1 February 2018

Land-banking is not to blame for the housing crisis


The government has found another way to put off ending the housing crisis: it is to launch a review into land-banking, and is expected to recommend a “use it or lose it” approach.

It is the latest in a depressingly long list of Labour policies that the Conservatives, who clearly have no ideas of their own, are to implement. When “Red” Ed Miliband floated the idea in 2013, Boris Johnson argued that: “you won’t get developers risking their cash to build, if they are told they are vulnerable to Mugabe-style expropriations.” This was as true then at it is now.

According to Sajid Javid, such an approach is needed “to stop owners from holding developments to ransom”.

“We’ve got a housing crisis. We’ve got no time for anyone who is just anti-development for the sake of it,” Mr Javid said in an interview with The Times. “If you are nimby, the government is not going to be your friend. We are on the side of people who want more homes.”

It’s refreshing to hear a cabinet minister admit that there is in fact a crisis. Last year at Conservative Party Conference there were plenty of events about the housing “shortage” but none whatsoever about the “crisis”. Maybe this year the censors will take a more light-touch approach.

Since 1995, house prices in the UK have increased by an average of 300 per cent  in real terms. In some areas of London the figure is over 1,000 per cent. This lack of housing that people can afford has a devastating impact on people’s quality of life and career prospects. Moreover, it leads to people delaying starting a family of their own, which is not only upsetting for people who would love to have children, but will also create problems for the economy in the future.

So while Mr Javid is right to state that we are facing a housing crisis, he is wrong to blame developers for hoarding land, and his proposal to use compulsory purchase orders won’t solve the housing crisis, it will exacerbate it.

How big of a problem is land-banking? The evidence suggests not very. For example, a 2008 report by the Office for Fair Trading “found [no] evidence to support the view, that, at the national level, homebuilders are hoarding a large amount of land with implementable planning permission on which they have not started construction”. A more recent report by the Home Builders’ Federation reached a similar conclusion.

The idea that developers might want to hoard land as the value of it will continue to increase seems superficially plausible, especially to politicians desperate to deflect blame. All developers need land for which they have secured planning permission to build new homes. If they did not have such a pipeline, there would be severe bottlenecks. Once all the houses they had permission for had been built and sold, they would have to wait years to get more planning permission to build more homes. The slower and more unpredictable the planning process is, the longer the pipeline needs to be.

Although the price of the land certainly does increase over time, it makes little to no sense for developers to miss out on profits and rental income just waiting for the land to appreciate. Investors are unlikely to be impressed by a business deliberately reducing its return on capital.

At this point it should be obvious that any move by the government to clamp down on land-banking would be an ineffective way to solve the housing crisis. It should also be starting to become clear as to why it might actually exacerbate the housing crisis. As already mentioned, attempting to expropriate the small amount of land-banking currently being used by developers would be to disrupt their business model. As a result, the developers will be unable to attract investment and funding for projects, thus decreasing the supply of new housing even further.

Moreover, compulsory purchase orders will have a negative impact on the value of house-building firms, if the government can simply expropriate land from developers reluctant to invest in these firms. We already witnessed this back in November when Philip Hammond announced a review into land-banking and the share price of UK building firms took a hit. If the government follows through with its plans, then there will be a lack of investment, developers will be reluctant to enter the UK market, and the housing supply will continue to fail to keep pace with demand.

It might be tempting for the government to blame builders in the private sector for not building, as this conveniently diverts attention away from the fact that there are vast amounts of public-sector land which could be used to provide the homes which the UK so desperately needs.

In his new book Hearts and Minds, former government minister Sir Oliver Letwin describes his struggles to free up public-sector land for home building. The book highlights not only how much land the public sector holds, the majority of which is of no use to the government, but also just how reluctant those working in government were to release the land. This is the real land-banking issue. The culprits are not developers in the private sector, but the government. The state holds vast swathes of land, which could be used to build the homes and alleviate the housing crisis.

Moreover, characterising building companies as greedy, land-hoarding robber barons is a useful distraction for the government. Theresa May claims that she wants to address the housing crisis, but she has consistently blocked the most effective means of solving it. For example, she has shown no appetite to liberalise the planning system, and she has ruled out building on the Green Belt.

There are some very simple solutions to the housing crisis. For example, research conducted by Hilber and Vermeulen found that the largest impact on house prices was caused by the regulatory constraints imposed by the planning system on development. As such, liberalising the planning system would increase the supply of available homes and thus reduce prices.

Furthermore, a paper by the Adam Smith Institute revealed that simply removing restrictions on land within 10 minutes’ walk of a railway station in London’s Green Belt would allow the development of 1 million more homes. Research conducted by Cheshire and Sheppard demonstrates that regulations relating to Green Belts are a factor as to why housing affordability in the UK compares unfavourably with that in other developed countries. Therefore, building on the Green Belt would again increase supply and so reduce house prices.

Either for political reasons, or simply because she does not understand the issues, Theresa May has refused to adopt the solutions which would solve the housing crisis. Instead she has focused on problems which are irrelevant, with ineffective “solutions” such as exempting first time buyers from stamp duty, or those which would actually exacerbate the crisis, such as extending Help to Buy.

The government’s latest proposal to clamp down on land-banking will increase risk for developers. If the Conservatives are serious about ensuring that people can afford to buy their own home and are not crippled by high rents, then they need to liberalise the planning system, allow developers to build on the Green Belt, and sell off the huge amount of public land. Everything else is a distraction.

Ben Ramanauskas is Policy Analyst at the TaxPayers' Alliance.