A few months ago, we offered a proposal to dramatically increase funding for affordable housing and put a damper on real estate speculation: tax housing capital gains. While San Francisco’s voter-approved Proposition A will produce a one-time infusion of $310 million for below-market housing, and that city’s inclusionary zoning ordinance has produced just about $30 million per year in in-lieu fees, a barely-there one percent tax on the total increase in value of residential property in the Bay Area would have given local governments $1.6 billion in 2013. (Update: We should clarify that there is already a federal residential capital gains tax, but its revenues aren’t targeted at affordable housing, and it exempts the first $250,000 of gains entirely. As we suggested in the first piece we wrote about this, we have in mind something more locally administered and directly targeted at affordability. We’re also fine with exempting some “normal” amount of returns, but a quarter million dollar profit goes beyond “normal” appreciation.)
Now, that idea has received some backup from across the Atlantic. As reported in The Guardian, Britain’s National Institute of Economic and Social Research, or NIESR, released a paper arguing that a capital gains tax on housing would be one of the best tools to tamp down on an overheated real estate market.
NIESR focuses less on the potential for such a tax to generate funds to subsidize affordable housing than on its potential to even the playing field between housing and other kinds of investments, since the UK, like the US, gives strong tax preferences to residential property owners. That, in turn, would make residential real estate speculation less attractive, slowing rapid increases in property values and, hopefully, making housing market crashes less disruptive as well. In the American context, reducing tax incentives to buy housing might also balance the scales a bit more between renters and homevoters, easing the political imperative for local governments to pursue development policies that maximize homeowners’ investment returns.
The NIESR paper also makes a strong case that a real estate capital gains tax would be a boon for intergenerational equity. Rising real home prices are pretty much a straightforward transfer of wealth to older generations (who own homes) from the younger generations (who must pay, either through mortgages or rent) to purchase them. As in the United States, homeownership in the UK has not only been declining markedly, it has been experiencing “gerontrification”: as older people hold onto homes whose value has increased dramatically, homeownership among young people has crashed, as the combination of higher home prices and a weak economy mean that fewer and fewer of them have the means to purchase real estate.
Moreover, also like in the US, housing is an ever-larger proportion of overall wealth in the UK, and therefore a major driver of wealth inequality. Residential and nonprofit real estate now represents nearly 60 percent of all wealth in Great Britain. And as MIT graduate student Matthew Rognlie has shown, virtually all of the increase in the ratio of capital gains to wage income over the last several decades—the prime macroeconomic driver of wealth inequality—has come from housing.
The point of all this, as ever, is not that homeownership is bad, or that homeowners should be punished. The NIESR paper echoed us in advocating that a real estate capital gains tax be charged only when a home is sold, so that people on low or fixed incomes whose homes appreciate in value rapidly aren’t caught without enough cash to pay. They also agreed that homeowners could have some amount of price appreciation exempted from the tax as a “normal” return. But when demand for housing in a particular neighborhood or city skyrockets, there’s no reason that current homeowners should reap all of the benefit at the expense of people who would like to buy but can’t because prices are too high. A real estate capital gains tax would not only dampen market price increases, but would represent a sea change in the amount of money available for below-market housing in high-demand areas. It should be on the agenda for anyone who’s worried about inequality and affordable housing.