Monday, 4 September 2017

No we don't need land reform, we need planning reform

Hardly a week passes without someone trying to pretend that housing markets are somehow immune to the rules of supply and demand. Many of these are just politicians and pundits trying to pretend that black is white but some lay claim to some sort of intelligent analysis - a bit like this from Laurie Macfarlane at Open Democracy:
How did we get here? A popular explanation is ‘we’re not building enough homes’. While this is part of the answer, it is far from the whole story. At the root of the problem lies something that has for a long time been overlooked: the role of land in the economy.
Now before we start on why this argument is problematic, I'll say that for the last couple of hundred years land has become - with each passing year - less important as a part of the economy except where its supply has been barred from a given market (ie housing). Yet people write long articles explaining why this isn't so and how, if only we reformed how we see (or tax, or buy and sell) land, then all these problems would be over.

The article that quote comes from is pretty typical of the genre, interesting and informed but still churning a set of misunderstandings. We can start with this one:
Land first began to be treated as tradable, private property in the 16th century, triggering the birth of modern capitalism. But this transformation gave rise to a tension. On the one hand, landed property empowered people by providing physical and economic security, including collateral to leverage credit, which helped drive economic growth and technological advancement. But at the same time, private property in land was inherently exclusionary: by its very nature, granting some people exclusive rights over what was previously a common resource involves taking away the rights of others.
There are lots of examples that show this argument is false - from Roman law through the edicts of Charlemagne to the Magna Carta - but let's just stick with the last one and Steven Gastowitz QC on the subject:

So, back in the 14th century land (and earlier) was a tradeable private property. Moreover, the fact that property rights - and the desire to have government defend and protect those rights - go back into ancient times tells us that saying their existence triggered "the birth of modern capitalism" is also false.

The whole (and this is pretty crucial) point about the modern market economy is that is is not based on land and the ownership of land. It is possible to be a billionaire and not own a square inch of land (unlikely I'll grant but possible). Business, in its modern identity, is based as much on intellectual property and brand equity as it is on the supposedly 'underlying' value or availability of land. Indeed a great deal of the real estate business isn't buying and selling land but rather the rights associated with land.

The problem is spotted by Macfarlane:
But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. We don’t know the exact breakdown between these two components (bizarrely, there is currently no reliable public dataset on the land market in the UK) but the available data implies that land under homes is currently worth around £3.7 trillion – nearly 70% of the total value of the housing stock. This makes residential land the UK’s most valuable asset, even in today’s high-tech economy.
Now we can talk about financial markets and that 'land values increase natually over time' but the main reason why residential development land is so expensive is because there is so little of it in the places where people might actually want to live (there's plenty - millions of acres - of developable land unrestrained by planning rules at rock bottom prices in places people don't want to live). The result is that government either cheats by giving itself the power to buy land at lower values than could be achieved in an open market - a cheat that Macfarlane notes got clobbered by the courts - or else throws out lots of subsidies. Macfarlane (wrongly but that's a different story) blames Margaret Thatcher:
With the arrival of Margaret Thatcher, the government withdrew from large scale house building, and councils were forced to sell their housing stock through ‘Right to Buy’, and prevented from building more. There was a shift away from supply side subsidies of ‘bricks and mortar’ towards demand-side subsidies of paying housing benefit to boost households’ incomes to enable them to access accommodation. Whereas in 1975 more than 80% of housing subsidies were supply-side subsidies intended to promote the construction of social homes, by 2000 more than 85% of housing subsidies were on the demand side aimed at helping individual tenants pay the required rent.
Although Macfarlane has mentioned the 1947 Town & Country Planning Act ("kept land in private hands, but nationalised the right to develop it") we've arrived at 2000 without asking whether the decisions made under that Act and its assorted successors has any role in driving the lack of residential development land? The problem gets hinted at when Macfarlane talks about financial liberalisation:
An ever increasing supply of credit interacted with a fixed supply of land, fuelling a house price boom. In turn, households were forced to take out ever larger mortgage loans to get on the housing ladder. Thus, a feedback loop emerged between mortgage lending, house prices and ever increasing levels of household debt.
The myth that land reform folk want to push is that this fixed supply of land is a simple fact driven by that old agage - 'buy land they aren't making any more of it'. Yet, at the same time, we're reminded that England uses only 10% of its land for towns and cities - not just the houses but all rest of that urban infrastructure. And, at the same time, significantly less than 1% of England's remaining land is earmarked for housing development. If you wanted to make a big difference the best way would be to double the amount of development land - something that could be done at a (very long, very painful) stroke of the proverbial pen.

Yet Macfarlane and the land reform folk still can't see the simplicity of such a solution preferring instead a government-driven and bureaucratic approach:
Compulsory purchase laws should be changed to enable public authorities to purchase land at agricultural prices, enabling the planning and development uplift to be captured for public benefit once again. A new National Land Bank should be established and made responsible for developing and leasing land, acquiring idle and vacant land for resale, and developing more New Towns. Planning authorities should be given more resources and stronger powers of plan making or zoning so that planning can be a ‘market maker’ rather than a market stifler.
Everything about this approach is wrong. Most of all giving local councils more ability to 'zone' as 'market makers' simply invites the worst sort of rent-seeking. Decisions about what is built, where it gets built and who builds it are no longer determined in a market but instead are the gifts of local council and planning power brokers. By seeking to "level the playing field between tenures" we recreate the world of council housing that so many came to hate and which right-to-buy ended.

Yes land is scarce. But it's not so scarce that we are incapable of allowing a mature market in development to build homes - for sale or rent but mostly the former - for those people who want to buy them in the places where they want to live. But in all of Macfarlane's article - and for all I know the book it derives from - there's no recognition that, in a large part, the unaffordability of housing is a consequence of deliberately limiting the land available for housing. Yet that is precisely what our planning system does.


1 comment:

Sobers said...

There's a third component to the price of a house, to go along with the cost of the underlying land, and the cost of the bricks and mortar. Its the State. By far the largest component now of the cost of a newbuild house is the various regulations the State demands you comply with when building a house, and also the cash bribe you have to pay to the State in order to be allowed do so. This isn't part of planning permission, its entirely separate. Its what are called Section 106 agreements. Basically in order to get your planning permission the local authority demand the developer sign a vastly convoluted document where they agree to pay sums of money for all manner of things the local authority want to do, from building cycle paths, to providing sporting facilities, to road improvements, to provision od schools and doctors surgeries. You name it, the council have a massive list of things they want money for from developers. And at the end of the day the house buyer pays for it all, in higher prices.

It has now got to the stage that even if you expropriated the land from the land owner for zero compensation, all the other State imposed costs mean that the price of a new house house would drop by perhaps 15-25k, ie roughly 10%. The rest is entirely State imposed costs, which are not going away. Indeed if the landowner got zero, the State would undoubtedly grab the extra value for itself, and houses would still cost exactly the same.

For example, this very evening I attended a meeting with a local cricket club, located in a small rural village. This village is currently undergoing a large amount of housing development, and all the developers have had to sign Section 106 agreements. These detail all the money they have to pay for 'local facilities', one of which is the potential provision of a new cricket pavilion. Adding up all the various agreements results in a potential sum of over £70k falling into the hands of the cricket club alone. Larger sums are due to all manner of other local organisations, including the parish council, to spend as they see fit. All of which will be paid by the house buyer.