A note on why land values matter...

This is a really splendid building in Bradford city centre:



As you can see it occupies a large footprint, has three stories and an imposing presence (it's also listed and in a conservation area but those details aren't relevant to my point here). It was recently sold at auction where it was listed at £670,000. I've a feeling it might have gone for less than this despite having good sitting tenants. For less than a flat in Southwark you could have all this magnificence!

The thing is that this price reminds me that land values in central Bradford are essentially zero. Imagine that's a cleared site for a second - could you build a three storey office block (even one that's not natural stone and to a high design quality) there for less than £670,000? Of course not.

The building is, however, there and this means it has value. But the sad - and it is sad - truth is that land in Bradford is pretty much valueless even if the buildings currently sitting on that land can be used and can generate some sort of yield. Forgive me for feeling that it's pretty difficult to have a commercially-driven regeneration strategy if the land values are zero or negative.

Maybe we need a different approach? Like the one here

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Why houses are expensive.

I like Peter Hitchens, he offers the same iconoclastic hammer to the centre-right's certainties as his brother did for the centre-left. Among Hitchens' common themes is a harking back to a time when we had full and steady employment, low levels of crime, stable communities and trust in institutions. Quite rightly, Hitchens tells us that these things are good things and that conservatives - whether of that party or not - should be concerned to get them back.

Sometimes, however, this enthusiasm for the essential elements of conservatism leads Hitchens to the realm of fantasy:

The homeowners of Britain are being lied to, and unfairly smeared to try to get us to accept a hideous and irreparable destruction of green space in suburbs and the countryside. They are also being blamed personally for a problem they did not cause, in a nasty war on the middle-aged. They should resist this.

This opening gambit is familiar, a justified reaction to the now too common trend of blaming 'baby boomers' for all the ills of modern society and especially for houses being so expensive. Hitchens tells us that this ain't so and the fault lies with "grabby developers", mass immigration, the "epidemic of divorce", the success of London, right-to-buy, and what he calls "targeted inflation".

Now, leaving aside the 'positive money' argument that Hitchens uses in his "targeted inflation" argument, it's hard not to see some truth, at least in the creating of demand for housing, in this list. And, as the rules of supply and demand tell us, increasing demand will raise prices if new supply isn't readily available. The problem with Hitchens argument is that he lays all the blame for house price increases on increasing demand for housing (whether as a home or as an investment) and none of the blame on the lack of housing supply.

Or more importantly, land supply. Because it is how much land we have on which to build (taking as read the increased demand Hitchens describes) that determines how much the homes built on that land will cost. After all it costs pretty much the same to build a house in Kensington as it does in Burnley but the former will sell for a few million while you'll be lucky to get a hundred grand for the house in East Lancashire.

And the supply of land for housing, across most of England, is something determined by government. Moreover, for nearly 70 years, the government - national and local - has determined that most of the land in places where people want to live will have a 'presumption against development'. Not to protect special beauty, heritage or environment but simply to prevent 'sprawl' and encourage denser development in the existing towns and cities. The name for this policy - and it's popular right across the English-speaking world - is urban containment. I saw this described in a school debating competition on this subject as a 'tourniquet for the city'.

Urban containment- even when we're laissez faire on densities - doesn't work. Indeed, it's one of the primary reasons for the housing crises in London, San Francisco, Sydney, Auckland, and Madrid. Here's work from Australia's reserve bank on the subject:

According to the research, and assuming typical mortgage provisions, (Note) the urban containment effect (our term) adds from $150,000 to nearly $500,000 to house prices in major Australian metropolitan areas --- this is not the house price, but the additional impact of urban containment ... The urban containment adds up to $29,000 to annual payments on the average house in Australia’s major metropolitan areas

In the UK this uplift would be between £80,000 and £275,000 - this is the cost of that tourniquet and represents, when multiplied by the hundreds of thousands or properties involved, billions in lost opportunity for the UK (and those other places caught in urban containment's web). And remember, simply making development more dense doesn't solve the problem (partly because building upwards is expensive but most because densification simply increases land values which are the source of our problem in the first place).

If we are to have a debate about urban containment it needs to be on an informed basis - one that recognises the social and economic costs of these policies. It isn't good enough simply to list the reasons why there's more demand for housing and then shout:

...the rape of the Green Belt and the overdevelopment of the countryside will mean our children inherit a blighted country, almost unrecognisable as the beautiful, civilised place my generation inherited from our forebears.

This is splendid polemic but doesn't answer the question as to how we offer the same deal to the next generation - how do they get that stake, a real tangible stake, in their land and culture? I agree entirely that some of the development we get today is pinched, crammed, and dominated by brick and concrete with little space for garden, greenery or the margins when kids can build a den or play out the make-believe that ten-years-olds invent. But this overdevelopment is caused by the lack of land, by the containment. London's 1890s and 1930s suburbs - the places Hitchens' waxes lyrical about - were built with space and openness because the land was cheap, there weren't planners with clipboards and rulers to tells them what they could or couldn't do. Why would future developers not do the same given space and a free rein?

