The Daily Mail today lead with the headline: “Tax on peace and quiet”. They claim that the long overdue and very much needed Council Tax revaluation that is shortly to begin will mean:

Houses in sought-after areas with a ‘ pleasant view’ or ‘good security’ will be targeted by the army of valuation inspectors. … New kitchens, conservatories, central heating and gardens will also be assessed under what the Tories have condemned as an oppressive ’snoopers’ charter’.

Their argument, and that of other critics of the revaluation neglects to understand the situation that we face. However that being said we also need to understand that there needs to be wholesale reform to the current system of local government finance, local taxation, and residential property taxation. We should also be aware of the contemporary nature of the British housing market and the changes in the housing market since 1991/2 when Council Tax was introduced.

Council Tax was introduced following the massive outcry against the Poll Tax – a reform of the rateable values system that in some form or another had been the way in which residents funded local authorities for 300-odd years. Rates were based on the notional rental value of the property, poll tax was based on the number of residents in a property, and council tax is based on the capital value of the property. What all three of these systems neglect in their base construct is an assessment of the basis to pay, but we shall return to this. First of all we must consider the changes in the housing market.

The early ’90s housing market
In 1991/2 when the properties of England, Wales and Scotland were valued the British housing market was in the midst of the housing market crash. The result of this was to constrict the housing market so that the differential between the most expensive houses and the least expensive was narrowed. What has happened in the years since is unparalleled levels of house price inflation, which has caused property prices across the board to rise at rates greater than general inflation and wages. In addition to the general inflationary trend the housing market has become further segmented in both geographical and structural terms (i.e. there are different typologies of housing in different typologies of place) which results in a diverse housing market, but one in which the ‘price’ reflects more than just the economic value of the property.

The current inequalities
The current structure of the Council Tax means that new properties (or significant alterations to them) will be valued in line with the value of a similar property in 1991. The current banding system is based on the structure of the housing market in 1991, such that bands A-D represent the majority of properties (and accounts for ~83% of properties in England, as such council tax rates are calcuated as a multiple of the band D value). One would expect that if you were to up-rate the council tax bands to reflect house price inflation we would see the bands A-D to represent 75% of properties as ranked by price.

Table 1: Council Tax bands in England

Source: 1991 band values from Wikipedia, uprated values via the Nationwide House Price Index, percentage of propertis from Neighbourhood Satistics.

Using data from DCLG (formerly ODPM) we discover that the lowest quartile houseprice in 2005 is £115,000, while the median house price is £159,150. We also see from the DCLG data that the mean house price in 2005 was ~£192, while using the mid-points of the bands and the percentage of properties in 2004 we see that the mean house price is ~£203k. While this is very back-of-the-envelope it serves to show that the current banding system isn’t reflective of the current housing market, however data on the upper quartile prices (the decile distribution would be more useful) would be need to understand the distribution more fully.

However looking at the national picture ignores the fact that different areas have different house prices and distributions of house prices. Burnley’s lower quartile house price is only £30,000 while Kensington and Chelsea’s was £313,750. Even within regions we see major variations, in Yorkshire and the Humber the lowest lower quartile house price by district is £47,500 in Kingston upon Hull, while in Harrogate the lower quartile house price is £142,500.

If we go on to consider the median we see that Burnley has the lowest median and mean house prices, similarly Kensington and Chelsea has the highest median and mean house prices. If we start to analyse the relationship between these three characteristics we see that Kensington and Chelsea has the greatest difference between lower quartile and median prices and also between median and mean prices. However Blenau Gwent has the smallest difference between the lower quartile price and the median price suggesting this location has the smallest variation in house prices, while Newham has the lowest difference between median and mean house prices suggesting the least skew in house prices.

If we compare the size of these differences to each other we see that in Welwyn Hatfield the difference between the median and the mean is 250% (2.5 times) of the difference between the median and the mean. This suggests that there is a significant skew in house prices in Welwyn Hatfield.

This is just a simple glance at the complexity of trying to understand the British housing market, and we haven’t even considered differences between property types (flats, terraces, semi-detached, detached; 1 bedroom, 2 bedroom; new build, 1960s properties, pre-1900s, etc.) let alone locational factors (proximity to transport/green space – which GLA Economics show have impacts on property prices; others show that schools and amenities can also have an effect on the property price). Even after that we have yet to consider that the socio-economic class and characteristics of the residents of a neighbourhood have an indirect effect on property prices.

The ability to pay
Further to the inadequacies of the current system to match the current structure of the housing market is the lack of any consideration of the ability to pay within the base calculation. Instead the inability to pay is matched through benefit awards or reductions (all student households get exemption, while single adult households get a 25% discount). There is an expectation that people in expensive homes can afford to pay for them, which in the nature of the early 1990s market may have been the case when house prices weren’t so out of line with earnings and income. Instead many have benefitted from significant rises in house prices without seeing similar rises in their earnings, subsequent moves are based on the ability of others to pay for the gains in their house price they have earned. This is why some are campagining for a system of local income taxes, which in the general sense are fairer, but we may see significant variations in between localities that may further distort the housing market in such a crowded market. While people complain about large increases (which is indeed a concern) we should remember hat the council tax band duties are not proportional to the difference between the values of properties in the bands.

Local funding
The Council Tax, while a highly contentious issue for localities acutally only account for roughly a quarter of local government income the others coming from central government funding (the protected Housing and Education grants, and the general Central grant). However the reason for large increases is that there has been little real-terms increase in central government funding in recent years. The Lyons Inquiry into Local Government has been asked to investigate sources of local government funding – we should hopefully find out their ideas in March. It is unlikely that a radical rethink is on the cards, and certainly not one that considers either income or headcount as a base. The most likely result is a rehashing of the current Council Tax that might respect the greater variations that occur in localities, perhaps awarding each region or local authority area with its own banding system – however this would also be dependent on any recommendations on the structure of local government.

The Daily Mail obvious has its own particular agenda to promote, but of course new kitches, conservatories, extensions, gardens, and loft conversions will fundamentally alter the price of a home and is value relative to the market – while part of the upgrade was to improve the living condition in most cases people will consider the improved re-sale potential that their upgrade has ensured.

This is not a situation of greedy central government trying to penalise people for their housing gains, it is a function of the uncontrolled inflation of the housing market that has occured over recent years, because our inflation target excludes housing costs. Council Tax revaluation will not hit home owners the worst, it will hit those who live in private rented accomodation as most social renters are on incomes low enough to make them eligible for council tax benefits (due to the residualised nature of this sector).

The issue of local government finance is highly complex, of which the Council Tax its context are a very complicated part. And both link into the debate about the nature of local communities and the government/administration of those communities. While an area of heated political concern, it is also a subject that needs a significant evidence-based approach that enables open and considered debate which can reach fair and socially equitable decisions.