Land value capture looks like an idea whose time has come

Originally published on September 13 on my blog for Inside Housing.

How does land worth £21,000 or £482,000 per hectare suddenly become worth £1.95m? And who should get the windfall?

The answer to the first question is, of course, when agricultural or industrial land is granted planning permission for residential use (all three figures are estimates in government statistics).

The answer to the second is much more complicated – getting it right could boost construction of new homes and provide a new source of funds for infrastructure and affordable housing; getting it wrong could destroy incentives for landowners to bring land forward and mean housebuilding dries up.

Now the all-party Housing, Communities and Local Government Committee has published a report on an issue that has a long history dating back to Winston Churchill’s criticism of the ‘unearned increment’ made by landowners following public investment in infrastructure – and even right back to Henry VIII.

Support for reform has grown across the political spectrum and even the last Conservative manifesto promised to ‘work with private and public sector housebuilders’ on the issue.

Supporters note, correctly, that the success of the post-war new towns was based on their ability to buy land at existing use value and use the uplift to fund infrastructure but that all this was stymied by legislation such as the 1961 Land Compensation Act that entitled landowners to the ‘hope value’ after their land is developed.

At the same time history is littered with examples of governments introducing uplift levies and tariffs and supplements that failed to deliver and sceptical landowners and housebuilders argue that reform will be prove much more complicated than supporters make out.

One of the most important conclusions is that previous attempts to tax land value uplift failed for political reasons: landowners simply waited for taxes introduced by one government (usually Labour) to be abolished by another (usually Conservative) government.

The report concludes that ‘it is clear any new approach should have cross-party support’ so the fact that it is endorsed by both Labour and Conservative MPs seems like a good starting point.

It takes a wide-ranging look at the principles of land value capture, reforms to existing mechanisms like Section 106 and the Community Infrastructure and potential legislative reforms as well alternative approaches such as land value taxation.

Giving evidence this month, housing minister Kit Malthouse made clear that the Conservative manifesto pledge referred to changes to the existing system, such as viability reforms already announced, as opposed to new mechanisms for land value capture.

The report welcomes the viability changes and a recent court judgement that makes it harder for developers to avoid their affordable housing requirements but says further changes to Section 106 and the Community Infrastructure Levy are needed.

And the committee clearly wants to go further, looking at the advantages and disadvantages of different models and the way that land value is captured in countries like Germany and the Netherlands.

The committee heard evidence that talk of a new generation of new towns may prove to be just talk if they do not have the same powers as their predecessors.

Most crucially, perhaps, the MPs support reform of the Land Compensation Act as ‘a powerful tool’ for local authorities promoting new towns and urban extensions – and reject arguments that depriving landowners of hope value would be ‘iniquitous’ and breach human rights legislation.

As they put it:

‘We believe that increases in the value of privately-owned land arising from public policy decisions should be shared with the local community. The compensation paid to landowners should, therefore, reflect the costs of providing the affordable housing, infrastructure and services that would make a development viable, as well as capturing a proportion of the profit the landowner will have made.’

Reform of the Act plus enhanced CPO and land assembly powers for local authorities would help deliver ‘a model that has worked well in the past and would lead to a significant, and much-needed catalyst for housebuilding’.

The MPs also argue that the government could do more to capture increases in value from publicly-owned land: rather than selling it to the highest bidder, it could look at cities in Germany and the Netherlands that achieve greater developer co-operation, higher levels of affordable housing and faster build-out rates.

However, it is not only big landowners who benefit from public infrastructure projects: the committee heard evidence that eight prospective transport projects in London, including Crossrail 2 and the Bakerloo Line extension, will generate a land value uplift of £87 bn, with 65% of it going to existing home owners.

The report recommends that the government should set up a cross-departmental project to consider how to capture land value on existing properties.

Whether any of that will be enough to deflect the government from its default option of tinkering with the existing system remains to be seen – just imagine what the Mail and Telegraph would make of anything that taxes home owners with big gardens in the South East.

However, this report from an all-party committee is the clearest sign yet that land value capture is an idea whose time has come.

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