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Housing and Land

Aug 30, 2019

Understanding the housing crisis: Housing and Land – a brief introduction

 

What is limiting the availability of affordable new-build accommodation in Britain today? This is a complicated question, but a large part of the answer lies in issues related to LAND.

Here are three articles/reports which discuss the relationship between land and housing [and inequality] in some detail. They are all well worth reading if you want to begin to understand why we are in today’s unsatisfactory situation – and what we might do about it.

Murphy, L. [2018] ‘The Invisible Land: the hidden force driving the UK’s unequal economy and broken housing market’ IPPR Commission on Economic Justice.

https://www.ippr.org/files/2018-08/cej-land-tax-august18.pdf

Jefferys, P. and Lloyd, T. [2017] ‘New Civic Housebuilding report: rediscovering our tradition of building beautiful and affordable homes’

https://england.shelter.org.uk/__data/assets/pdf_file/0005/1348223/2017_03_02_New_Civic_Housebuilding_Policy_Report.pdf

Bentley, D. [2017] ‘The Land Question; Fixing the disfunction at the root of the housing crisis’, Civitas

https://www.civitas.org.uk/content/files/thelandquestion.pdf

Here, in brief, are some of the points that can be learned from these reports – although it’s well worth reading them in full to start getting a proper understanding the complex dynamics that are in play.

Much new housebuilding in Britain today is by [large] developers/builders on land that is privately owned – and the following discussion refers primarily to new accommodation built by them.

The first major ‘problem’ for any developer is to find land that they can buy to build on. Existing landowners don’t always want to sell. They will typically only consider doing so if they can achieve a price they think is satisfactory and will aim to get the highest price possible at the time they decide to sell. This is one reason landholders often have some incentive not to put a large amount of land on the market at the same time, because this may decrease its price per acre. They have an interest in keeping land supply scarce. They can often employ ‘waiting’ and long-term strategies because land is not like, for example, meat or clothing. It won’t go off or out of fashion and lose its value if you don’t sell it quickly. Owning land is often a good way of ‘storing’ wealth. In fact the value of land often goes up over time even when the land owner does nothing to improve it at all, which is another reason why landowners may decide to ‘wait’. Land may increase in value if the demand for it increases, or, for example, if its ‘quality’ is improved by becoming more easily accessible by virtue of new [often state provided] transport routes, or through proximity to other attractive facilities – a new shopping centre perhaps. Another critical factor which can increase the value of land is the planning permissions relating to it. If agricultural or industrial land gets [or even is anticipated to get] planning permission for new housebuilding its value increases enormously. Bentley cites figures for 2014/16 showing that whilst agricultural land in South East England was worth on average £22,000 per hectare, its residential equivalent was £3,600,000, for the West Midlands comparable figures were £24,000 and £1,500,000. He suggests that on average £60,000 of the cost of each new house built in this period directly relates to original landholder’s profit from their sale of the land on which it was built. We’ll have more to say about this later.

Back to our builder/developers: when a landowner does decide to sell some land, those who are interested in buying it for development have to make some key calculations. First, what is the price that they must offer to secure it in the face of competition from other potential purchasers and can they access the funds to finance such a bid? Second, and as important, will they be able to produce a profitable development at that purchase price?

All three of the reports above present the competition for land which leads to its high price as a major cause of

  • The high cost of much new housing. [Murphy notes that whilst in 1995 the cost of a dwelling was generally split about 50:50 between that of land and building by 2016 this had changed to 70:30 respectively]
  • The often poor quality of new building and of the overall character and amenities of new developments

Given the ‘production’ cost of a house equals the cost of the land on which it stands + the cost of actually constructing it [and providing such necessary site-services as water, sewage etc.], higher land costs have a strong potential to lead to higher overall house costs. This may lead developers to look for well-off purchasers who can afford to buy expensive properties. In many areas these may be fairly limited in number at any given time, which tends to discourage developers from building ‘too many’ houses all at once on the land that they have purchased. They will want to avoid ‘flooding’ the local market and ending up with houses they either can’t sell or have to sell at prices which aren’t profitable. Typically the development companies own considerably more land than they are currently building on.

The other strategy that housebuilders can employ is to try and cheapen the cost of developing the land that they have bought and the accommodation they create in order to increase the number of people who can afford what they build. This sounds good, but often has major drawbacks. In principle there may be potential for attractive, innovative design using new construction methods and materials which might reduce the cost of each build. But often developers’ cost-cutting simply results in badly designed, small, densely packed, poor build quality accommodation with, for example, no or limited amenities such as publicly accessible green spaces.

All developers, in principle, require planning permission the authorities may make gaining it dependent on providing certain public amenities and a specified proportion of ‘affordable’ accommodation – which may have to be sold [or rented] at a loss in relation to its cost of production. However, currently developers are often able successfully to challenge and substantially reduce these requirements by claiming that they would make the overall development unviable.

Of course, in many cases, the price of new housing could be reduced if the developers made smaller profits. But the dynamics above would still be operative if merely breaking even rather than maximising gains, were the goal. The deleterious effects of high land prices also affects the opportunities for any not-for-profit or public sector building schemes and makes it hard for small private building firms without the capital resources of the large companies to keep afloat. The latter are particularly vulnerable in any period of economic downturn when house prices fall and they lack the resources to ride out lack of profitable sales. Small firms need to recoup the cost of their land purchases more quickly than the large developers who can often adopt a longer-term perspective. The number of small house-building firms in Britain has been steadily decreasing – which some argue has reduced innovation and the range of house styles on offer.

What can be done?

This is a difficult question, but can be divided into two parts

  • What ideally should be changed?
  • What might it be politically possible to change?

