Housing used to fight inequality, not worsen it

The story is not as simple as blaming the Right to Buy. At first, the policy turned millions of council tenants into homeowners, spreading wealth further and boosting owner-occupation to almost 70% by the mid-2000s.

But it only benefitted one generation. Sales receipts went back to the Treasury rather than being reinvested in new council homes. Over time, the original buyers gave way to new ones, often part of the wave of buy-to-let that saw private renting double between the 1990s and 2010.

As Ms Smith points out, trends in wider inequality followed a similar pattern, with the share of national income taken by the top 1% falling from 31% before World War I to just 7% in the 1970s, before rising to 13% by 2023. By contrast, the share of the bottom 50% reached an all-time high of 23% in 1970, but has since fallen to 20%.

“For most of the 20th century, housing was the force that made society more equal. Council housing and rent control improved standards, made homes more affordable and tackled exploitation of tenants by private landlords”

Housing played a key role in these trends, with successive governments promoting both homeownership and council housing, before they went into reverse in the 1980s.

Wage growth slowed for most, even as top earnings soared, and a wave of financial deregulation, credit liberalisation and restructuring of taxes and benefits led to a U-turn in inequality.

Loose credit plus falling interest rates sparked real-terms increases in house prices of 30% between 1977 and 1997 (a period that included a housing market crash), but 147% between 1997 and 2007.

Housing was still (just about) acting as a cushion against wider economic inequality, with increased housing wealth mitigating against wage stagnation for homeowners and a shrinking social housing sector protecting those who could still access it.

But this era came to an end in the financial crisis after 2008, with the housing system now “set to amplify rather than ameliorate economic inequality”, in the words of Ms Smith.

Rates of owner-occupation fell, especially among younger people, but it also became more economically selective: only half of households in the middle deciles of the income distribution are now owners.

Windfall gains from rising house prices intensified housing wealth inequalities, with the beneficiaries able to buy second homes and properties to let and children from homeowning families far more likely to be able to buy, thanks to family help and inheritances.

Ms Smith sums it up as follows: “The wealthiest 10% saw an average capital gain on residential property of £174,000 across the first two decades of the 21st century, while the least wealthy one-third netted less than £1,000 each.”

At the same time, entry into ownership became more precarious, with first-time buyers becoming increasingly indebted, and inflation and rising interest rates eating into household budgets (with the building safety crisis adding to the stress).

Finally, private renting became a fresh source of wealth for investors at the same time as rising rents and frozen housing benefit increased the pressure on tenants and social housing became ever more scarce.

The net effect of all this was to amplify inequality, with poorer households spending progressively more of their income on housing and richer ones progressively less.

So, what can be done about all of this? There are no quick fixes, she says, but housing will have a bearing on the future.

More broadly, despite the minimum wage, the UK has one of the highest levels of income inequality in the world, so a more progressive tax system has to be part of the answer.

Restoring housing benefit and increasing subsidies for social housing would obviously help, too.

Reform of the taxation of property is essential: existing taxes such stamp duty and council tax are highly regressive and badly designed, disadvantaging those who have bought most recently or whose properties have risen least in value.

“Inheritances and the ‘Bank of Mum and Dad’ are playing an increasing role in determining whether younger generations can afford to buy”

Owner-occupation offers the only form of leveraged investment available to most people, but those investment gains are lightly taxed, with main residences exempt from both capital gains and the tax on imputed rents that was charged until 1963 (though the tax relief on it survived until 2000).

A land value tax, favoured by most economists but feared by most politicians, would be a good place to start.

Rebalancing the tax system from incomes to wealth is an obvious shift in financially straitened times, but it’s vital that it works with the grain of the housing system, rather than against it.

Ms Smith’s final point is that restructuring the housing tax base could be aligned with spending and investment and “ringfence the funds needed to reposition housing against economic inequality”.

There are obvious political barriers to that – it’s hard to imagine even the current government with a huge majority going near it – but there is another factor to consider too.

Inheritances and the ‘Bank of Mum and Dad’ are playing an increasing role in determining whether younger generations can afford to buy, but we are only just starting to feel the full effects. A new assessment by property company Savills estimates that the over-60s now hold a record £2.89tn of net housing wealth. By contrast, the under-35s own £600bn of housing wealth, but owe half of that in mortgages.

The conventional way to look at that is to see the gap between generations, but the more telling one is within generations, as inheritance increasingly determines your ownership and wealth prospects. Left to its own devices, that will only intensify the impact of housing on inequality.

Doing nothing is as much of a political choice as acting now.

Jules Birch, columnist, Inside Housing