Category: Blog Post

The left-leaning think tank The Smith Institute has published a new report called: “The unspoken decline of outer London; why is poverty and inequality increasing in outer London and what needs to change?”  The report is supported by the Trust for London.

Outer London is now in economic decline.

In the past, the popular view was that poverty in the capital was confined to the inner London boroughs and that the leafy outer Boroughs were full of affluent Tory voters.  That is no longer the case.  The report shows that poverty, inequality and deprivation are rapidly shifting from inner London to outer London.  60% of all Londoners living in poverty are now based in outer London, a total of 1.4 million people.  This figure has almost doubled in the past 15 years, from 32% in 2004.  If we don’t act now, London will end up like Paris.  In Paris, the arrondissements in central Paris are very affluent whereas the outer suburbs [the ‘banlieues’] are deprived and disadvantaged with all the tell-tale signs of deprivation ie poor housing, lack of employment opportunities, high crime and racial tensions.

Mayor needs to support the outer London Boroughs.

The report is a timely alarm call to the Mayor of London and all Londoners particularly as the Mayor is preparing the next London Plan at the moment.  The report warns that growth across London has already become unbalanced with employment opportunities increasingly located centrally.  Unemployment is higher in outer London that in inner London.  High rents have priced poorer Londoners out of inner London.  The report calls for a radical rethink to rebalance London’s economy and deliver inclusive growth for all Londoners.  Better paid jobs and affordable housing for local people are desperately needed in outer London.  A greater emphasis is needed on supporting the poorer London boroughs which have suffered from government cuts.

Paul Hunter, Deputy Director at the Smith Institute said:

“London is becoming a divided city.  The ‘trickle out economics’ of city centre growth and turbo charged house prices is not working for outer Londoners on low incomes, who struggle with housing affordability issues and access to good jobs.  That is why we are calling for a more balanced approach to economic development of the capital.  This would mean reassessing infrastructure and regeneration projects to help spread growth across the capital with a much greater focus on tackling poverty.”

Adverse effects of City Centralist policies.

The report suggests that the current ‘city-centralist’ approach to planning is changing the pattern of economic growth adversely particularly for people on low incomes.  The rise in housing costs together with the effects of the so-called ‘welfare reforms’ have driven more low income people into private renting in outer London.  Housing Benefit claims in the private rented sector are up 17% in outer London but down 13% in inner London.  One solution to this is that Mayor should support the introduction of rent controls or rent regulation throughout London.  Rent regulation is commonplace in large cities in continental Europe; Berlin is a very good example of this.  The report also calls for a step change in investment in outer London and that new funding and policies should seek to promote better paid, higher skilled jobs there.  The emphasis should be on local jobs to reduce the costs and stress of commuting.  On housing, the report suggests that the GLA and Boroughs should pilot ‘affordable housing zones’ using publicly owned land to create areas where housing is more affordable including new forms of low cost housing where costs are kept low in perpetuity.

Deputy Mayor for Outer London.

The report recommends that the Mayor of London should create the role of Deputy Mayor for Outer London to be a champion for outer London who would work with the GLA to deliver a new vision for outer London.  There is also a strong case that the now defunct Outer London Commission should be refashioned into an Outer London Inclusive Growth Taskforce with a remit which includes tackling poverty and inequality as much as securing economic growth.  A new vision for London’s suburbs and town centres is needed when strategic decisions are being made.

Axing Crossrail 2?

On transport policies, the report is more controversial.  It recommends that the GLA should review the £30bn of Crossrail 2 funding with a view to redirecting investment in outer London.  But Crossrail 2, like its predecessor Crossrail 1, is designed to improve rail links not only inside the metropolis but also for the Home Counties where a large part of London’s labour force lives.  Many of these work in the financial services industry.  Good transport links are important to maintain the City of London’s competiveness as a world wide financial hub.  It was largely pressure from the Corporation of London to improve London’s transport systems that persuaded policy makers at City Hall to support the development of Crossrail 1 and the Overground network.

If Crossrail 2 was axed, people would still have to commute into London.  But the existing suburban rail services cannot cope at the moment.  So much of the future commuting would be by road thus increasing urban congestion even further with its serious implications for air pollution.  Notably, there is no mention of the problem of air pollution anywhere in the report.  Also it is doubtful that if Crossrail 2 was axed that the money saved would be spent on London’s infrastructure.  It would simply go back to the Treasury.

