This document summarizes key points from an OECD report on housing policy and the environment. It notes that housing accounts for a large portion of global energy use and emissions. The report recommends policies like land value capture, building codes, and property tax reform to increase housing affordability while reducing emissions. Specifically, it advocates shifting from transaction taxes to annual property taxes based on land value rather than building value, and providing discounts for energy-efficient buildings. This could encourage construction and mobility while addressing climate change. The document argues the UK in particular needs holistic reforms like increasing social housing and incentivizing development to improve its affordability crisis.

1. Housing Policy and Fiscal Tools
John Muellbauer
17th Annual Meeting of the OECD
Network on Fiscal Relations Across Levels
of Government
22-23 November 2021

2. OECD (2021), Brick-by-Brick: Building Better Housing
Policies
• Wonderful to see this holistic, evidence-based approach.
• Draws on a vast treasury of comparative analysis by OECD economists over many
years and on OECD investment in expanding the evidence base.
• Despite the immense benefits for dealing with the climate emergency and
improving housing affordability, for efficiency, sustainable growth, reducing
intergenerational inequality and social exclusion, for financial stability, there is
great resistance to the implementation of many of these policies.
• It comes from powerful elites, especially from entrenched land-owning interests,
‘know-nothing’ climate change deniers - long financed by the fossil fuel industry,
from myopic, individualistic ideology that denies externalities and ‘Society’, and
from monopolistic media that promulgate mis-information.
• Most citizens do not understand ‘General Equilibrium’ – the idea that there are
many inter-relations, spill-overs, feedbacks and unintended consequences.
• Holistic policies cover not just taxation and expenditure but many aspects of
regulation, the legal framework, governance, and institutional design from central,
regional and local government, regulators and central banks.
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3. The Climate Crisis
• Climate scientists fear that the world is approaching a catastrophic tipping
point in the global climate:
• “Climate tipping points — too risky to bet against”
• Crushing climate impacts to hit sooner than feared: draft IPCC report
• 2019 UN Emissions Gap Report
• Amplifying feedback loops increase the probability of mass species
extinction, major sea-level rises and other disasters:
o Melting polar ice caps, Himalayan glaciers: reduce reflection of sun’s rays,
increasing global warming.
o Melting permafrost in the Arctic tundra: releases trapped methane, about 30 times
more potent a greenhouse gas than CO2 (in the short run).
o Tundra soil: warming will release large amounts of buried carbon over a longer
time scale.
o Rain forests: when stressed by drought, they reverse the carbon cycle (incl. by
wildfires) and release CO2 instead of absorbing it.
o Oceans: major absorbers of CO2, but their warming reduces this stabilising capacity.

