An unequal struggle for housing

Posted: May 1, 2025 | Author: julesbirch | Filed under: Home ownership, Inequality, Social housing, Tax |Leave a comment

Originally written as a column for Inside Housing.

Housing seems such a natural engine of inequality that it’s easy to forget that the opposite was once true.

For most of the 20^th century housing was the force that made society more equal. Council housing and rent control improved standards, made homes more affordable and tackled exploitation of tenants by private landlords. 

Owner-occupation expanded -perhaps 10 per cent of the population owned their own home in 1914 but that proportion expanded to a third by 1939, half by the start of the 1970s and two-thirds by the mid-1980s – while the proportion of homes rented from a private landlords fell from almost 90 per cent in 1918 to less than 10 per cent by the early 1990s. 

And then things went into reverse. A fascinating chapter by Susan Smith in this year’s UK Housing Review explores how this happened and what can be done about it. 

The story is not as simple as blaming the Right to Buy. At first, the policy turned millions of council tenants into home owners, spreading wealth further and boosting owner-occupation to almost 70 per cent by the mid-2000s. 

But it only benefitted one generation. Sales receipts went back to the Treasury rather than being reinvested in new council homes and over time the original buyers gave way to new ones, often part of the wave of buy to let that saw private renting double between the 1990s and 2010. 

As Susan Smith points out, trends in wider inequality followed a similar pattern, with the share of national income taken by the top 1 per cent falling from 31 per cent before the First World War to just seven per cent in the 1970s before rising to 13 per cent by 2023. By contrast, the share of the bottom 50 per cent  reached an all-time high of 23 per cent in 1970 but has since fallen to 20 per cent. 

Housing played a key role in these trends, with successive governments promoting both home ownership and council housing, before they went into reverse in the 1980s. 

Wage growth slowed for most even as top earnings soared and a wave of financial deregulation, credit liberalisation and restructuring of taxes and benefits led to a u-turn in inequality. 

Loose credit plus falling interest rates sparked real terms increases in house prices of 30 per cent between 1977 and 1997 (a period that included a housing market crash)  but 147 per cent between 1997 and 2007. 

Housing was still (just about) acting as a cushion against wider economic inequality, with increased housing wealth mitigating against wage stagnation for home owners and a shrinking social housing sector protecting those who could still access it. 

But this era came to an end in the financial crisis after 2008, with the housing system now ‘set to amplify rather than ameliorate economic inequality’.

Rates of owner-occupation fell, especially among younger people, but it also became more economically selective: only half of households in the middle deciles of the income distribution are now owners. 

Windfall gains from  rising house prices intensified housing wealth inequalities, with the beneficiaries able to buy second homes and properties to let and children from home-owning families far more likely to be able to buy thanks to family help and inheritances. 

As Susan Smith sums it up: ‘The wealthiest ten per cent saw an average capital gain on residential property of £174,000 across the first two decades of the 21^st century, while the least wealthy one-third netted less than £1,000 each.’

At the same time, entry into ownership became more precarious, with first-time buyers becoming increasingly indebted and inflation and rising interest rates eating into household budgets (and the building safety crisis adding to the stress).

Finally, private renting became a fresh source of wealth for investors at the same time as rising rents and frozen housing benefit increased the pressure on tenants and social housing became ever more scarce and residualised. 

The net effect of all this was to amplify inequality, with poorer households spending progressively more of their income on housing and richer ones progressively less. 

So what can be done about all of this? There are no quick fixes, she says, but housing will have a bearing on the future. 

More broadly, despite the minimum wage, the UK has one of the highest levels of income inequality in the world, so a more progressive tax system has to be part of the answer. 

Restoring housing benefit and increasing subsidies for social housing would obviously help too. 

Reform of the taxation of property is essential: existing taxes like stamp duty and council tax are highly regressive and badly designed, disadvantaging those who have bought most recently or whose properties have risen least in value.

Owner-occupation offers the only form of leveraged investment available to most people but those investment gains are lightly taxed, with main residences exempt from both capital gains tax and the tax on imputed rents that was charged until 1963 (though the tax relief on it survived until 2000).

A land value tax, favoured by most economists but feared by most politicians, would be a good place to start. 

A rebalancing of the tax system from incomes to wealth is an obvious shift in financially straitened times but it’s vital that it works with the grain of the housing system rather than against it. 

Susan Smith’s final point is that restructuring the housing tax base could be aligned with spending and investment and ‘ring fence the funds needed to reposition housing against economic inequality’.

There are obvious political barriers to that – it’s hard to imagine even the current government with a huge majority going near it – but there is another factor to consider too. 

Inheritances and ‘the bank of mum and dad’ are playing an increasing role in determining whether younger generations can afford to buy but we are only just starting to feel the full effects. 

A new assessment by Savills published this week estimates that the over-60s now hold a record £2.89 trillion of net housing wealth. By contrast, the under-35s own £600 billion of housing wealth but owe half of that in mortgages. 

The conventional way to look at that is to see the gap between generations but the more telling one is that within generations as inheritance increasingly determines your ownership and wealth prospects. 

Left to its own devices, that will only intensify the impact of housing on inequality. Doing nothing is as much of a political choice as acting now. 

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