Improving London’s orbital networks.

The report is right when it suggests that a much greater focus from the GLA and TfL on orbital transport networks in outer London would enable inclusive growth and create new jobs in outer London.  But increasing the number of buses on the roads would not be the solution; that would make the already serious problem with pollution even worse.  The London Borough of Croydon has shown the way forward; trams.  These street running vehicles are pollution-free and inexpensive to run.  With the development of new types of electric trams based on enhanced battery power, large disruptive and expensive civil engineering works would not be necessary to develop new routes.  The proposed West London Orbital Railway should also be supported.  This line would run from West Hampstead/Hendon to Old Oak Common on existing lightly used freight lines. On route, it would interconnect with the Tube and Overground services at Harlesden.  At Old Oak Common, it would interconnect with Crossrail 1, HS2 and the services to Heathrow airport.

Conclusion

Overall, the report is an important contribution to planning for the future of the metropolis.  Its arguments are backed up by detailed analysis and statistics.  I think that it should be given very serious consideration by policy makers at all levels.  Whilst I have some reservations about some of the public transport policies contained in it, I think that the report should be supported by those who have London’s interests at heart.  I recommend it to readers of Red Brick and hope that they will support its recommendations.

By Glyn Thomas, Chipping Barnet CLP

The Smith Institute is an independent think tank which provides a high-level forum for thought leadership and debate on public policy and politics. It seeks to engage politicians, senior decision makers, practitioners, academia, opinion formers and commentators on promoting policies for a fairer society. For more information visit: www.smith-institute.co.uk or @smith_institute

A bi-partisan leasehold reform inquiry report by the House of Commons Housing, Communities and Local Government Select Committee has trashed the English leasehold tenure system.

Using strong language, the report concluded that:

“Too often, leaseholders, particularly in new-build properties, have been treated by developers, freeholders and managing agents, not as homeowners or customers but as a source of steady profit. The balance of power is too heavily weighted against leaseholders and this must change. Our report sets out recommendations for how this might happen”

These recommendations included that:

1. Commonhold should become the primary model of the ownerships of flats in England and Wales, as it is in many other countries
2. Mis-selling in the leasehold sector should be investigated by the Competition and Market Authority.
3. Documents in the purchase of properties should be standardised so that the key features of the lease are fully transparent.
4. Incentives to use a particular solicitor should be abolished.
5. Retrospective legislation is required to remove onerous ground rents and permission fees from existing leases.
6. There should be a new system of consultation for leaseholders affected by major works in privately -owned buildings.
7. The Government must ensure that freeholders are not allowed to recover their costs from their leaseholder where the leaseholders have won their case at a tribunal.
8. The current law allows freeholders to recover the lease from the leaseholder through the strict legal right of forfeiture. This should be abolished.

Leases in English law date back to feudal times. Once your lease expires even if you have paid a lot of money for it, you become a mere tenant of the freeholder. All leaseholders pay a ground rent to the freeholder.

In virtually all other English-speaking countries this form of tenure has been abolished and replaced by some type of communal ownership of the freehold.  The Commonhold and Leasehold Reform Act 2002 introduced the commonhold tenure whereby the freehold title would be shared by all residents in the block. Commonhold failed as it was not made compulsory for new developments and require the agreement of all leaseholders in a block to transfer to this tenure. In practice this was impossible to obtain.

If a leaseholder does not pay their service charges, the freeholder can apply to court to have the lease forfeited and the leaseholder loses the right to live in the property. This feudal practice should have no place in modern Britain.

The Committee were anxious to see commonhold becoming the primary model of the ownership of flats in England and Wales, as it is in many other countries. There is no reason why the majority of residential buildings could not be held in commonhold; free from ground rents, lease extensions and much greater control for residents over service charges and major works.

The Committee were concerned that leading developers had in the past sought to use their dominance to exploit customers through the imposition of onerous ground rents.  They were also disappointed that leading developers were unwilling to respond to their requests for more information as to the number of leasehold properties sold with ground rents exceeding 0 .1% of the value of the properties.

Leasehold houses

There has been much press coverage of volume builders such as Persimmon and Taylor Wimpey building houses with leases. Some of these properties were sold with dodgy freeholds to third parties. The influential Leasehold Knowledge Partnership estimate that there are 100,000 new build leasehold flats and houses that are unsellable due to onerous ground rent terms.

