Jeffrey Matsu
Chief Economist, CIPFA
The UK’s housing market faces regional growth challenges, worsened by an ineffective tax framework. Comprehensive tax reform is needed to promote equitable housing development and reduce regional disparities.
The Government’s ambitious pledge to build 1.5 million homes over five years underscores the critical need for such reform. However, achieving this target requires more than just political will; it demands a robust delivery plan that aligns housing policy with fiscal measures.
Barriers to housing development
One significant barrier is the existing tax system’s emphasis on property-related taxes, which constitute 4% of GDP (double the OECD average). Taxes like stamp duty land tax (SDLT) hinder mobility by imposing financial penalties on property transactions, thereby discouraging downsizing or relocation to regions with better employment opportunities. This rigidity stifles labour market flexibility — a vital component of regional economic growth.
Moreover, the exemption of primary residences from capital gains tax (CGT) incentivises over-investment in housing, contributing to price inflation and affordability issues. This dynamic disproportionately affects regions like London and the South-East, where soaring property values widen the wealth gap between areas, hindering economic convergence.
Adopting a more neutral, transparent
and simplified tax framework could
align housing and regional growth policies.
Need for comprehensive tax reform
The private rented sector also suffers under the current tax regime. Value-added tax on repairs and refurbishments dissuades landlords from maintaining and improving properties. In areas with weaker rental demand, poor-quality housing stock compounds economic stagnation, deterring inward investment and population retention.
To realise its housing ambitions and promote balanced regional growth, the Government must undertake comprehensive tax reform. Adopting a more neutral, transparent and simplified tax framework could align housing and regional growth policies. For instance, replacing SDLT with a recurrent land value tax would reduce transaction distortions, encourage efficient land use and provide stable revenue for local governments. Additionally, reforms to CGT could disincentivise speculative investments, freeing capital for business and infrastructure development in underperforming regions.
Transform housing policies for growth
The UK’s housing crisis and regional disparities will persist unless we address the structural flaws in the tax system. Comprehensive tax reform is not just desirable but essential to transform housing policies into a catalyst for equitable and sustainable national growth.
