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From Iain Donaldson, a Manchester Liberal Democrat Learn more

How it really is – the folly of the Mansion Tax

by Iain Donaldson on 24 October, 2014

The price of any commodity is dependent both on the need for the commodity and its availability in the market. The more a product is needed and the less available a product is the higher its price will be. That has been the simple economic truth that has driven the UK’s housing crisis year on year, and unfortunately there looks to be no sign of the political elite ever learning from the follies of the past.

Amongst these follies lie ‘Market Value Rents’ and ‘Council House Sales’ and the privatisation of social housing and the ‘spare room subsidy’, and about to join them is yet another folly, the Mansion Tax.

I set out in my speech to Lib Dem Conference (follow this link to hear the speech) why the ‘spare room subsidy’ demonstrates economic illiteracy on a grand scale, but for those who haven’t heard what I said let me sum it up here:

You can not expect local landlords (social or private) to plan for the housing needs of tomorrow if the properties they are able to let are shackled to the needs of today.

What I mean by this is that if a landlord has a two bedroom property then when there are customers needing one bedroom but none needing two bedrooms the property can be let to a single occupant. If however a landlord has a one bedroom property then it can only be let to customers needing one bedroom and if there are none in the market for renting the property lies idle. It was on this basis that councils like Manchester disposed of thousands of unlettable single property flats in the late 1990s and early noughties.  If we truly believe in local decisions being taken locally then we have got to leave the landlord the freedom to determine what stock they need and how to manage that stock.

The problem arises when there has been no house building for years, social housing has been sold into private hands and there is a massive shortage of housing. Let us be clear here, the small number of people that have moved house as a result of this policy combined with the continuing rise in the waiting lists (belied by recent changes to who is eligible for social housing) demonstrates that the policy is totally failing to have any real impact on the housing market. Just to be absolutely clear, I am not speaking here with 20/20 hindsight; I predicted this failure of our housing policy and proposed a number of radical solutions over 15 years ago.

Let us turn now to the folly of the Mansion Tax, and why it is just another demonstration of economic illiteracy.

The mansion tax is based on the market value (the current estimated price) of a property. That value is in turn affected by the availability of housing in the local area. If the government has a policy of introducing 300,000 new properties into the housing market every year over five years then the scarcity of housing will reduce, the premium attached to properties will decline and the price of housing will drop. There are no ifs or buts about this, it is simple economics based on the principles of supply and demand. That means that if the house building policy is successful the Mansion Tax that can be collected will drop and that means that the vital services dependent on the tax for their continuation will be faced with a lower than anticipated income. As I said, the Mansion Tax is economic folly of the greatest order, and hypothecating the tax to specified vital services is just an extension of that folly.