One of the problems about building new houses is the cost of the land they are built on.
There is a huge amount of difference between the value of agricultural land and land which has planning permission for housing. There is also a difference in the value of land which is out in the sticks and land which is close to services and infrastructure.
This is where property investors make much of their money. As this article by Patrick Collinson of the Guardian explains:
While reporting on the recent court case where controversial landlord Fergus Wilson defended (but lost) his right to refuse to let to Indians and Pakistanis, I learned something about how he’s now making money.
He is now far from being Britain’s biggest buy-to-let landlord. He’s down to 350 homes, from a peak of 1,000. And what’s he doing with the cash made from sales? Buying agricultural land close to Kent’s biggest towns. One plot he bought for £45,000 is now worth, he boasted, £3m with development permission. And therein lies the reason why we have a housing crisis.
An unfair profit
So this is how it goes. The local authority or government, funded by the taxpayer, pay for services and infrastructure. Local landowners, without having done anything, then get a massive boost in the value of their land, giving them an unearned windfall when they sell it.
It seems particularly unfair that local authorities, having paid for the improvements, should then have to pay this increased price if they want the land for building social housing.
It is also the reason why developers, if they buy land at these prices, can only afford to build posh expensive flats for millionaires rather than the affordable family homes which is what is really needed.
Proposals for reform
Compulsory purchase without the uplift
Proposals being put forward by John Healy, the shadow Housing Minister involve amending the 1961 Land Compensation Act so the state can compulsorily purchase land at a price that excludes the potential for future planning consent. Which could cut the cost of building 100,000 council houses a year by almost £10bn to around £16bn.
“Rather than letting private landowners benefit from this windfall gain – and making everyone else pay for it – enabling public acquisition of land at nearer pre-planning-permission value would mean cheaper land which could help fund cheaper housing,”
The Guardian article which that quote comes from has the heading “Labour plans to make landowners sell to state for fraction of value”. However, if you take into account the fact that the extra income is unearned and is often only there because of state spending in the first place, the proposals seem much more reasonable.
Some Conservatives are inevitably hostile, such as Liz Truss who has described the idea as ‘sinister’ However others are more sympathetic. For example, Conservative MP and former planning minister Nick Boles who agrees that the huge windfalls gained by some landowners appear inequitable, saying
“There will be mass opposition, but there aren’t that many landowners and they are not a huge voting block. Not all Conservatives would naturally feel comfortable with this but I have been struck by the positive reaction.”
Sajid Javid also appears to look on this favourably saving “I think it’s right that the state takes a portion of that uplift to support local infrastructure and development.”
A land value tax
Another proposal, supported by Tony Blair (although that alone is not a reason to dismiss it) is to introduce a new land value tax.
A land value tax would be an annual charge levied on the value of land itself. Supporters of the tax say it would stop developers from “land banking” and get building.
However, it would be very hard on people owning property but with no money such as elderly pensioners.
Personally, I prefer this idea of allowing the state to compulsorily purchase at the lower value, particularly if the state is responsible for the price uplift due to its investment in the neighbourhood in the first place. But no doubt you will have your views on this.
The best action would be to clamour to your MP for the solution you prefer. You can always contact your MP via the Write to Them website
Please also let me have your comments below. I am not an economist so there may be points I have missed.