The Prime Minister is on record as saying that, other than in exceptional circumstances, she does not see why new homes should not be built and sold with the freehold interest at the point of sale. Government figures in 2015/6 estimate that there were 1.4 million leasehold houses and 2.9 million flats. The fact that there are over one million leasehold houses tend to reflect the high profits of leading developers. There is a little need for leasehold houses unless the freeholder wants to use such properties for income generation purposes.

To make matters worse John Healey MP has uncovered official figures showing Help to Buy has been used to purchase 17,586 leasehold homes since 2013. The Government claims that they cannot stop this until the scheme expires in 2021.

Government response

On 28 March 2019 the Government announced via a press release that that 40 leading developers had signed “a pledge” to crack down on toxic leasehold deals. Developers will contact current leaseholders with ground rents that double more than once every 20 years and offer them a ground rent linked to RPI.

One leaseholder with a Taylor Wimpey ground rent calculated that under her lease a doubling ground rent is just short of £2 million for the duration of the lease (250 years). Doubling stops after 50 years. If the ground rent was linked to RPI at the current rate of 3.3 % per annuum, the total ground rent is £25.7 million. The fact that some lenders will not provide mortgages for such inflation linked ground rents is ignored.

The pledge will not apply to leaseholders who have sold at a loss to get out of this mess. Nor will it apply where the ground rent has been sold on to a third party. The developers have not been asked to pledge not to build leasehold houses for which they are being subsidised via the help to buy scheme. The Government’s response has been condemned by the Chair of the Commons Select Committee. The response does not address all the recommendations made by the Committee.

This issue is going to run and run especially as many Tory MP’S are concerned at how their constituents are being treated. The select committee received a record number of over 600 responses to their inquiry. The national leasehold Facebook campaign has over 6000 followers. The Leasehold Knowledge Partnership group now believe that leaseholders could in fact form 25% and not 18% of all homes in England.

Political implications

Even though leasehold reform is often not discussed in Labour circles, politicians cannot afford to ignore the issue. The Government estimates that in 2015/6 there were 4.3 million leasehold dwellings in England. This equates to 18% of the English Housing Stock. In the same period there were 1.4 million leasehold houses and 2.9 million flats. These figures contrast with 4.5 million private rented households and 4 million households who rent from either a local council or a housing association. (See English Housing Survey Headline Report 2017-18).

An excellent House of Commons briefing paper provides helpful regional and constituency trends. After London, the North West had the largest number of leasehold transactions. 58% of all leasehold houses were built in the North West. This region has 75 MP’S in Parliament of whom there are 20 Tories.  There is a constituency breakdown to show the highest proportion of leasehold flats. This also includes leasehold houses only.

Leasehold reform should be a rich campaigning area for Labour. The Tories are too close to propertied interests to tackle this issue properly and yet claim to be the custodians of a property owning democracy. On the one hand the Government promises to make commonhold compulsory for new developments and yet cannot immediately stop the help to buy scheme from subsidising developers building leasehold houses with dodgy freeholds.

If Labour is to win the next election, the culture within the Labour Party must change. All sections of the party must recognise that the leasehold housing system is broken and needs to be fixed. Labour should campaign to expose Tory failings and present some of the positive solutions contained in this parliamentary report.

By Dermot Mckibbin, Beckenham CLP

For more information see:

1. https://www.parliament.uk/business/committees/committees-a-z/commons-select/housing-communities-and-local-government-committee/inquiries/parliament-2017/leasehold-reform-17-19/
2. https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8047

Last week we published Dave Treanor’s excellent evidence to the Affordable Housing Commission, focusing on the issues of taxation, housing subsidies, land, and construction, and making a number of comparisons with the experience in Germany.

Today we’re highlighting the evidence submitted by SHOUT, the campaign for social housing @4socialhousing . As it is a long read, the full evidence has been published on Medium and can be found here.

SHOUT’s evidence starts by examining the definitions of ‘affordable’ and ‘social’ housing which have become increasingly bizarre over the past ten years as the government has sought to hide its dreadful performance in delivering homes for people on low incomes. It concludes that traditional social rent is the only housing product which reliably provides genuinely affordable homes to people on the lowest (in and out of work) incomes across the whole country.

Social rent is an exceptionally robust model of housing provision, and remarkable in the degree of self-financing it involves. It meets four key objectives:

• First, tenants pay a rent that is genuinely affordable (on all definitions).
• Second, rents broadly cover the costs of providing homes over the long term.
• Third, rents at these levels minimise the requirement for housing benefit, making it easier for people to make work pay.
• And fourth, long term very substantial savings in benefits fund the initial subsidy required to get the homes built in the first place.

