Monday, 16 December 2013

Labour and the landbanks - good politics but bad policy


“The homebuilding industry, which owns a significant landbank, does not appear to systematically hoard land with implementable planning permission; most land of this type is under construction.”

This was the conclusion of the Office of Fair Trading back in 2008. And I know times have changed since then what with the financial crash and so forth. However the fundamentals of the industry haven't changed and, to be honest, the 500,000 or so permissions that haven't been built represent a low rather than a high figure - at least in national terms. Indeed, if we take the projections of housing need at face value (I think they're completely barking mad though) then this represents just over two years' supply.

Since the last time Ed Miliband talked about this subject, things have moved on. I'm guessing that his advisors looked at the evidence and discovered that the big housebuilders weren't sitting on loads of land they weren't intending to develop. So the rhetoric has changed - we now talk about land 'hoarding' instead. That and the fact that housebuilder profits have risen!

Miliband will point out that the profits of the four biggest housing developers have soared by 557% this year. He will accuse them of hoarding land to push up its value, with homes being built at the slowest rate witnessed in peacetime for almost a century.

Over at the New Statesman, they are helpful to Ed by casting a wider net on the supposed landbanking:

One reason for this is the practice of land banking, with investment funds, historic landowners and developers sitting on vacant land and waiting for its value to go up.

The essential argument remains unchanged. Houses aren't being built because developers are waiting for values to rise. As we've pointed out, this isn't true for the housebuilders (indeed they've been buying up land because their land supply was drying up) but there is a wider truth, that of development viability.

Put simply, plenty of investors and developers bought land and property prior to 2008 and are regretting it. They paid more than they should and, not surprisingly, are reluctant to realise that loss. As a result plenty of sites with development permissions, particularly in the inner city, are simply not viable.

Worse, the expectations of planners add costs - sometimes these are valid (cleaning up contamination, getting the drainage right) but others are indulgent (zero-carbon housing). To be fair to local councils, they're constrained by the onerous rules laid on them by well-meaning idiots in Whitehall. And by expectations set in the time before the financial crash.

As a result of this developers shun more difficult and marginal housing land and are prepared to wait for better options to emerge. This is a particular problem in London where much of the development land is marginal and expensive to develop. And if it's not viable to build market housing on this land, it's certainly not viable to build social housing.

The answer doesn't rest with compulsory purchases or with new rules and interventions but with the removing of barriers to viability. The current idea of allowing the renegotiation of s106 agreements is a good one but we also need to allow for greater flexibility in other barriers such as the requirement for zero-carbon homes.

Finally a note about those profits. As ever it rather depends where you start from - by picking 2010 when housebuilder profits were very low the rise seem massive. However, the big housebuilders' margins have yet to recover to pre-crash levels (about 17%). Indeed, the recovery in profits are because the builders are doing just what Miliband says he wants them to do:

Until now the biggest driver of the recovery in housebuilders’ margins has been the changing nature of their land banks. Having held expensive, low-margin land bought before the financial crisis – much of which has now been built on, written down or sold – they have found themselves with cheaper, higher-margin land picked up during and after the recession.

The big block to viability - and to sustaining those profits - is our old friend planning:

In addition, many of the bullish forecasts for housebuilders’ margins and profits assume a big rise in sales volumes – which still lie some way off their 2007 peak – and this is reliant on the planning system keeping pace.

What Miliband is doing is finding scapegoats and easy marks (greedy developers, NIMBY councils and profiteering housebuilders) rather than proposing things that might actually ease the process of development. Great politics but pretty poor public policy-making.

Update: some kind folk at Channel 4 have done a fact check and here are the conclusions:

Land banking or hoarding could be a problem, but there is no evidence that the big developers are guilty of hoarding land. In fact, the number of unimplemented planning permissions has fallen since 2008.

Developers appear to be working through their land banks more quickly.

A string of independent reports has found no substantive evidence of the big housebuilders trying to rig the market by sitting on land. All of which suggests that Mr Miliband might be aiming his lance at the wrong windmill here.

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