I see Will Hutton in today's Observer talking about housing "shortages" and the panic that's setting in. He takes extensive coverage from the initial report of Stephen Nickell's National Housing and Planning Advice Unit I covered earlier. Tim Worstall comments here on one aspect of Hutton's suggestions - that the Bank of England needs to target house price inflation.

I would add that there was a piece by Eddie, now Lord, George, Mervyn King's predecessor as Governor of the Bank of England back in March this year which I didn't see getting much comment at the time that "The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession."

This tells you all you need to know about house prices in my opinion. For those of you who still labour under the misconception, common though it is, that house prices are driven primarily by supply and demand, what Eddie is saying here is that house prices are in fact primarily driven by the availability of money. And, whilst preventing a slump is no doubt a laudable aim, do you see how it has been done? Cheap money, secured against land values, is created by the lending banks, and while interests rates remain low this is less of an issue. But it's pay back time and the people who are squeezed are not the great and the good who made the decision to ramp up house prices with cheap money, but the poor sods who found they simply had to borrow more because everyone else could just in order to buy a house.

And in the meantime, the government has borrowed countless billions on things like PFI deals. Can any economist out there explain to me why it would have been any more inflationary than the chosen strategy of ramping up debt money for the government to have created, Keynes style, that PFI money to spend into the economy instead? As it stands, a whole generation more or less of house buyers will face straightened circumstances with their more expensive money as well as us all having to look forward to higher taxes to repay the debt on PFI deals.

But I really want to take Hutton to task on these other two aspects of his "solution". First, he says:

"The simple answer is to build more houses, especially social housing, but that means eroding the green belts and relaxing planning laws - unpopular ideas. "

Only up to a point. It is a commonplace scare tactic to say that building more housing will eat up some of the most precious parts of our green and pleasant land. Again, setting those who have (in this case a nice view) against those who don't have even a window from which to look out on a view. However, at current planning guidance densities of 40 dwellings per hectare (and I don't claim that this is appropriate in all places), even if every new house in the government's claimed requirement of 2,000,000 over the next two decades were built on previously undeveloped land it would require less than half of one per cent of the land currently classified as agricultural, grazing or woodland (and even this does not factor in land in upland non-agricultural uses such as moorland or undeveloped urban land - the "green lungs" and equivalent that Oxford is so proud of). You can get the spreadsheet from DEFRA if you want the figures for yourself.

However, according to the Department for Communities and Local Government, there is also enough land, at these densities, for 2,500,000 new homes on previously developed land now languishing at below its optimum use. And this does not take into account land currently developed as housing, largely from the inter-war years, that seriously underuses whole swathes of suburban land. So if Stephen Nickell has any job to do, it is to find a way to get this sort of quentity of already urbanised land into more productive housing uses. A point which Hutton begins to look at in the following paragraph:

"There are tougher measures, too. If housing faced higher taxes, either through inheritance tax, a wealth tax, lifting stamp duty, or limiting tax-free capital gains on housing, then house-price inflation would slow. And if Britain repealed its far too generous concession that non-residents and non-domiciled individuals can buy and hoard houses without paying tax, that would dent overseas demand. All have been ruled out because of a recoil at higher taxes."

And yes, you know what I'm going to say here don't you. Why faff around with these various taxes, all of which, you will notice, penalise investment in the capital value of dwellings rather than encouraging parsimonious use of land. They only attempt to cure one part of the problem - by knocking something off the overall price of existing housing. Not the whole problem by encouraging the bringing into more productive use of underused urban land assets.

Introducing a signficant Land Value Tax - one that would replace IHT, CGT, National Non-Domestic Rates and Council Tax at least - will bring down the capital value of land, but make it uneconomical to hold any land out of use or below its optimal use, or you'd be paying the rest of the community (in this case represented by the tax collecting government) for the privilege. It will of course mean that people have to borrow less to pay for their home. And this in turn will focus the monetary authorities on how to create a stable and equitable money supply to pursue their macro-economic aims without exploiting the poor sods at the bottom of the pile. They will need to find ways of getting new money into the economy when it's needed without forcing us all to take on more debt. And we will end up with an altogether fairer and less costly money supply if they do it right.

Technorati Tags: monetary reform, affordable housing, debt, Eddie George, Will Hutton, land value tax