From Capital to Construction: How UK Savings Can Finance Housing Supply Without Public Spending

Papers are the author’s own opinion and do not necessarily reflect the views of Onward.

Scarcity by Design argued that Britain’s housing crisis is not simply a failure of planning, but the result of planning constraints interacting with global capital flows. When supply cannot respond, capital inflows reprice land rather than finance construction. The consequence is rising prices, weaker affordability, and persistent undersupply.¹ The natural follow-up question is whether domestic capital can be redirected to solve a problem that foreign capital has helped to intensify.

The answer is yes. Britain has deep household savings, a large pool of retail investors, and an acute shortage of homes.² What is missing is a mechanism that channels those savings into new supply rather than into bidding up existing stock. A targeted tax reform could do precisely that, without public spending, without subsidies, and without inflating prices.

The proposal is straightforward. UK resident investors who pre-purchase newly built homes off plan would receive a time-limited income tax relief on rental income from those properties. In return, developers would gain early sales that unlock finance and accelerate construction. The state would forgo tax on income that would not otherwise exist, while gaining additional housing supply, higher transaction volumes, and wider economic activity.

This is not a demand-side giveaway. It is a supply-side financing reform.

The development finance constraint

Housing shortages are often discussed as though builders simply choose not to build. In practice, the binding constraint for small and medium-sized developers is finance. Banks will not lend at scale without pre-sales, particularly in the residential development market.³ Equity capital is expensive. Planning delays increase risk and compress margins. The result is a system that favours large volume builders and disadvantages the smaller firms that once delivered the majority of new homes.⁴

Pre-selling homes off plan is the cheapest form of development finance. It reduces risk, satisfies lender requirements, and improves cashflow certainty. Large developers already rely on this model, particularly in London, often using overseas investors. Smaller builders, especially outside prime markets, struggle to attract early buyers and therefore struggle to build.⁵

A tax incentive that encourages UK savers to pre-purchase new homes would directly address this financing bottleneck. It would substitute domestic capital for foreign capital, while expanding supply rather than inflating prices.⁶

How the policy would work

The policy has four core elements.

First, UK resident investors who pre-purchase a new-build home before construction begins would receive a partial or full exemption from income tax on rental income for a fixed period, for example fifteen years.

Second, these purchases would be exempt from the additional stamp duty surcharge normally applied to second homes, provided the property is newly built and bought off plan.

Third, to avoid crowding out owner-occupiers, no more than fifty per cent of units in any development could be sold under this scheme. The remaining units would be sold conventionally, most likely to owner-occupiers or standard buyers without tax relief.

Fourth, eligibility would be limited strictly to new supply. No existing homes. No conversions. No speculative flipping. The relief would apply only to homes that would not otherwise be built.

This is a supply-conditional incentive. If nothing is built, nothing is claimed.

Why this works

From a development perspective, the benefits are immediate. Pre-sales unlock bank finance, improve loan-to-cost ratios, and reduce the amount of equity required. Risk premia fall and projects that would otherwise stall become viable, particularly for small and medium-sized builders.⁷

From an investor perspective, the policy shifts housing investment away from capital gains and towards income. A time-limited tax exemption raises net yields, making rental investment viable in lower-value regions where price growth is modest but housing need is acute. Capital is therefore directed towards areas with strong rental demand rather than speculative upside.⁸

From a macroeconomic perspective, the reform channels domestic savings into productive investment. Pettis and Klein argue that global imbalances arise when surplus economies export excess savings that are recycled into asset inflation rather than real output. In a deficit country like the UK, those inflows are absorbed domestically, and binding housing supply constraints ensure that this absorption takes the form of higher land prices rather than meaningful additions to housing supply.⁹ This proposal changes the channel of absorption, directing savings into construction activity, labour demand, and physical capital formation.

From a fiscal perspective, the cost is limited and largely notional. The state forgoes income tax on rental income that would not exist without the incentive. In return, it gains stamp duty from transactions, VAT on construction inputs, corporation tax from developers, and income tax from construction employment.¹⁰ The net effect is likely to be neutral or positive.

Addressing the objections

Some will worry that this subsidises landlords. That concern is understandable but misplaced. This is not a blanket tax break for buy-to-let. It is narrowly targeted, time-limited, and conditional on new supply. Investors cannot use it to bid up existing homes.¹¹

Others will argue that planning reform alone is sufficient. Planning reform is essential, but finance still matters. Even with better planning, projects fail without capital. This proposal complements planning reform by ensuring that once permission is granted, homes are actually built.¹²

There will also be concerns about regional distortion. In practice, the opposite is likely. Because the incentive rewards income yield rather than capital appreciation, it favours places where rents are strong relative to prices. That naturally channels investment towards less affluent regions where housing shortages are severe but speculative demand is weak.¹³

A centre-right reform

This proposal aligns squarely with a centre-right economic agenda. It uses markets rather than mandates. It mobilises private savings rather than public spending. It supports small and medium-sized builders rather than incumbents. It increases supply rather than inflating demand.

Most importantly, it recognises that Britain’s housing crisis is as much a financing problem as a planning one. Scarcity by design is not only about what we block, but about what we fail to enable.

If Britain is serious about delivering 1.5 million homes, it must make it easier to finance them. Allowing UK savers to invest tax-efficiently in UK housing supply is a pragmatic and conservative place to start.

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1. Michael Pettis and Matthew C. Klein, Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace (New Haven, CT: Yale University Press, 2020), chapters 2–4 and 8–9. ↩︎
2. Office for National Statistics, Housing Purchase Affordability, UK: 2024 (Newport: ONS, 2024). ↩︎
3. Bank of England, The UK Commercial Real Estate Market and Financial Stability, Financial Stability Report (London: Bank of England, latest edition). ↩︎
4. Institute for Fiscal Studies, The Determinants of Local Housing Supply in England, IFS Working Paper W24/35 (London: IFS, 2024). ↩︎
5. Centre for Economic Performance, London School of Economics, Supply Constraints and House Price Dynamics, SERC Discussion Paper 181 (2016). ↩︎
6. Filipa Sá, “The Effect of Foreign Investors on Local Housing Markets: Evidence from the UK,” Journal of Housing Economics 49 (2020): 101692. ↩︎
7. Paul Cheshire, Christian Hilber, and Ioannis Kaplanis, “Land Use Regulation and Productivity: Land Matters,” Journal of Economic Geography 15, no. 1 (2015): 43–73. ↩︎
8. Alain Niyibizi, Elena Patel, and Gabriel Zucman, The Effect of Foreign Investors on Local Housing Markets: Evidence from the UK, EU Tax Observatory Working Paper (2023). ↩︎
9. International Monetary Fund, World Economic Outlook Database, 2024 Edition (Washington, DC: IMF, 2024). ↩︎
10. Department for Business and Trade, Overview of Greenfield Foreign Direct Investment (FDI), 2003 to 2023 (London: Government of the United Kingdom, 2024). ↩︎
11. Christian A. L. Hilber and Wouter Vermeulen, “The Impact of Supply Constraints on House Prices in England,” Economic Journal 126, no. 591 (2016): 358–405. ↩︎
12. Office for National Statistics, Balance of Payments, April to June 2025 (Newport: ONS, 2025). ↩︎
13. Charles Goodhart and Manoj Pradhan, The Great Demographic Reversal (London: Palgrave Macmillan, 2020), chapters 6–7. ↩︎