A three percentage point increase in stamp duty may not be the most effective way to address the problem, but Labour’s new proposal is a step in the right direction
Ed Miliband’s housing pledge includes a bold new policy aimed at reducing overseas demand for UK housing. This is not a new issue, but until now little had been done to address it.
Britain is not building enough homes to keep up with demand, and those that are being built are often part of large housing developments priced towards the top end of the market. Rather than easing the housing problem, these new developments make the affordability crisis more severe.
They usually attract overseas investors, some of whom can scoop flats off plan by the dozen, and their presence in the market helps enhance London real estate’s reputation as a desirable asset class, not much different from government bonds and company shares. This in turn attracts even more investors, and since they generally have deeper pockets than the locals, they push up property prices.
This has two knock-on effects. The first is that more and more local buyers are priced out of the property market, and since they need a place to live, they become renters. These ‘nearly homeowners’ are relatively wealthy and can afford to pay more in rent, and the new flats need to command rents that are higher than average, and so rental prices are pushed up throughout the area, affecting those who live in rented accommodation.
The second is that rises in property prices make an increasing number of potential buyers conclude that they will never get on the property ladder. This means that there is no point in saving up for a deposit, and frees up more money to spend on rent. After all, people might be willing to slum it for a few years in order to save for a deposit to buy their own home, but they might as well splurge on rent when that is not an option. This adds an additional upward pressure on rental prices.
Government policies to address affordability must both increase supply and decrease demand. But so far the government has focused on increasing demand through policies like Help to Buy, which benefit a small minority at the expense of making the affordability problem more severe.
Instead, the government needs to restrict demand from those who are not buying property to occupy it or as a long-term investment, as this will help ease the pressure on property prices and rents.
Although a three percentage point increase in stamp duty may not be the most effective way to address the problem, Labour’s new proposal is a step in the right direction. Rent increases will not slow down and we will not have a nation of homeowners until property stops being developed and marketed as a financial asset, and is instead built for those who are looking for a place to call home.
Gabriel Leon is a political economist and lecturer at King’s College London. Follow him on Twitter