In this blog, SMF Deputy Research Director makes the case for adding a 7th pledge on Labour's pledge card. He's making the case for tripling the number of social houses built, funded by taxing long term empty properties, house-flipping and overseas owners.
Labour’s new six point ‘first steps for change’ card is dropping into digital wallets across the country. They squeezed in one more pledge than New Labour did in 1997, but I’m sure I won’t be the first to make the case for a seventh, in this instance: “Triple the number of social houses built, funded by taxing long term empty properties, house-flipping and overseas owners”.
Keir Starmer made a housebuilding target and planning reform the centrepiece of his party conference speech last autumn, but this policy area has not been afforded pledge card status. Perhaps that reflects the difficulty of making quick progress, or the political palatability of planning reform among marginal voters. Also, many of the promises revealed yesterday twinned an outcome with an explanation of how it would be paid for. The 6,500 new teachers, for example, will be paid for by introducing VAT on private school fees. If they are looking for a funding stream to associate with their housing ambitions, then SMF has a suggestion.
Our recent series of reports on housing compared policy in the UK with overseas, to ask what lessons could be learned. We are not the only country that has faced declines in homeownership and soaring house prices in recent decades. One tactic deployed internationally has been taxing behaviours that hurt the prospects of citizens getting on the housing ladder. In his paper, my colleague Gideon Salutin estimated that introducing these taxes in the UK could generate as much as £4bn in revenue, depending on the extent to which the taxes discourage these actions.
The funds raised should be earmarked for social housing. We estimate that they would triple the number of social homes built from under 10,000 to over 30,000 a year.
Table 1: Potential tax revenue raised by housing ‘fairness taxes’
Source: SMF analysis
Vacant Property Tax – £2bn raised a year
Canada taxes vacant homes at 1% of their value each year at the federal level, with additional levies sometimes applied at the provincial and even municipal level. With annual house price growth of 7.5% a year in the country since 2010, the return for investors is still strong. After these measures were instituted in British Columbia, there was a 27% fall in the number of vacant properties. A similar vacancy tax in Melbourne, Australia, however, has had little effect on vacancy rates, but has proved lucrative for the state budget.
There are 676,000 vacant properties in the UK according to council tax records, which are likely an underestimate. At an average value of £300,000 a piece, an annual value tax of 1% would bring in up to £2bn a year. Alternatively, a tax could be focused on those properties vacant for a longer period. There are 248,000 properties which have been vacant for over a year. Applying a steeper charge, perhaps 3% a year as Victoria state is proposing, would also raise over £2bn a year.
Non-Resident Purchases Tax – £1.35bn raised a year
Rampant house price growth has attracted foreign capital flows into the UK and other hot markets, placing them in competition with citizens for these assets. New Zealand banned foreigners from purchasing existing homes in the country in 2018 under most circumstances. Other countries didn’t go as far, but implemented fees on non-resident buyers.
In Britain, non-residents currently have to pay an extra 2% on stamp duty. The New Economics Foundation has suggested trebling this and putting the proceeds towards social housing. Equivalent taxes can reach 15% in some Australian states, and up to 25% in some parts of Canada. Foreign purchases were already falling in Australia before the introduction of these measures in 2016 and 2017. They dropped from 16% to 3% of total property transactions from 2015 to 2021, but the share sold to foreign buyers has since recovered to 10% in 2023. This suggests that the role of the taxes in these changes is uncertain.
We estimate that around 16,000 properties are sold to non-residents each year in England. Assuming these are worth on average £300,000 each, taxing 25% of their sale value could bring in more than £1.3bn. A gentler approach with a 10% levy would still generate around £500m.
Rapid Sales Tax – £0.55bn raised a year
Property speculators can buy and sell homes quickly to maximise profits, as a stockbroker would shares. This can inflate prices and overheat property markets.
Australia and Canada tax all capital gains made from property if the sale is within a year of purchase. This is a short wait when property sales typically take months anyway. In New Zealand, property sales within 10 years of purchase are taxed as income which is much more of a disincentive for flipping.
In England, around 25,000 homes are sold within 12 months, or ‘flipped’ each year, generating around £1bn in profit. Taking even half of these gains for the exchequer would net c£500m a year, before the impact of any behaviour change is taken into account.
Investing in Social Housing – up to £4bn invested a year
Taxing vacant properties, ‘house flipping’, and non-residential purchases can be a win-win. If these behaviours reduce, then that improves the supply available for those striving to get onto the housing ladder. If they do not reduce much, which is more likely based upon international evidence, then the taxpayer gets a windfall, which can be used on other measures to support the housing market. This could be worth as much as £4bn a year, and we suggest investing any gains in building more social housing.
In 2023, only 9,561 social homes were built in England. With 22,023 sold or demolished, the social housing supply continues to shrink. The National Housing Federation estimated in 2019 that a grant of £183,000 on average would be required from central government to fund the cost of building a social housing unit in the period of 2021-2030. A £4bn windfall from housing ‘fairness taxes’ could triple construction to over 30,000 social houses a year. This number remains modest compared to the highs seen in the mid-20th century, but would at least get the social housing stock growing once more.
If the funding was spread to ‘affordable’ as well as social housing, the impact on overall supply of the ‘fairness tax’ revenue would be more stark. The Affordable Homes Programme 2021 to 2026 has been the government’s main lever for increasing construction of affordable and social rent homes outside of London. Its grant pool of £7.39bn was designed to support up to 130,000 new homes outside of London across the 5 year period, so a grant of £57,000 per house. At that level, these housing ‘fairness taxes’ could have added an extra 340,000 homes to the programme, were the funding concentrated beyond London. Housing authorities have, however, complained that the level of grant in the Affordable Homes Programme no longer reflects the true costs of construction, so the true figure would likely be somewhat less.
As noted previously, the scale of the funding injection into social housing that the ‘fairness taxes’ generate depends on whether non-residents, house flippers and vacant home owners in the UK prove more responsive to the taxes than those abroad. Either way, the results of their introduction would be positive for the UK housing market, and worth scribbling on the bottom of any new pledge cards.
Methodology
Vacant Property Tax
- Number of vacant properties in England taken from council tax data, as reported by the House of Commons Library
- It notes that this is likely to be an underestimate as some local authorities “do not award any discounts to empty properties”, meaning that owners are not incentivised to report their property as vacant
- Average property value for England used from Jan 2024 data
Non-Resident Purchases Tax
- Stock of foreign owned homes in England and Wales of 60,366 in January 2010 and 181,701 in August 2021
- As well as this net growth of 121,335 there will have also been churn, as foreign owners sell during this period
- People stay in their home for 9.2 years, or 110 months on average
- Conservatively assuming that foreign owners keep their properties for twice as long means that 0.5% of the non-resident housing stock is sold each month
- Assuming linear growth in the overall non-resident owned housing stock between January 2010 and August 2021, and applying the 0.5% monthly churn within in suggests that 197,000 homes were purchased by non-residents over the period, or 17,000 a year in England and Wales
- Apply the ratio of overall England and Wales housing transactions to get England estimate of 16,000 a year
Rapid-Sales Tax
- 26,340 properties flipped in 2022
- Taken midpoint of £10-75k typical profit from property flipping (£42,500)
- Total profit of £1.1 billion
