Planning, profits and public land

Originally posted on my blog for Inside Housing on September 24. 

While all eyes were on the prime minister’s speech at the National Housing Summit you may have missed news that landowners are now making an astonishing £13 bn a year pre-tax profit just from getting planning permission for housing.

That is the estimate in a new report from the Centre for Progressive Policy (CPP) and the National Housing Federation (NHF) published on the same day as Theresa May was telling housing associations what they wanted to hear.

The £13 bn profit made by landowners in England in 2016/17 is up £4 bn on 2014/15 thanks to a huge increase in residential land values in the last two years.

Seen from one end of the telescope, that was already more than the profits of the entire UK housebuilding industry and it is now more than the global profits of Amazon, Coca Cola and McDonald’s combined.

But the impact can also be seen from the other end of the telescope, with housing association after housing association quoting examples of where they have been outbid by private developers for land.

The sites are often public land but individual associations report examples of developers who bid a higher price than them only to do nothing with it or sell it on for a profit shortly afterwards.

At the heart of this is the issue of land value capture that was highlighted in a report by the Housing, Communities and Local Government Committee earlier this month.

The all-party committee gave their backing to proposals advocated by the CPP for a change in the law to allow public authorities to capture the increase in the value of land once it gets planning permission for homes (this week’s report has more details on the change that would be needed).

This would bring Britain into line with what happens in countries like Germany, France and the Netherlands.

If that sounds radical it would essentially be a return to the model used for the post-war new towns, where infrastructure was financed from the uplift in land values, before the law changed to entitle landowners to the ‘hope value’ of future development when land is compulsory purchased.

The idea now has backing from across the political spectrum but so far the government has only tinkered around the edges of it, with housing minister Kit Malthouse telling the committee that a 2017 Conservative manifesto pledge to explore land value capture referred to measures already taken on viability and land value capture.

The £13 bn figure sounds (and is) astronomical but it is based on official government figures on land values for different uses and takes account of value that already gets captured under the current system via Section 106 and the Community Infrastructure Levy.

Take off an estimated £2.8 bn in tax and you are still left with a windfall profit for landowners of £10.7 bn in one year – essentially a form of housing benefit for the very rich that the report estimates is equivalent to 29% of the value of the average home in England.

If that value could be captured under the proposed alternative, more than £200 bn extra could be available over the next 20 years to fund infrastructure investment and affordable housing.

The effect would obviously vary from area to area but the report estimates that London’s high residential land values could enable it to become ‘self-sufficient in funding infrastructure and affordable housing’.

Across the country as a whole, previous work by the CPP has estimated that redirecting landowner profits could boost housebuilding output to 280,000 homes a year with sufficient funding for around 100,000 affordable homes.

If these numbers sound too good to be true, that’s exactly what landowners and housebuilders told the HCLG committee – they argued that such a policy would be impractical and incompatible with human rights legislation (the MPs rejected this point after hearing evidence from a leading barrister).

Few expect a government with all its attention on Brexit to take much more immediate action, especially when confronted with arguments that a change in the law would undermine an existing system that is delivering more homes and lead to a reduction in land coming forward for development.

However, there is little doubt that land value capture would make a huge difference to proposals for the Oxford-Cambridge corridor (the CPP estimates it could fund the infrastructure plus enough subsidy for 36% of homes to be affordable) or to the new generation of new towns and urban extensions long promised by all politicians.

Some individual landowners, like Cambridge University in developing new homes for staff and students or Prince Charles in developing Poundbury, have seen the benefits for themselves.

But a larger change in the system would require a change in the mindset of all involved, by public authorities in regaining the confidence to facilitate large-scale projects and by housebuilders in moving away from their current business model but perhaps the process could begin with central government’s attitude towards public land.

The emphasis since 2010 has been on selling it as quickly as possible to the highest bidder. That produces immediate returns for NHS trusts and government departments whose budgets have been throttled by austerity but it also leads to exactly the sort of problems reported by housing associations that are out-bid for sites.

It’s only three years since the Public Accounts Committee revealed that the government was pledging to speed up the release of public land but not even counting the number of homes delivered on it.

For all the improvements in the land selling process promised by Homes England, the government could go further, for example by adopting the NHF’s proposal that at least 50% of homes built on disused public land  should be affordable to people on the lowest incomes.

One example of how the current system does almost the exact opposite can be seen in a planning row over a former Ministry of Defence site at Beaconsfield in Buckinghamshire.

The government could also change its own mindset: public land is currently seen as a wasted asset that should be sold off as quickly as possible to the highest bidder to deliver short-term gains for departmental budgets.

But what if it was seen instead as a precious and finite resource that could be at the heart of a system delivering long-term benefits for the country as a whole?