The evidence takes an overview of the central issue of rent. Based on research by Capital Economics, it concludes that the current policy of rent reductions is unsustainable, that the single national policy for rent should be replaced by regional assessments, that the future policy of rent increases is only sustainable if there are corresponding increases in benefits, and that investment has become far too dependent on rent surpluses, there must be a resumption in grant for social housing if we want to build much more.

The core of SHOUT’s case remains the economic assessment undertaken by Capital Economics which showed that a programme of 100,000 extra social rent homes a year is not only feasible but would be an econnomically sound long-term choice for the country to make. It is also probably the only policy that woul make it possible for the government to achieve its stated goal of building 300,000 new homes a year by the mid-2020s.

Capital Economics’ main findings included:

• in almost all parts of the country, the cost to the welfare system of supporting low income households in private rented housing (and, to a very considerable extent, in homes at Affordable Rent) is greater than supporting equivalent households in homes at social rent;
• the decline in the stock of social rent homes, and rising private rents, means that the cost to the welfare system arising from the housing costs of low income households has increased very fast in recent years: it has nearly doubled in real terms in the last 10 years, and now accounts for over 37 per cent of housing benefit spend;
• if this trend were to continue, expenditure on housing benefit would increase, by the end of the OBR’s long-term forecast period in 2065-66, to £197.3bn in nominal terms, or nearly £62bn a year at today’s prices, with the private sector component more than quadrupling, to £38bn at today’s prices;
• set against the significant risk to fiscal sustainability of carrying on with current policy, a policy of resuming the development of homes for genuinely affordable rent at scale “is fiscally sustainable and economically efficient.”  It would bring about “a sustained structural improvement to public sector finances – by reducing spending on welfare payments and stimulating higher tax receipts.”  Other things being equal, public borrowing would be 0.5 per cent of GDP lower by 2065-66, and the stock of public debt 5.2 per cent of GDP lower;
• if the increased investment in new homes were scored as public expenditure, the proposed policy would initially, of course, lead to an increase in public spending and borrowing, as the up-front investment in new housing would be greater than the welfare savings achieved early in the policy. However, the report (written in 2015) notes that the impact would be very modest (peaking at 0.13% of GDP in 2020-21).
• opinion in the markets would be very sympathetic to investment in tradeable and income-generating assets which would help address the longstanding economic risks caused by inadequate volumes of housing development, and there are ways the Government could support investment without it scoring in the public spending totals (to which we return below);
• the estimates of benefits and costs in the core analysis is very cautious, limited to the direct cost of building new homes, welfare savings and increased tax receipts from higher construction activity.  However, there would be significant additional socio-economic benefits in terms of health, wellbeing and education.
• In a subsequent report, Capital Economics concluded that the analysis remained  robust whatever the outcome of Brexit fiasco.

The evidence also makes the case strongly for a policy of protecting the existing stock of social rented housing and ending the practice of running it down through right to buy, ‘conversions’ to so-called affordable rent, ill-considered estate regeneration and unjustified market sales to generate finance for new build.

Finally, the evidence calls for a range of new policies, including:

• to resume security of tenure with a clear framework of rights and responsibilities
• to strengthen consumer regulation
• to further devolve housing responsibilities, and
• to greatly strength the voice of tenants in relation to both policy and management.

 

The Affordable Housing Commission, organised by the Smith Institute, funded by the Nationwide Foundation and chaired by Lord Richard Best, has issued a call for evidence as it gets under way.  It poses a number of questions:

What does affordability mean in different areas of the country? How does it link to the welfare system? Why has housing become unaffordable and what are its effects? What policies have been put in place and have they been working? How can supply be increased and what are the roles of the tax system, government funding, housing providers, and the planning system? What other areas of policy need to change – eg infrastructure, institutions, governance, public attitudes?

Most policies on affordability tackle the symptoms and not the causes of the housing crisis.  Housing becomes unaffordable when the cost increases by more than earnings.  If we fail to understand why this has happened over the last fifty years, we’ll repeat the mistakes of the past.  Subsidising housing for those priced out of the market merely tackles the symptoms and will never provide a cure. It often helps one group of households at the expense of others.

If the workings of the housing market are to blame, why is the problem so much worse in the UK than across most of Europe. Why does the same thing not happen in Germany?

