Housing Supply and The Landowner Question

I have a gripe with landowners.

Landowners are key players in the housing supply debate who often go unnoticed.  We don’t talk enough about landowners.  Like housebuilders, landowners also walk away from residential development schemes with money in their back pocket.  But I don’t see them occupying the front pages of the Daily Telegraph or the comments section of MailOnline.

Landowners have the UK spatial planning system to thank for generating value in their assets and the UK speculative housebuilding industry to thank for extracting that value and turning it into landowner cash.

Given the perilous state of UK housing, this begs the following questions – why do landowners deserve to continue benefiting from decades-past government policy that placed housing delivery in the hands of the market but forgot to smartly regulate that market?  And, why do landowners deserve to continue benefitting from decades-past government policy that restricted the use of their asset, thereby indirectly increasing its value?

In response, my opening gambit is this: we need to reconfigure the residential land acquisition process so that landowners shoulder more of the costs, risks and burdens associated with increasing housing output in the current macroeconomic context of housebuilding.  Let me explain why.

Firstly, when compared to housebuilders, landowners bear little, if any, risk in the financial structure of the speculative residential development process.  Yes, land acquisition deals might collapse, on occasion, but as a former land buyer, I know very well that there will always be another chance for landowners to sell housing land to another builder. House price inflation, the 18,000 other housebuilders registered with the NHBC and an insatiable demand for new homes pretty much guarantees this. I know I’m skirting around the viability issue here. But that’s because it’s an issue dictated by landowners. Not housebuilders.

Secondly, whilst land doesn’t make up a huge proportion of the financial structure of a development scheme, it’s part of the problem and has a reasonably significant part in explaining housing supply constraints.

Figure 1: The Financial Structure of the Development Scheme – current day (A), optimistic (B), pessimistic (C).

Figure 1

Figure 1 shows the financial structure for a part residential part commercial (retain and let) development scheme in Sheffield, with a 2.5 year development period.  Structure A is current day costs and values, Structure B is an optimistic price and value inflation scenario and Structure C is a pessimistic price and value deflation scenario.  Figure 2 gives you the details.

Figure 2: Optimistic (B) and Pessimistic (C) Development Scenarios

Figure 2 Short

What’s important to notice in this example is that the land cost doesn’t change in those optimistic and pessimistic scenarios.  It remains the same because the land deal is already done; ownership exchange has occurred by this point.  It’s in the ‘post land acquisition’ part of the development process where the risk is realised.  The developer shoulders all of this risk.  It comes of the bottom line.

Remember Mr Landowner?  By this time, he’s long gone.  Already walked away with his cash. He doesn’t need to worry about this part of the development process.  There is no chance of clawing back any money from him.

Or is there? Those working in residential development ‘post recession’ might say that, actually, there is.  Land deals can be structured so that deferred payments are made to the landowner part way through the development programme to account for market changes. And they would be right.

But I’d argue that more needs to be done to ensure this happens legally, away from the auspices of the developer’s profit motive.

More needs to be done to capture the value inflation of land granted residential planning permission. Because, this value inflation doesn’t just provide developers with the risk premium necessary to speculatively deliver housing. It also goes in the back pocket of the landowner.

Within the current context of housing market volatility, the landowner continues to unfairly benefit from the speculative residential development process, whilst the housebuilder shoulders an increasing burden of risk and, in some of the UK’s struggling housing markets, with little prospect of reward.

So, what can we do? Three things:

1)      We can ‘shave’ some of the land value – a development levy/tax/charge – to fund affordable homes and infrastructure requirements. This should be administered regionally (definitions on a post card…) and should not be part of the planning process.  An entirely separate legal process should occur between the LA and the landowner, which kicks in as part of the land ownership exchange process.  Create a land tax officer if need be.

2)      We can ‘shave’ some of the land value – a development levy/tax/charge – to be held in situ in a risk-abatement account, underwritten by the Government, to give the developer a risk comfort blanket, thereby stimulating developer engagement with risky housing markets.  If it isn’t used, it goes into the above pot.  Again, this should not be part of the planning process.  A separate legal process should occur between the Government, developer and landowner, which kicks in as part of the land ownership exchange process.

3)      A vacant land levy could prevent landowners from ‘hoarding’ land with residential planning permission.  But not for vacant land without residential planning permission. You can’t force the market.

To some extent, the above solutions nullify the residential land market.  But is it really so draconian to consider taxing the ownership exchange of land for residential development, to tend to the basic human needs of the 21st century?

The easier solution would be to ask housebuilders to roll up their sleeves, build more homes and just get on with it, changing their conventional and long standing strategies to do so and taking on more risk.  But as Cameron et al already know, this isn’t working and is taking up time. We don’t have time, we have a housing crisis.

The land (owner) question needs raising.  Let’s talk about it.

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3 Responses to Housing Supply and The Landowner Question

  1. stevenboxall says:

    Yes, I agree, the landowner gets too much for doing too little.

    However, I don’t agree with the land taxation/development charge idea – this has been tried in the past and hasn’t worked. Landowners just withdraw from the market hoping and believing that a future government will remove it. CIL is a type of such a charge, as are S106s, but already we have the government saying ‘don’t apply it here; don’t apply it there’. We need other, perhaps simplier, ways of capturing the increase in land value for the benefit of the community and society.

    I have recently published my own thoughts in my blog about increasing the supply of homes:

    http://stevenboxall.wordpress.com/2014/06/12/homes-and-housing-how-to-solve-the-problem-of-supply-its-simple-but-not-simplistic/

    The section on New Towns ect touches on landownership and uplift in land values.

  2. Polemic Pain says:

    Hang on, I dont understand why someone who buys some land at a market price is not allowed to benefit from the purchase to the full. they have assumed risk in buying it in the first place. Or are you talking about historical land owners who have had it for years and you don’t think deserve to have a huge profit when selling their family jewels?

    Or are you going one stage further and suggesting that owning land is more a lease from society and that land belongs to the state not an individual to decide what they want to do with it?

    I also believe that the price a landowner receives for land includes the risk premium, or in this case discount, of not bearing any further risk. Landowners would want to be paid higher prices if the they had to assume future risk.

    Rather than add more regulation would it not be more efficient to loosen the current planning laws which create these huge price differentials all based around planning permission?

    The part of your chart I find most surprising is how little the cost of the land is in proportion to the developers profit which somewhat suggests that perhaps you are targeting the wrong component when arguing about fairness.

  3. Samuel Fisher says:

    My understanding too is that land costs for residential developmemt are higher than the chart indicates and closer to the construction costs.

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