The government’s new housebuilding target of 300,000 net additional homes per year for England will require new build completions to rise from around 184,000 to somewhere close to 280,000 units a year. To achieve this, the government needs to tackle three key issues related to the current dysfunctional land market.
Firstly, the requirement to bid for land parcels makes it prohibitively expensive for smaller scale builders and housing associations, as well as cash-strapped local authorities, to acquire land. Second, too many planning permissions are held by non-house builders due to their ability to profit from rising land values. Thirdly, lower levels of infrastructure investment have meant that fewer large scale sites are opened up, and the ability to claw back only a quarter of the uplift in land values means there are insufficient funds to invest in new infrastructure.
The land market is disproportionately impacted by the compensation rules set out by Parliament. When the compensation rules assume that land will be awarded planning permission in the future, then land will trade at levels close to residential value.
But if the rules do not award compensation for prospective planning permission, as in the Netherlands, then market values will trade at levels close to agricultural or industrial land values. This is why the Netherlands has been able to build two thirds more housing units than Britain since the mid-1970s.
One approach to reforming the land market is to amend the 1961 Land Compensation Act and remove “prospective planning permission” from the compensation arrangements. This would have a direct impact on land prices, causing market values to fall much closer to use value: there would no longer be an incentive to hoard and speculate on land. This market-based solution would improve the efficiency of the land market and reduce the need for wasteful government intervention, such as spending nearly 10 times more on housing benefit than Germany as a percentage of GDP.
This reform would enable private sector housebuilders to expand capacity: they would no longer have to manage the risk of the value of land through time. Small housebuilders would no longer be at a disadvantage, and self-build units could dramatically increase as long as local plans allocated sufficient plots.
Such a reform of the land market would also enable the rise in land values to fund large scale investment across the country, increasing investment by as much as £9.3bn per year across England alone. This rise in land values would permit groups of local authorities to borrow from the capital market to invest in new infrastructure, with the revenue streams from the uplift in land values paying back the bond holders.
Data collected and analysed by the Centre for Progressive Policy during its in-depth analysis of the Oxford to Cambridge corridor suggests that the level of housebuilding can be raised by 8,200 units per annum, based on annual investments of £790m excluding land costs. This analysis can be used to help assess how many incremental units might be built given an additional £9.3bn of investment. Although land values differ across the country, the Centre found that the Birmingham and Leeds city regions generate similar levels of land value capture to the Oxford to Cambridge corridor.
Using this analysis, the Centre estimates that the incremental revenues unlocked through land reform could pay for the necessary infrastructure for an additional 96,500 units per annum, a quarter of which would be in the Core Cities.
This would come very close to meeting the government’s new target of 300,000 units per year. Moreover, 36 per cent of these units would be affordable and fully paid for through this mechanism, which amounts to an additional 35,000 units per year.
Far from being a leap into the unknown, these reforms would actually be a return to how Britain used to build houses. The popular garden cities, new towns and infrastructure projects built in the first half of the 20th century were possible because they used the uplift in land values to fund the projects.
The housing white paper and the Conservative Party’s 2017 general election manifesto recognised the importance of land value capture to boost housebuilding. The government now needs to act and introduce market forces to an opaque and inefficient land market, which remains the major obstacle to building the houses the country so desperately needs.
Thomas Aubrey is the author of a recent report on housing and the land market for the Centre for Progressive Policy.