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Not in my back yard

Increasing the supply of housing

by Henry Law
Land value taxation as advocated by the Campaign is only one of many possible ways of collecting land value. Many alternative proposals are put forward, such as development auctions, an idea which has been devised by Tim Leunig of the London School of Economics, who has written a pamphlet called “In my back yard – a proposal for development auctions”, published by the Centre Forum at the beginning of 2007.

The author has started with the assumption that the high prices of housing are due to shortage of supply, with restrictions on planning consents being the bottleneck.

Leunig suggests increasing the supply of housing by making more land available for development. Under the proposed scheme, local authorities would invite offers of land from local landowners, for which they would be able to pay up to five times existing agricultural use value. They would then grant planning consent for residential use and auction the sites to developers.
Link to original article.
Link to FT article by Tim Leunig and Liberal MP Ed Davey summarising the proposal.

The benefits claimed are that it would encourage landowners to bring land forward for development and that the councils would capture the increase in land value released by planning consent. In this it resembles the scheme under which the post-war new towns were constructed, although the land acquisition in that case was by compulsory purchase.

Writing when the housing boom was approaching its peak, the author was working from the assumption that the excessive cost of housing was due to niggardliness on the part of planning authorities, who were in thrall to their “not-in-my-back-yard” constituents. Leunig argues that if the local authorities stood to gain financially from allowing development, they would be more inclined to allow land to be developed, thereby increasing the supply of housing and so reducing its price.

Some general points about the housing market

1    Where is the evidence that shortage of planning consent is a bottleneck in housing supply? In the late-1980s, the London Planning Advisory Committee reported that there were significant numbers of planning consents which were not taken up, and there is no reason to assume that the situation has changed significantly. In my own immediate vicinity in the centre of my home town of Brighton, there are numerous cases of developers playing the planning system by obtaining planning consent and selling sites on – and on – in a game of pass-the-parcel. Now that the music has stopped, those sites, most of which have been vacant since the early 1990s – will remain derelict at least until around 2015, by which time the consents will have expired and the game can start again. In this way, sites – including land in the city centre – have been held vacant for periods of 25 years or more. In addition, there are further important examples in the city, of developments which have been granted consent but which have been abandoned due to the changed economic circumstances.

Without access to the statistics, the only available evidence is anecdotal, but clearly there is an issue of some sort here. Planning consent does not always result in development.

2    Related to this is the number of vacant homes. No planning consent is needed to bring a vacant property into use. The Empty Homes Agency reports that about 700,000 homes are vacant in England. Again, there is an issue here.

3    A further related issue concerns under-occupation, particularly by the elderly. Couples often remain in their family homes long after their grown-up children have left. There may be good reasons for this, for example they may want to have space for their children to come and stay with them, or they may want to remain in a familiar area, or enjoy a long-established garden. But often they stay put due to inertia, shortage of suitable alternative accommodation and because of the trouble and high cost of moving, in particular, transaction costs and the stress of being involved in a chain of buyers and sellers. This again is something that needs to be addressed as part of the process of improving the workings of the housing market.

4    Housing is not an amorphous commodity like sugar. The housing problem has an important geographical component. Every location is unique. Rising demand, reflected in rising prices does not call forth additional supply as no more land can be produced at any particular location, especially a desirable one. On the contrary; rising price trends are an encouragement to owners to keep land off the market in the expectation of further rises.

In a commuter town like Brighton, there is a limited number of housing sites within, say 15 minutes’ walk from the railway station. Beyond that distance it becomes increasingly onerous and time-consuming to make the daily journey to London. People are also restricted as to their choice of residence for a variety of personal reasons such as the proximity of friends or relatives, or on account of the opportunities in the location for cultural and leisure activities. Simply increasing the supply of housing does not solve the problem in its particularity. Premium prices will continue to be paid for land in favoured locations, and when prices are on a rising trend, owners do not rush to sell but will tend to hold sites out of use in the expectation of further price rises. In this respect, the land market behaves in a manner precisely the opposite to that of markets in products and commodities where rising prices lead to increasing supply.

5    The prices of houses, that is, building costs, tend to stay broadly in line with the retail price index
and now stand at about £800 per square metre, which puts the price of a 100 square metre house at £80,000. That is not unaffordable; spread over 25 years, it amounts to under £70 a week. It is not house prices that have spiralled, but land prices. It is not pedantic to make this distinction, as neglecting to do so has made it more difficult for the public at large to grasp the nature of the problem, which inhibits informed public discourse.

6    There are significant holdings of land in developers’ land banks. They have an interest in trickling it onto the market so as to obtain the best prices.

7    It would be possible to continue at length but the final point concerns the so-called housing ladder, which the author seems to take as a given. It penalises those who climb on later in life – for example if they have studied or worked outside the country in their earlier years. It leaves families short of cash precisely when they are most in need of it. It is not immediately obvious why a ladder, especially on in which the lower rungs are barely in reach, should be an inherent feature of the housing market.

Critique of In my back yard

As regards the specific proposals for development auctions,

1    The principle of using land values as public revenue is a good one. However, under the present proposal, it is only possible to do this once. It is like extracting a mineral deposit. Revenue gained in this way might be used to pay for a capital project but it does not give rise to an ongoing stream of revenue to keep the project running.

2    There are significant public sector capital and revenue costs involved when land is developed
, in particular those related to the infrastructure needed to sustain the development. Whilst the capital costs can be derived from and will absorb some of the profits from the auction, no revenue stream is thereby generated to cover ongoing costs.

3    The development of land also gives rise to other external costs and benefits which fall on, or are enjoyed by, other owners. The scheme will not remove the influence of the NIMBYs, since it gives rise to winners and losers each with much at stake. Amongst the winners are the owners of farmer land who sell at above current use value and those people in the local authority area who will enjoy the benefits of the facilities paid for out of the proceeds of the auction. Those who will find the development literally in their back yard will be the losers; they will perceive their rural idyll as having been swallowed up under a tide of bricks and mortar. This will in practice mean the loss of amenities like views of open fields and places to walk their dogs, which will not be compensated for by, say, a new swimming pool or library in the town centre. They will just experience more congested local roads, busier car parks and more crowded commuter trains. In practice, the prospect of a lump sum payment may not be sufficient to swing local planning decisions if the voters will find themselves worse off. Local opinion is likely to be bitterly divided in the face of such proposals.

4    In the present situation where credit is tight
and demand for houses is restricted by mortgage availability, the amounts paid for development sites will be substantially less than at the height of the boom.

5    Much developable urban fringe land is either owned by large building companies and forms part of their land banks
, or is the subject of options to purchase by such companies. In that situation, the prospect of landowners offering up land for development auctions is small.

6    There are many urban areas where all the developable land has already been built on
. There is limited scope for building on land formerly occupied by industry and it is also important to maintain a balance of land uses by ensuring sites are available for local employment. The price difference between land in residential use and the same land in business use is primarily due to the effects of the property tax system, since it is subject to a much higher tax under the UBR regime than when when developed for residential use and Council Tax is payable.

The author could usefully have another look at classic land value taxation as a solution the the problem he addresses.