I sought to answer these questions through an in-depth study of housing policies in ten European countries, and wrote it up in Housing Policies in Europe  [1]  The book contains the evidence behind the conclusions and proposals in this paper, all referenced back to its sources.

Impact of taxation of affordability

Taxation in the UK is more biased in favour of owner-occupiers and against tenants than anywhere else in Europe.  This makes a home the most profitable investment anyone in the UK can make. The more they can invest the wealthier they will become.  In Germany taxation is almost tenure neutral.

House prices in Germany are more stable than in the UK, and on average across the country have become more affordable over the last thirty years, with prices rising on average by less than earnings. Rented housing is taxed no more heavily than home-ownership. Germans get as good a return net of tax by investing in their industries as they would from buying their own home. This takes much of the heat out of their housing market. It may also help explain the success of German manufacturing.

In cash terms a mortgage may be just as hard to pay as rent, but unlike rent it is an investment in an asset that rises in value and does so by more than the mortgage payments on it.   In most years house prices in the UK rise at a higher rate than the interest their owners pay on their mortgages, and sometimes by more than the total income earned by the household.  And yet these gains are completely free of taxation. Rents rise with inflation, and in response to rising house prices, typically doubling every ten years. Mortgage payments fluctuate with interest rates but do not generally rise over time. Once the mortgage is paid off the owner lives rent free.  None of this additional spending power is taxed.

Most home-owners would think it outrageous to even think about taxing these gains, and fail to recognise the extent to which they benefit compared with those that rent.  This widens the gap between the rich and poor, transferring wealth from the young who generate most of it through their hard work to an older generation that owns most of the housing. The gap between rich and poor is growing ever wider.  The biggest gap is found between those owning and those renting their homes.  Yet housing benefit is seen as welfare and is being cut and capped, while the wealth tied up in a person’s home is increasingly exempt from inheritance tax.

The best solution would be to tax home-owners on the benefit of living rent free in their own home, as was done until this was abolished in the seventies.[2]  Failing that a fair equivalent might be to allow tenants to offset rent against the tax they pay on their income.

Favourable taxation and other subsidies to promote owner-occupation result in higher house prices, benefitting existing owners at the expense of those less fortunate, adding to affordability problems.

Stamp duty which is paid by the buyer should be replaced with capital gains tax paid by the seller of a property. Tax the one making the gain, not the one struggling to climb the housing ladder. The lack of tax on these gains inflates prices higher up the ladder. Stamp duty discourages mobility and is a disincentive to down-sizing, whereas a tax on capital gains would only be incurred to the extent the property had increased in value, and the liability would be triggered but not increased by the transaction.

Inheritance tax rules also discourage the elderly from downsizing, by shielding part of the value of their residence from taxation.

Private rental sector

Private rental tenancy terms in the UK are amongst the worst in Europe, making home-ownership the only sensible option, adding to the demand putting pressure on house prices.[3]

Tenants in the UK are treated with very little respect.  How can anyone make a home in a property where the landlord can repossess at two months’ notice?

There are a number of reasons why housing in Germany tends to be of better quality and more affordable than the UK. There are few circumstances where a tenant who pays their rent and abides by the terms of their tenancy can be evicted. They take pride in looking after their homes, with more control over repairs and maintenance. It is not uncommon for tenants to upgrade their kitchens and bathrooms by agreement with their landlord who may contribute to some of the cost. In the UK this is only possible where you own your own home. As a result, many middle-income Germans are content to live in rented housing.

Generally, elsewhere in Europe tenants can only be evicted if they break the terms of their tenancy agreement and are often less dependent on a landlord for day to day repairs and maintenance.  Many families are happy to live in good quality rented housing, without paying extortionate rents.  We must end no-fault evictions. But that is not the whole story.

The way to make housing more affordable is to tackle the underlying causes of house prices rising faster than earnings. That requires long-term changes in housing policy, much longer than our electoral cycles tend to promote. The poorest will always suffer the most from any shortage and require additional help, but focussing all subsidies at the bottom end of the market deepens the poverty trap. Subsidies to help the poorest tenants enable them to pay higher rents, raising costs for those that just fail to qualify. Solutions are required that impact across the whole of the housing market.