All the commentators feel that something should be done to limit the gains landholders can currently make when their land is changed, [or designated as available for change] from agricultural or industrial to residential uses. One possibility would be to tax the profit made by owners of agricultural/industrial land heavily when they sell it to property developers. Not only might it seem ‘just’ to prevent the making of often enormous ‘windfall’ gains, simply through the sale of this type of asset, but the taxes raised could, for example, be used to subsidise social housing schemes. It’s possible this type of measure might also keep down the price of land to nearer its original agricultural value, since owners would have less of an incentive to push its price up if most of their profit would be taxed away. On the other hand it might also reduce their willingness to offer it for sale at all. In periods where the British state has clawed back some land-sale profits, there seems to have been a tendency for landholders to try and sit things out and wait for new governments to bring in more acceptable tax regimes.

Criteria of ‘viability’ in planning permissions might also be applied more stringently. Planning authorities should be more prepared to challenge developers’ [often unwarranted] claims that the conditions demanded of them would preclude any worthwhile profit. Developers should certainly be stopped from playing the viability card to get permissions changed, simply in order to re- sell their site for more than they bought it for – as sometimes is the case. Equally unsatisfactory are situations where potential land-purchasers come to assume that planning permissions are easily challenged. This may then affect calculations of the price they can afford to offer– contributing to the rising cost of land.

On the other hand, some suggest removing planning restrictions all together is the way to go, claiming this will increase the amount of land for development and [thereby] reduce its price. That many developers today hold considerably more land than they are currently building on might suggest that, in the short term at least, increasing the land area available for building is not necessarily a solution in itself. Moreover, planning regulations can be argued to have merit in themselves in providing, if often imperfectly, some useful control on what is built where. Planning has the potential to ensure the long term ‘general public interest’ is taken into account. And where, as is often the case, differences of interest manifest themselves, it can [in the best case scenario] provide a reasoned way of resolving them. One that doesn’t simply give all the power to the economically dominant.

A further possibility to make land available when required and at an ‘affordable’ price is some kind of compulsory purchase system. At the extreme, and politically unlikely in contemporary Britain, the private ownership of land might be ended altogether by its nationalisation or movement into some kind of community trust[s]. The compulsory appropriation or reallocation of smaller amounts of land by the state is however a possibility. At present in Britain governments can allow its compulsory purchase in certain circumstances, for example, when required for key infrastructural projects such as new road or rail routes. In 2012 land was compulsorily purchased by the London Development Agency to create the Olympic site. Expropriated land owners are compensated – amounts are often contested but since the 1961 Land Planning Act are supposed to be in line with what the owner might reasonably have expected to obtain through a private sale for a non-agricultural use. Prior to this, compensation in line with such ‘hope values’ was not the norm. Thus post world war two, the new town development corporations had been able to buy agricultural land at close to existing use-value, enabling them to use the subsequent value uplift to pay for these new towns’. Unsurprisingly, advocates of greater use of compulsory purchase to facilitate building a greater amount of affordable housing, suggest that original landowners receive compensation, but not large profits on the land that they are forced to sell. Some also believe that the ‘threat’ that land might be compulsorily purchased could generally reduce its price.

The ‘New civic housebuilding report’, sees compulsory purchase as a useful resource but also argues it needs to be combined with a well co-ordinated delivery organisation to drive each particular scheme through. Both private and public and non-profit enterprises might be overseen and related to each other by an appropriate overarching development body – which might, for example, set and enforce requirements for developments to be completed within specified time frames. The report references various pre and post world war 11 developments which it sees as having fitted this model. [context? Milton Keynes early stage development land costs only 1% of cost of houses]. It also argues that land which is already in public ownership should be invested into partnerships for long-term returns, rather than being sold for the highest price to speculative developers.

To conclude

There would not seem to be one simple and easily effected solution to the problems the present organisation of land poses for increasing good quality and affordable housing stock today.

Many of those who own land are likely to resist limitations on their freedom to dispose or retain it as they like, or to accept limitations on the profits they can derive from acting as they want. However, those who do not own substantial amounts of land may well find reducing the profits that can be made merely from selling it, something they could agree with. People are likely to be divided by particular planning decisions in terms of whether they see them as directly to their own benefit, to their personal detriment, or as having no particular effect upon themselves. However, some may feel strongly, as a matter of general principle, that planning should facilitate protecting and creating good quality environments and are likely to oppose extensive or total planning deregulation. Orientations towards compulsory land purchase may also be divided, with landholders unlikely to favour it unless they feel it offers them favourable compensation. The New civic housebuilding report raises the possibility that in some circumstances they might also be encouraged to support particular developments based on compulsory purchase if they were offered opportunities to become investment partners in the development and to derive secure, if moderate, long-term returns from this. What is clear is that land is a particular kind of entity. In our society [but not all] it can be bought and sold, but unlike other commodities it is not actually produced. It’s ‘quality’ in terms of various criteria can be changed, but [short of Netherland’s type coastal extension] there’s never going to be any more of it. We can’t get ourselves out of present difficulties by manufacturing more land – so it is vital that we work out ways to use it as effectively, sustainably and equitably as possible.

State action and housing

There can be debate about to what extent and ways in which the state should become involved in housing provision. Some may argue that it should have nothing to do at all. But this is not a real possibility not least because we will always need some kind of legal framework in terms of which land and property ownership and transfer can be regulated. Unless we want to live in a world where people gain and retain their land and homes with physical force, ownership rights need to be subject to a rule of law. What constitutes desirable content of such law can be debated [should the state be able to force people to sell their land for development against their will? Should ownership rights be voided if a property is left empty and unused for a specified period? How should competing claims to a piece of land or property be resolved?] That there needs to be some kind of state-backed law is uncontestable.