The social cost of urban containment isn't a joke either - this is America, which is worse than Britain, but anyone visiting our cities will see this happening:

Homelessness has long been a San Francisco problem, and with home prices rising, it’s arguably worse now than ever. A January report on SFgate.com claimed that the city’s homeless count is close to 6,700, and a local advocacy group estimates the count at 12,000. The problem is all very visible throughout the city, and increasingly, in Oakland and Berkeley, with open drug use and fights blaring out from the encampments that rest along sidewalks and below underpasses. A recent U.N. official, after visiting the Bay Area, said that in some ways, the city’s treatment of the homeless is worse than what she saw in the slums of India.

For sure, there's other reasons for homelessness than just high rents but getting a roof over peoples' heads should be a start. And, right now, someone losing their rented place in London, is going to find it really hard to get another place, for the first time in my lifetime people are on the streets solely because there isn't a home available for them to live in.

It seems likely that we will keep these policies - the rage in Hitchens' polemic really does reflect how people feel - but I hope, in doing so, that we won't carry on pretending that there isn't a social cost to having urban containment. We'll keep large swathes of countryside - much of it not especially special - while cramming more folk into unsustainable city living, having more homelessness and a generation embittered by their inability to do what their parents did, buy a house.

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Do we obsess too much about land?

Let's start by agreeing with this statement (and I think the recent Housing White Paper starts to help):

Secrecy surrounds much of the country’s land ownership. It’s time for the Land Registry database to be completed and opened up to all

And then let's not disappear down the rabbit hole of believing that somehow everything in our economy is ultimately derived from land ownership or that what matters is acres not five pound notes. This is the mistake that Guy Shrubsole makes in this article:

“The ownership of land,” wrote the 19th-century radical economist Henry George, “is the great fundamental fact which ultimately determines the social, the political and … the moral condition of a people.”

Who owns land matters. Landowners get to choose how their land is used, and that has big implications for almost everything: where we build our homes, how we grow our food, how much space we set aside for nature. Owning land confers wealth, status and often political power.

Shrubsole goes on to talk about how many acres the Ministry of Defence owns and how much of the UK is grouse moor. The thing is that, as even Henry George knew, what matters is land value not acreage. Self-described 'radicals' have an unhelpful obsession with how much land folk own rather than how much that land is worth. This obsession harks back to a nineteenth century viewpoint that saw land as the sole source of value and the ultimate store of wealth.

Housing covers just 10% of the UK's land but represents by far the largest proportion of land value (I appreciate that part of Guy Shrubsole's mission is to answer the question 'what's all that land worth'):

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange.

Since agricultural land values are typically about 1% of housing land values meaning that, for a back-of-the-envelope guesstimate, the rest of the UK's land outside cities is worth between £600bn and £1tn. And, discounting mortgage lending, owner-occupied property accounts for £4.4tn of that value (65% of £6.8tn). Back in the 1880s when Henry George was writing, land value probably was in the hands of a relative few men. Today this just isn't true - for all the 'Generation Rent' stuff (and this really only applies to London and the South East) we remain a property owning society.

The problem is that George and other 'radicals' were focused on rents and saw that much of the UK's national income came in the form of rents to that land meaning that taxing land value represented an effective and fair way to tax those rents. Not only does most of the UK's land value - all those owner-occupied properties - not generate any actual cash rent but most people's income comes from the less aristocratic process of trade. And there is precious little link between trade and land values.

Nor does land ownership have very much to do with the UK's (or rather London and the South-East's) problems with housing supply. I'm pretty confident that, were we to designate some land currently used for agriculture as housing land, there will be some happy smiling land-owners. Grubsole talks about the housebuilders sitting on land, something that may or may not be true, but fails to recognise that the amount of land actually allocated for housing in the UK is tiny (less than 1% of the UK's land area) and the housebuilders own only a small part of that housing land.

Our obsession with landed estates strikes me as an unhelpful hangover from a time when these estates really were where the UK's land wealth was held. Those estates are still pretty big and pretty valuable but they are pretty marginal to the UK's economy - the existence or not of moorland maintained for shooting may be a public policy issue but it isn't a matter of any real consequence for the economy or indeed for the majority of the population. And, for all its importance, agriculture is similarly insignificant as an economic sector.

Overwhelmingly the value added in our economy - our national income - does not come in the form of rents and is not dependent in any way on land values, however much you contort the concept. Yet people still look back wistfully to those nineteenth century 'radicals' as if people actually want "three acres and a cow"! Today, our obsession with land only continues because the systems we've created to govern the use of land make it that way. Our planning system creates that huge disparity between agricultural values and development values, local taxes are based (admittedly poorly) on land values, and because house prices are a staple of private conversation the experts in real estate become a mix of celebrities and exploiters of innocent punters.

But it's not the grand acres that this system is bothered with but rather the millions of little plots on which our homes sit. That's where the 11 million mortgages worth £1.1tn are found not on Lord and Lady McMuck's hundred thousand acres of Scottish moorland. Yet Guy Grubsole and the land obsessed fret more about the latter than the former. I agree that knowing who owns stuff would be useful but let's not allow this to distort our view of the UK's wealth simply to satisfy some sort of agrarian radical wet dream based on a world long gone.

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