The German approach to social housing has also played an interesting role, and could hardly be more different from council housing in the UK. None of it is intended to remain as social housing forever. In return for subsidies from local, regional or central government to deal with a shortage of affordable housing, new homes are built and let to low-income households from a housing waiting list at no more than 80% of market rents. After an agreed period of between twenty and thirty years the obligation to let at below market rents tapers off. Most of this housing was originally provided by not-for-profit housing companies, some of which were set up by the municipalities.

Much of the privately rented housing in Germany was constructed with subsidies and initially let on social housing terms by a mix of private and non-profit landlords.  These were professionally managed on generous tenancy terms, laying the foundations for a much fairer private rental sector. Even so, two-thirds of rented housing is now held by individuals who typically let one or two properties. The rest is provided by a combination of municipal companies, co-operatives and private companies.

The UK is quite exceptional in the proportion of welfare support provided through personal housing subsidies, an unfortunate biproduct of which is to raise market rents, particularly at the lower end of the rental market.

If UK housing associations had invested in secure market rent over the last thirty years, there would now be a substantial stock of well managed housing on which nobody was extracting capital gains.  The growth in buy-to-let demonstrates how profitable that would have been. It would have reduced the pressure on rents and improved the choice of housing for those who cannot afford to buy and would never reach the head of the queue for social housing. It is never too late to change.

We should learn from the German experience. It requires little if any subsidy for a social housing organisation to develop secure market rent alongside more affordable options. Some are already doing it on a small scale. I can think of few policies that could have more of an impact at such a low cost. All it needs is the political will to do it and encouragement from those regulating the sector.

Instead, private landlords are blamed for competing with first-time buyers and bidding up prices. They are burdened with heavier taxation, all of which is paid out of tenants’ rents. Imposing fairer tenancy terms would have been a far more effective way of rebalancing competition between first-time buyers and buy-to-let landlords, and less likely to push up market rents. A drop in the availability of rented housing is never going to reduce rents or improve the choices faced by tenants. The few studies of the effect on house prices of purchases by landlords show less of an impact than is commonly assumed.^[4]

Excessive borrowing fuels the growth in house prices

If more money flows into the housing market than is spent on construction and renovation it can only have one result: higher house prices. This is true whether it comes through banks’ lending additional money raised on wholesale markets, from parents passing wealth down to their children, or from help to first-time buyers, or from overseas investors finding housing in the UK a safe haven for their money.

Mortgage lending in the UK is relatively unconstrained. Where demand outstrips supply and getting onto the housing ladder is clearly profitable, the amount they will pay is only constrained by how much they can borrow.

Most mortgage loans in Germany are restricted to 80% of the property value, limiting the amount a household can afford to pay, unlike the UK where excessive borrowing fuels the growth in house prices.

With mortgage interest rates at below 3% it soon becomes cheaper to buy than to rent, adding to incentives to climb onto a housing ladder.  Saving for the deposit is the most significant constraint.

Quantitative Easing, cheaper credit for banks and reductions in the bank base rate following the financial crash reduced the cost of investment in housing without making it any more affordable: the reduced cost and increased availability of borrowing was all captured by existing owners and developers in higher house prices. Above all it boosted land prices, increasing the pressures on affordability.

Failings in the business of housing construction

The market in potential building sites is controlled by a diminishing number of major developers who control the supply of new housing, and will only build in a rising market.

The supply of land for housing is restricted by planning regulations and constrained by the green belt, so it does not increase in response to rising demand.

In order to ensure a regular supply of sites the construction companies build up land banks, or buy options securing sites on pre-agreed terms. Developers and land dealers assemble potential sites, using their expertise to take them through planning, adding considerably to their value in the process.

The price a developer is prepared to pay is based on the expected value of the properties that might be built on each site over the next ten years. The land market ‘prices in’ the expected increase in property prices.

It should also take account of local planning requirements. But in competing for potential building sites developers become adept at minimising the affordable housing liability, arguing it would make the development unprofitable. They run rings around councils in negotiating planning permission and s106 planning gain commitments.

The latest National Planning Policy Framework (NPPF) includes measures intended to make the viability process more transparent. It clarifies that the land value used in assessing how much affordable housing would be viable should be based on the Existing Use Value of the site under current planning consents (plus a premium to incentivise development), and not the potential value it might fetch in the market taking into account any likely change in permitted use.  If the developer overpaid for a site that is their problem. In theory that should ensure that any requirement in the Local Plan to include a proportion of affordable housing is reflected in land prices, ensuring it is deliverable.

