House price inflation has been one of the greatest sources of inequality in this country. Bearing in mind the differing prevalence of homeownership among different demographic groups and the different average values of the homes owned, it redistributes wealth from poorer to richer, from younger to older and from the rest of the country to London and the South East. It is difficult to argue that this redistribution has been from the undeserving to the deserving.
What if governments wanted to do something about this? For a start, they could stop fuelling house price inflation through the succession of ludicrous short-term fixes that focus on boosting the demand for housing. The latest example is the so-called “help to buy” scheme, which one wag, reacting to the consequent spectacular increase in the profits of housebuilders, tellingly referred to as the “help to buy yachts” scheme.
Meanwhile, governments could facilitate a massive expansion of housebuilding which would increase the supply of housing and thereby lower its price. But governments have been banging on about increasing housebuilding for ages, and yet seem to be incapable of delivering. This Government was going to radically reform the planning system in order to release more land for housebuilding, but recoiled in the face of opposition from key voting groups.
Another approach would simply be to tax property gains through the introduction of a wealth tax, including residential property. Or the current exemption of owner-occupied residential property from capital gains tax could be dropped, as recommended by the Mirrlees Review into our tax system, published in 2011. Given the will, taxing property ownership would allow taxes on earnings from work to be lower. But the political barriers against taking any action along these lines are formidable.
That makes this sound like a UK-specific problem. Yet, over recent years property prices have soared pretty much throughout the developed world. You don’t need to be John Maynard Keynes to recognise the common feature that explains this striking international phenomenon. It is extremely low interest rates, aided and abetted by the policy of Quantitative Easing, which has pumped huge amounts of money into the system. Whatever the merits of this loose monetary policy, we need to recognise its downsides. One of them is increased wealth inequality, and this enables inequality in consumption to be greater than it would be because of income inequality alone.
Whatever difficulties may be created as interest rates rise, there will be a silver lining. As rates of house price inflation fall back to near zero, then this engine of inequality will grind to a halt. For a while, it may even go into reverse.
Roger Bootle is chairman of Capital Economics.
Send him an email at: roger.bootle@capitaleconomics.com
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