Under-occupation, over-accommodation, and the question of tax

It is always welcome when someone wanders on to your patch and looks at it with fresh eyes. That is why I found George Monbiot’s article in yesterday’s Guardian so stimulating (available here). Not that I entirely agreed with him, but I think he is right to pose unconventional questions about British housing policy.

Monbiot’s argument is, briefly, that if and when we think about under-occupation as a housing problem the focus is always on social housing, but this is to miss the bigger issue of under-occupation in the private sector. This is surely correct. A key strand in Local Decisions, the recent housing Consultation Paper, and the current reforms to Housing Benefit is how households can be encouraged or incentivized to move out of properties larger than justified by their current needs. The issue is usually framed in terms of empty nesters and older households occupying family homes, while families sit in overcrowded temporary accommodation. Yet, the issue of under-occupation in the private sector is rarely raised. It is part of the thinking behind restrictions to Housing Benefit. Single households under 35 years living in the private rented sector are only eligible for assistance with the cost of shared accommodation. Such households do not ‘need‘ their own flat. To subsidise them to live independently would be to allow them to be ‘over-accommodated’ at the expense of the state. Excepting that specific issue, policy is silent on the matter of the under-occupation of private accommodation.

We might explain this as being about the distinction between the sphere of private decisions and the sphere of public assistance. It is not the state’s role to interfere with choices in the private housing market. That’s as may be, but Monbiot’s point is that refusing to consider the issue carries consequences. Under-occupation in the private sector is getting progressively worse. While the research on why that might be doesn’t really exist, Monbiot points the finger at increasing economic inequality. On the assumption that the income elasticity of demand for residential space is positive and greater than one, which seems reasonable, then Monbiot’s argument is plausible. Increasing income polarisation could lead to an amplification of the problem.

The point is that if policy does not concern itself with the way in which the private housing stock is utilized then the only response to a housing shortage is to build more properties. The alternative – to look at how well the current stock of private housing is matched to the needs of the population – is not on the radar. Monbiot argues that this is a mistake. He helpfully, and characteristically, introduces the environmental dimension. In terms of the use of scarce and irrecoverable natural resources, is it sensible to build more properties on greenfield sites when the current stock is increasingly badly utilized? Is it even ethical?

In the social rented sector the process of matching properties to people is integral to a local authority’s allocation scheme: families of certain size and type will be eligible to access certain types of accommodation as a result of the application of a set of allocation rules. This isn’t a mechanism that is going to be applied in the private sector. Instead, Monbiot looks to taxation. Households who choose to under-occupy should be taxed heavily for the privilege, unless they take steps to utilize their available space more effectively by, for example, taking in a lodger. If they don’t want to pay the tax then they should move to smaller accommodation which is more appropriate to their needs.

The broad thrust of this argument seems to me to merit further development and elaboration. It would require rethinking how we understand property taxes – which are, in any event, something that the British don’t seem to understand all that well. In fact, it would require us to change our understanding of the overall housing stock and how it should be managed – rather than starting from the private ownership of property we would be thinking of ‘home ownership’ as the temporary stewardship of a component of a national asset, which will be passed to subsequent generations. As such, the state has a right to seek to influence how that national asset is utilized.

When we think of property taxes we typically think of them being primarily about revenue raising. They can act as a progressive component in the tax base. They can act as an alternative to income tax or a local sales tax. They are less easy to evade than other taxes – you can’t move your property offshore – but they bring with them operational problems, particularly if based on valuations not physical characteristics. Detailed design is crucial. The primary aim, though, can be raising revenue without unnecessarily distorting behaviour. The tax that Monbiot has in mind is precisely the opposite. It is more like the tax on an environmental externality such as pollution. The point is precisely to affect behaviour.

Monbiot’s argument is not, however, without its problems.

He criticises the existing Council Tax for not being a very good mechanism for achieving his desired ends. He argues that the 25% discount for single occupancy actually encourages under-occupation. I’m not sure that the discount does encourage under-occupation. More importantly, the Council Tax is not really intended to be a property tax. It is more a charge for local services levied in a form that is close to a poll tax, without actually being a poll tax, and with a mild form of progressivity built in. But that progressivity is in theory loosely correlated to service utilization rather than simply income. The single person discount is a recognition that service use will be less intense. From an economic perspective a poll tax is actually a highly efficient tax: if it is flat rate, unavoidable and universal then it will not distort behaviour. It will just change the budget constraint facing all households. But we know such taxes are politically very unpopular. Monbiot’s tax is not an alternative to the council tax. It is trying to achieve something different.

To what this new tax might be applied is also somewhat opaque. Monbiot’s argument is a little unclear about whether we are talking about application to bedrooms, bed spaces or to floor space. Under-occupation is conventionally measured in terms of available bedrooms. That is fine for assessing the extent of overcrowding, but it is perhaps less good as a basis for taxation because of the incentives it sets up. Think back to the Window Tax of the eighteenth and nineteenth century and the sudden preference for rooms with less natural light. We can imagine that an under-occupation tax based on number of surplus bedrooms will be followed fairly rapidly by an apparent shift in preferences towards open plan living. Taxing on the basis of floor space is less easy to manipulate. Although, of course, taxing floor space might well lead to a shift in demand towards larger plots, bigger gardens and smaller dwellings.

Moving to a greater focus on floor space may be no bad thing in any case. Britain is peculiar in its obsession with the number of bedrooms as a calibration of the size or desirability of dwellings. It leads to the construction of dwellings with several small rooms which cannot be used very flexibly. Many other countries think in terms of useable floor space. You can put the internal walls where you like.

Monbiot’s idea is novel in its orientation and mechanics. But perhaps it does not come totally out of left field. As you may recall, the Liberal Democrat manifesto included the proposal for a Mansion Tax on dwellings over £2mill. It didn’t make it into the Coalition Agreement. David Miliband adopted a similar proposal as part of his policy platform in his unsuccessful bid for the Labour party leadership. There are also active discussions – certainly in Liberal Democrat circles – of the desirability of a land value tax. Such a tax has different characteristics – in particular it should have less of an impact on decisions about what sits on the land – but it is part of the same broad debate.

This proposal to tax under-occupation follows close on the heels of Grant Shapps’s statements about the need to stabilise house prices (which I discuss a bit more here). Perhaps we are seeing the beginning of a serious conversation about how to address the deficiencies of our dysfunctional private housing market. That would certainly be an exciting development. And one that is long overdue.

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  1. If my partner and I move in together, we go from paying 75% of the local Council Tax rate each to being jointly responsible for 100%. Assuming we split the bill equally, we both pay a third less than before. I’m not seeing how this incentivises single occupancy; in fact it seems as though Monbiot’s tax on overaccommodation already exists to some extent.