But in practice local authorities are also expected to meet targets for the delivery of new housing, weakening their position in negotiating with developers.

Land banking contributes to the problem.  If house prices rise by more than the cost of constructing them, the increase in value flows through to the land. When house prices rise by more than expected, land prices go up at an even faster rate.  But the corollary is also true: when house prices fall, land prices fall even further.  That is what happened following the financial crash in 2009. As a result, many smaller construction companies found themselves in breach of their loan covenants, with insufficient assets to cover their debts. They could not afford to build their way out of trouble, particularly in a housing market where demand had collapsed.  This became a great opportunity for the bigger and richer construction firms to buy up the smaller and weaker ones largely for their land banks, giving them ever tighter control over the housing market.

It is never in a developer’s interests to release newly constructed homes at prices below those they expected when they bought the land several years previously, or in sufficient quantities to lower the prices being paid.

The property development companies are some of the biggest donors to the Conservative Party, and persuaded the government that the only way to get the housing market moving again after the financial crisis was to boost demand with lower interest rates, Help-to-Buy schemes, and by reducing the obligations on which planning permission was granted.

All that achieved was to increase house prices, while construction remained in the doldrums. Before ‘Help-to-Buy’ new house building in London averaged 42,392 units a year. Since ‘Help-to-Buy’ it fell to 35,274 per year.   London house prices rose 48% since it was introduced in 2013.

What the government could have done as prices rose was to introduce an annual tax on land value to discourage the hoarding of potential building sites. In an optimised market construction companies would buy sites a few months before they were ready to build on them, and the supply of land would become much more responsive to any increase in demand. Construction would be opened up to new building companies, breaking the monopoly of the big players. The profits of developers should derive from their ability to add value through good design and efficient delivery, rather than speculation in property prices.

Capturing hope

More of the unearned profits arising from public investment and planning decisions should be captured for the benefit of the community, rather than going into the pockets of landowners.

Public housing built in the thirty years after the war was largely self-financed from rents and the sales income it generated. Councils built on bombsites, or land bought at slum-clearance prices, with loans financed by the Public Works Loan Board and repaid from rents, requiring little or no subsidy.

New Town Corporations paid little more than agricultural prices for land and repaid their entire borrowing from the added value of the developments. This paid for the delivery of whole towns including their infrastructure, creating 32 communities and housing 2.8 million people.  They paid £4.75 billion back to Treasury in 1999 and have since then yielded an additional £1 billion in profit. [5]

All of this was ended by a court case in 1974 that reinterpreted the 1961 Land Compensation Act, requiring public bodies acquiring land through compulsory purchase to pay the ‘hope value’ arising from potential future development on top of the value under its current planning status. In practice this affected all land valuations, and put an end to self-funded new towns and council house building. It also added to the cost of roads, railways, airports and other infrastructure development. It represented a massive transfer of unearned wealth to landowners and led to a massive reduction in public sector housing construction.

The arguments for and against retaining ‘hope value’ in compulsory purchase valuations were explored in a Parliamentary Inquiry that reported in September 2018.[6]  Labour proposes to change these rules and establish an English Sovereign Land Trust working with local authorities to buy land at prices close to existing use value. With the ‘hope value’ removed, the cost of building a two-bed council flat in Wandsworth, south-west London, would be cut from £380,000 to £250,000.  In Chelmsford it would fall from £210,000 to £130,000.[7]

Previous initiatives by Labour governments to capture some of these gains were thwarted by the owners of potential development sites hanging on to them in the hope that things would return to the way there were following the next election.[8]  What we really need is a cross-party consensus.  But, council tax is in serious need of reform, and if a Labour government replaced that with a Land Value Tax, an incoming government might find that harder to reverse.

Dave Treanor

[email protected]

[1] See Housing Policies in Europe available as a free download from www.m3h.co.uk/publications

[2] Schedule “A” tax against which they could offset interest on their mortgage

[3] See www.treanor.co.uk/blog/Fixing_our_rental_sector.pdf

[4] ‘Buy-to-let mortgage lending and the impact on UK house prices: a technical report’ by Ricky Taylor, published by the National Housing and Planning Advice Unit (abolished by the Coalition government in 2010).

[5] https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76602.htm

[6] https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76602.htm

[7] https://www.theguardian.com/politics/2018/feb/01/labour-plans-landowners-sell-state-fraction-value

[8] https://redbrickblog.wordpress.com/2018/01/24/taxing-speculation-in-land/