Bedroom Tax – David Cameron’s poor grasp of the facts

By Julian Pratt

The government has lost its Court of Appeal cases relating to two families that have a clear need for a spare bedroom and whose Housing Benefit has been cut, though the cases will now go to the Supreme Court. This ‘bedroom tax’ attacks those who are most in need of decent housing and is rightly described as ‘vile’ by Danny Dorling (2014:147) in his excellent book All that is solid: the great housing disaster.

David Cameron’s response is seductive but outrageous – that it is ‘unfair to subsidise spare rooms in the social sector if we don’t subsidise them in the private sector’. Housing Benefit is of course a subsidy to private landlords as well as to social landlords, but the substantial point is that we do subsidise – on a massive scale – spare rooms in the private sector. The most obvious way is by exempting owner-occupiers from Capital Gains Tax on their home. It’s not unusual to hear people say that they have ‘earned’ more by watching the value of their home rise over the years than they have by working full-time. This means that buying the most expensive home you can afford is one of the best investment decisions any family can make. Location is of course a major factor in this expense, but so is the size of the house. The exemption to Capital Gains Tax is therefore encouraging people to buy larger homes than they might without such an exemption – contributing to the large number of unoccupied bedrooms in the private sector. Housing in the private sector is used far less efficiently than in the social sector.

That’s just the capital gain. We also now fail to tax as income the ‘imputed rent’ that an owner-occupier can be considered to receive as income from themselves in rent (as the result of the exclusion of owner-occupied properties from Schedule A in 1963). This has provided a further subsidy to owner-occupiers that distorts housing tenure by incentivising investment in unnecessarily large homes in the private sector.

There are plenty of other subsidies for private housing that may subsidise overprovision of bedrooms, like Help to Buy and other schemes for first-time buyers and Right to Buy for residents in council and housing association properties. And the inequity of subsidies to owner-occupiers goes far wider than this. The government has shown that it will do whatever it takes to prop up house prices, whether this be by demolishing housing in northern cities or by increasing the money supply.

David Cameron is right though – we need a society that treats renters and owner-occupiers fairly and even-handedly. Subsidies to owner-occupiers currently make it inevitable that their wealth will grow in the long term, principally as the result of rising house prices and rent-free accommodation once the mortgage is paid off. How can we ensure that renters are fairly treated?

A large part of the cost of any house, and almost all of any increase in its value, is attributable to the value of the land rather than the building. What we need is a cap on ever increasing land values. The value of land is fundamentally determined by the discounted stream of expected future rents, though expectations of future price rises add a speculative element. The most effective way to cap land prices is to collect the full market rent, or even just any future increase in the market rent, as a location fee or Land Value Tax.

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