4. Ch.7 Reconciling Housing and the Environment
OECD Report says
• The residential sector (buildings and construction) accounts for 28% of global final
energy consumption, 17% of total CO2 emissions, and 37% of emissions of fine
particulate matter.
Complex links tie housing and environmental quality:
• Land-use policies.
• Regulation, subsidies and taxes to reduce the carbon footprint of construction and
improve the energy efficiency of the existing building stock.
• Environmentally related transport policies affecting housing.
• “in 2018, 2/3 of countries still lacked mandatory building energy codes. High-
performance buildings, such as near-zero energy buildings, still make up less than
5% of new construction”.
• But potentially increases affordability problem and social exclusion. Under-
emphasis on potential for green property taxation: ‘green’ and split-rate property
tax have the potential to resolve the conflict between affordability & equity, and
meeting climate goals.
• More generally, new regulation, taxes and subsidies could speed adoption of new
technologies, bringing down costs in medium term.
• Carbon capture and storage is likely to be critical. Report fails to mention the use of
wood as a superb carbon store: 2019 UN Emissions Gap Report, UK Housing: Fit for the Future
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5. Fiscal measures for better housing affordability…
• Build more public sector, subsidised housing.
• Make more use of land value capture when planning permission is given: acquire
land for public land banks at prices reflecting existing permissions on auctions
and/or compulsory purchase.
• ‘Planning gain’ – the increase in value from residential permission - can then fund
infrastructure and public sector housing.
• Supported by fiscal rule focused not on gross debt but on net asset position where
land and buildings valued at current market prices are part of the asset base.
• Note: sovereign bond market spreads are lower in countries with stronger net
assets/GDP, Peppel-Srebrny (2018) and for deficits due to investment spending
rather than current spending, Peppel-Srebrny (2021).
• Relax planning constraints and incentivise local government to release more land
for residential building.
• Reform property taxes: reduce transactions taxes, move to recurrent, non-
regressive, land-value taxes with ‘green’ discounts.
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6. Property taxes: central recommendation
• “Relying less on housing transaction taxes and more on annual taxes on immovable
property while shifting the base of these taxes from the value of structures to current land
prices would bring multiple benefits. The move away from transaction levies towards
recurring taxes would lower obstacles to mobility, facilitating labour market adjustment
and boosting economic growth. Shifting the basis from the value of structures to current
land prices would encourage construction in valuable developable areas, helping to
address supply-demand mismatches. Many countries are underutilising recurrent property
taxes and have substantial scope for increasing these levies.”
• The need for such a shift has never been greater.
• Especially in Anglo-Saxon and Scandinavian countries, there had been large pre-pandemic
rises in house prices relative to incomes, pricing many younger citizens out of home-
ownership, especially with tougher down-payment requirements that followed the GFC.
• Easy money policies pursued by OECD central banks in response to the pandemic have
fuelled further large wealth gains for property owners relative to the rest.
• The Corona virus pandemic has generated huge structural changes in employment patterns
and in housing preferences, many long lasting.
• OECD research confirms that transactions taxes are a serious impediment to the desirable
adjustment in spatial patterns of employment and residence.
• The report confirms that annual property taxes linked to recent market values improve
macroeconomic stability and long run rates of growth – especially given large gov’t debt.
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7. Macro and regional stability reasons for market-value
based taxes
• Annual property taxes linked to recent market values combined with macro-prudential
limits on household leverage reduce the incentive for property speculation based on
expectations of high rates of return which tend to be based on recent property
appreciation, as explained in our 2021 JEL survey paper .
• They benefit not only macroeconomic stability but tend to dampen down drivers of
higher regional inequality.
• Why? Rises in land prices in growth hotspots should deter in-migration and further
growth at those hotspots, acting as an automatic dampener of widening regional
inequality.
• However, many potential migrants to the hotspots will keep coming in anticipation of
further capital gains, and residents sitting on large capital gains will postpone moving to
cheaper locations to cash in those gains.
• Annual property taxes dampen such speculation, which otherwise prolong swings in
widening regional inequality.
• The case of the UK illustrates need for reforms…
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8. Council Tax is highly regressive: English data from
Fairer Share
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9. Holistic reforms needed in the UK
• The UK has relatively high transactions taxes on housing & by far the
highest commuting times of European countries in the OECD report.
• The structure of taxation and land supply restrictions help explain why the
UK has had the largest rise in the G7 since 1970 in house prices relative to
per capita household disposable income.
• The OECD’s holistic policy recommendations are closely aligned with a four-
part approach to address the UK’s pressing housing problems set out in
Muellbauer (2018).
1) Far better land value capture for society, helps fund:
2) Expansion of social house building, whose collapse since the pre-Thatcher era
has exacerbated affordability and social exclusion.
3) Incentivise local authorities to give planning permissions.
4) Radical reform is necessary of the UK’s property tax system, among the most
dysfunctional in the world. Shifting from high transactions taxes to a green annual
property tax has multiple potential benefits for efficient use of the housing stock
and improving access for the young.
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10. Green land value tax as a split-rate property tax
• The green LVT would consist of a standard per square metre charge on the
land minus a discount on the building depending on its energy usage,
maximum for an energy-neutral building and gardens. Regular revaluations to
discourage speculation and to avoid cliff-edge changes.
• To protect cash-poor but land-rich households, everyone would have the right
to defer the tax. The tax authority would register a proportionate interest at
the Land Registry equal to the unpaid tax for each year deferred, to be settled
when the property was sold or transferred - avoids complex interest charges.
• No discounts for single persons or second homes. A 25% surcharge on owners
not domestic tax payers or pensioners to discourage foreign speculators. To
make the tax a little less onerous in high priced regions, an allowance linked to
regional land prices could be given.
• Such a radical tax reform would need to be phased in over several years. With
higher revenue from the Green LVT, transactions taxes would be cut.
• Tune proposals to anticipate push-back from the “haves” and the special
interests.
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