If the socially responsible investing criteria (ESG, or Environmental, Social and Governance) that shareholders expect of quoted companies were applied to the national housing market, what reforms would they suggest?
Presumption to build: false assumptions
The policy of ever-more housing assumes that it will outpace demand and so resolve the current housing shortage. But there’s a flaw: the property market does not behave in this way. Increasing supply often draws in buyers from elsewhere; they add to the local demand from buyers anxious about being priced out of the market. Since rising prices suck in more buyers, building more and more homes is unlikely to satisfy demand or stabilise prices. In many respects, housing behaves like momentum investing in the stock market.
Here’s how it fails the E, S and G tests:
New developments can destroy the existing environment – trees store carbon, but so (to a lesser extent) do grass and shrubs. New buildings could be required to incorporate the same amount of plant life as if there were no buildings on the site, as in central Singapore.
A central drive-to-build fails to recognise regional differences and the real issue: the need for low-cost housing, rather than for more expensive houses and flats.
The drive-to-build mindset ignores an inconvenient fact: of the estimated 25m dwellings in the UK, a significant number are left empty, or mostly left empty through using them as second or holiday homes. Instead of relying on building more, better use could be made of the existing housing stock, for example through licensing and a local-people-only sales policy.
VAT distortions
If you repair and maintain your home, your materials are subject to VAT. If you build a new home, the materials come tax-free.
Tests E and S are failed because:
This tax relief can make it more cost-effective to demolish and rebuild rather than improve or extend a property. Because VAT makes retro-fitting more expensive, it acts as a disincentive to improving older buildings. VAT applies to listed buildings as well, even though they’re more expensive to repair.
In recent years, there’s been a greater appreciation of how our surroundings can influence our mood and sense of well-being. People often complain that new housing estates look similar wherever they’re built, whereas older buildings add visual diversity to the “built environment”.
Lax planning controls
Property developers resent planning controls, which aim to target new-builds on regional and social needs, and which are designed to save local heritage and environments. The central government squeeze of local authorities' funding has reduced local planning controls and enforcement.
The E and S tests are failed:
Fewer planning controls make building developments less environmentally responsible. For example, since building on brownfield sites can involve decontamination and other expenses, builders prefer green sites.
Building more expensive homes is more profitable than building cheaper ones, so developers habitually build fewer affordable homes than agreed in the original planning consent. Weak local planning and enforcement increases the risk of inappropriate housing being built.
Council Tax unfairness
The highest rate of council tax is only three times that of the lowest rate and there are many exemptions.
Test failed: S
The annual tax as a proportion of market value is relatively less for more expensive properties. And there are quirks: a house subdivided into flats (in which maybe a dozen people might live) is taxed higher than if it was un-divided, housing maybe just one or two people. Since the annual residential property tax bears little correlation to the current market value, there’s less financial incentive to downsize or rent out parts of larger properties.
Exemptions can be unfair. Students are exempt, for example, so the tax burden falls more on local taxpayers in university towns and cities.
CGT distortions
Homes (“primary residences”) are exempt from capital gains tax.
Tests failed: S,G
Untaxed gains on main residences favour both the wealthy and those who bought when prices were lower. This skews the benefits in favour of the better off and the older generations, so increasing social inequality.
Since you can nominate your primary residence for tax purposes, it may not be the one that’s really your home. For example, single people can get away with each having a different primary residence, even if they live together.
Although these policies encourage the under-use of the existing housing stock and/or lose tax revenues, no political party dares tackle them because of the fear of losing votes. The road to easy wealth some support fosters the urge to buy, especially amongst those who resent being stranded in an insecure rental market. The artificial bolstering of prices by the undertaxation of property (and the overtaxation of income) ties up national resources in unproductive residential property and reduces labour mobility and the potential for economic growth. For those in government quick to demand ESG in companies, maybe it’s time to put their own house in order.
