External monetary policy committee member David Miles says the tax system favours homeowners over renters and suggests policymakers look at ways of addressing this “distortion”.
In a speech made in York yesterday, Miles said that although banks may become less risk averse in their lending in the future, they are unlikely to again offer the levels of high LTV mortgages that were sold pre-2007.
As a result, he says individuals will continue to have to save higher deposits, meaning they will typically buy a home later in life and so levels of home ownership will continue to be suppressed.
However, he said “it is not at all clear” that lower rates of home ownership are a “big loss to society” and suggested that policymakers look at ways of addressing a tax system that currently favours homeowners over renters.
He said that while homeowners pay no tax on the benefits derived from having a place to live, landlords pay tax on rental income while capital gains tax is not levied on owner-occupied first homes but is on capital gains made on rented property.
He highlights that tax incentives against renting are least when the rental property is financed with debt, as landlords can offset interest paid on loans against rents received when calculating taxable income, but says in any case the tax system creates incentives which work against renting.
He said: The natural way of addressing the tax distortions is to change the tax treatment of rental versus owner-occupied property. The recent Mirrlees Review describes how this might be done. But changing the tax system is not easy. Losers are invariably created.
“No one should expect change to come quickly. But so long as the tax system favours owner-occupation we should recognise that – other things equal – this will make the owner-occupation rate inefficiently high. That needs to be born in mind when we consider how changes in the availability of mortgage finance for owner-occupiers might be reducing the owner-occupation rate.”
Miles suggested that lower owner-occupation levels will lessen the impact of interest rate changes, increasing economic stability, and improve labour mobility.