re-distribution? Not on our watch. Hey, Corbyn, leave our wealth alone!

As house prices increase, so do rental costs. Recent studies highlight that the average monthly rental cost for a two-bedroom house in London is £1730 [1]. Meanwhile, the London Living Wage pays £10.55 per hour, [2] or approximately £1460 per month, resulting in a shortfall of £234 before considering other needs. Given this, it is unsurprising that 33% of food bank referrals are due to household incomes not covering essential costs [3].

Some argue that increased housing prices are market signals which indicates demand levels exceeding supply [4][5]. This justifies that more houses should be built to increase supply and decrease demand. This may sound plausible, but evidence suggests ample amount of housing has been built to satisfy demand [6]. Whilst over 22,000 residential properties sit vacant in London alone [7], rising house prices are not due to lack of supply.

The redistribution system is supposed to ensure that resources, or income, is shared ‘fairly’ across society [8], although this arguably not so in the U.K. Analysing central policy failures of previous decades related to the house market provides an overview of why.

The shift towards privatisation of the housing market during the Thatcher era saw a decrease in council housing replaced with ‘rent seeking’ private landlords [9]. In efforts to increase GDP following WW2, a deregulation of the finance market and an emergence of buy-to-let mortgages opened new doors for those looking to invest in capital providing easy returns for little effort, including foreign investors [9] [10]. High tax rates on the rich that were needed to sustain the country through WW2 were removed by Thatcher, who argued that such taxes slowed economic growth as there was little incentive to work harder if being taxed heavily [9]. With more disposable income, low interest rates, easy access to buy-to-let mortgages and a desire for an easy life, more properties were purchased by investors. This brings us to the financial crash of 2008 which occurred due to a history of unregulated lending. At this point, banks and lenders were more risk averse which increased interest costs and a decrease in mortgage availability, particularly for first time buyers [9].

The importance of this back story is that it played a key role in allowing vast amounts of wealth to accumulate in the hands of a small percentage of people. Figures show that the top 10% of households hold more wealth than the bottom 50% [10]. This is problematic as the ever-growing amount earned by those at the top is siphoned from the pay of the labour force. More troublesome is that whilst this money sits dormant and unproductive in bank accounts of the privileged few [11], it is not being spent in the market that supposedly takes care of fair distribution by creating jobs and allowing labour income to increase [8] [12] [13]. This is important for several reasons.

Based on the work of Thomas Picketty, we know that one way of reducing wealth inequality requires that income from labour (working) must be higher than income from capital (income from properties or investments) [8] [13] [14]. As housing costs are rising and labour income is not, there is less disposable income available to be spent in the market as there are fewer jobs. This therefore concludes that the current housing crisis directly restricts the reduction of the wealth gap and instead contributes to its growth. This wealth gap is not just about money, it is also about those at the bottom being statistically more subject to a lower standard of living, caused by lack of money [15]. Unfortunately, given that Earths resources are finite, growth and job creation to create a fair economy cannot continue forever [16].

If building more houses hasn’t fixed the housing crisis [6] and policies stemming from the Thatcher-era have founded the mechanisms for unfair distribution [9][10], what is the solution?

Wealth Taxation and Land Tax [8][17][18]. The concept of Wealth Tax looks beyond income taxes which seldom recognise true returns from capital [17]. Increasing inheritance tax would further reduce intergenerational, non-merit-based accumulation [18]. Land tax would discourage those in possession of capital from investing in non-productive economic assets, such as housing through high taxation [8]. This would incentivise alternative investment in human capital or labour-creating opportunities to avoid paying land tax. This combination would allow for steady decreases in returns from capital and increases in labour income returns, thus decreasing the gap between rich and poor. Whilst ideal sounding in nature, achieving such reform is problematic. As billionaires hold the government to ransom with threats to leave the country [19], the concept of such policies is met with controversy and disapproval.

 

 

 

 

References

  1. Trust for London. 2019. Average London rents. [online] Available at: https://www.trustforlondon.org.uk/data/average-london-rents/ [Accessed 8 Jan. 2020].
  2. London City Hall. 2019. London Living Wage. [online] Available at: https://www.london.gov.uk/what-we-do/business-and-economy/london-living-wage [Accessed 18 Nov. 2019].
  3. The Trussell Trust. 2019. End of Year Stats. [online] Available at: https://www.trusselltrust.org/news-and-blog/latest-stats/end-year-stats/ [Accessed 17 Nov. 2019].
  4. Swinney, P. 2019. Yes, supply is the cause of the housing crisis – and we do need to build more homes in successful cities | CityMetric. [online] Available at: https://www.citymetric.com/business/yes-supply-cause-housing-crisis-and-we-do-need-build-more-homes-successful-cities-3804 [Accessed 17 Nov. 2019].
  5. Cheshire, P.and Buyuklieva, B. 2019. Homes on the right tracks: greening the Green Belt to solve the housing crisis. Centre for Cities, London, UK. [online] Available at: http://eprints.lse.ac.uk/102337/1/Cheshire_homes_on_the_right_tracks_published.pdf [Accessed 17 Nov. 2019].
  6. Mullheirn, I. 2019. Tackling the UK housing crisis: is supply the answer? UK Collaborative for Housing Evidence. [online] Available at: http://thinkhouse.org.uk/2019/cache0819b.pdf [Accessed 17 Nov. 2019].
  7. (2018).Home Alone. [online] Available at: https://www.admiral.com/multicover-insurance/home-alone [Accessed 18 Nov. 2019].
  8. Daly, H.E., Farley, J.. 2011. Just distribution. Ch. 23 in Ecological Economics: Principles and Applications, 2nd ed. Island Press, Washington, DC, pp. 441-456.
  9. Stiglitz, J. 2015. The Origins of Inequality, and Policies to Contain It. National Tax Journal. 68(2), pp.425-448.
  10. Office for National Statistics (2018). Wealth in Great Britain Wave 5: 2014 to 2016. [online] Available at:https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016#total-wealth
  11. Nunn, A. 2016. The production and reproduction of inequality in the UK in times of austerity. British Politics. 11(4), pp.469-487.
  12. Maclennan, D. and Miao, J. 2017. Housing and Capital in the 21st Century. Housing, Theory and Society, 34(2), pp.127-145.
  13. Fuller, G., Johnston, A. and Regan, A. 2019. Housing prices and wealth inequality in Western Europe. West European Politics. 43(2), pp.297-320.
  14. Piketty, T., and Saez, E., 2014. Inequality in the long run. Science. 344(6186), pp. 838-843.
  15. Wilkinson, R.G., and Pickett, K. E., 2009. Income inequality and social dysfunction. Annual Review of Sociology. 35, pp. 493-511.
  16. Berman, Y., Ben-Jacob, E. and Shapira, Y. 2016. The Dynamics of Wealth Inequality and the Effect of Income Distribution. PLOS ONE. 11(4), p.e0154196.
  17. Christophers, B. 2017. Intergenerational Inequality? Labour, Capital, and Housing Through the Ages.Antipode. 50(1), pp.101-121.
  18. Neate, R. 2019. Super-rich prepare to leave UK ‘within minutes’ if Labour wins election. [online] the Guardian. Available at: https://www.theguardian.com/news/2019/nov/02/super-rich-leave-uk-labour-election-win-jeremy-corbyn-wealth-taxes [Accessed 18 Nov. 2019].