A rising tide may lift all boats, but not in economics or housing

Ed Miliband made two statements this week that are of importance to housing: on the ‘mansion tax’ and on ‘trickle down’ economics.

Support for the mansion tax hits a number of targets. It is an important message that the burden of additional taxation will be felt most at the top. It is a useful source of additional revenue. And it will help control the superheated London luxury housing market, a global market that has had a significant rippling effect on the price of property across the capital.

I have a natural tendency to disagree with Simon Jenkins, and his Guardian piece saying that the income from a mansion tax should go to local government rather than the national exchequer is no exception. Given that a large proportion of ‘mansions’ are in the boroughs of Westminster and Kensington and Chelsea, there is no reason on earth why those boroughs should benefit disproportionally. Instead, a different argument should be applied: the money should be used specifically to put more grant into the affordable housing sector to get more homes built at genuinely affordable rents.

An even bigger Miliband theme was his attack on ‘trickle down’ economics: the theory that has dominated global economic policy for three decades. By reducing taxes and removing regulation at the top, so the theory goes, more economic activity will be generated and the benefits will be felt by everyone. Miliband has previously argued that the saying ‘a rising tide would lift all boats’ cannot be applied to economics where the evidence suggests that recent economic growth has disproportionally benefited those who are rich already: wealth drifts upwards and doesn’t trickle downwards. He quotes Henry Ford, who used to say: ‘I have to pay my workers enough so they can buy the cars they are producing’, and he sees a British equivalent in housing, once understood by Macmillan but now needing to be re-learned: for houses to be built, people have to have the income to buy or rent them.

Trickle down ideas have had a bad effect on housing policy over the decades. For many years the assumption was made that an executive house built on a new estate in the sticks helped the poor because in theory everyone could move up one leaving an extra home for someone at the bottom. The theory never worked in practice of course because of pent-up demand and the propensity of household formation to increase when supply increased. However the theory still dominates Tory thinking and especially that of Boris Johnson, who seems to believe that any house built anywhere in London will eventually help the poor because any extra supply will help bring prices under control.

The imbalance of supply and demand means that we will not see any benefit from trickle down for many years to come, even if the theory works. The only effective way to help people on low incomes, the homeless and people on waiting lists is to build homes that have sufficient capital grant (or an equivalent like free land) at the start to enable them to be let at genuinely affordable rents. Even these homes will eventually pay for themselves and produce surpluses that will, in time, help to subsidise more new homes, just as council housing is doing now.

The two Eds, Miliband and Balls, are slowly challenging the economic assumptions and misguided dogma that have been in place since Thatcher, revealing a more radical economic policy, and one that is good for housing prospects: tackling debt not through scorched earth policies but by promoting growth – and construction will be key.

Courtesy of Steve Hilditch at Red Brick, and on Twitter @stevehilditch and @labourhousing