The high price of land is stifling housebuilding, but by removing the ‘hope value’ premium, buyers and builders can hope for better days, says Simon Graham.
Quickening the pace land comes forward for development and is actually developed is central to the government’s economic growth agenda. The hallmark of the Planning and Infrastructure Bill, introduced in parliament last month, is a system of override switches designed to short-circuit the interminable blockages and delays that have held back new housing and infrastructure development for far too long. But will it work?
Opportunities for judicial review on critical infrastructure projects will be cut; developers will pay a nature restoration levy upfront to mitigate the likely environmental impacts of new development, avoiding lengthy delays getting developments started; councillors will be trained better in planning law, taken out of planning decision-making for all but the largest developments, and councils will be able to set their own planning fees; development corporations will be given enhanced powers to ‘do anything necessary or expedient’ to get new towns built; spatial development strategies will be established, intended to overcome the constant tensions involved in getting large developments built across local authority boundaries; compulsory purchase processes will be streamlined and ‘hope value’ removed where development is deemed to deliver public benefit.
Phew! Nobody could accuse Sir Keir Starmer and Angela Rayner of not at least trying to fulfil their promise to banish the ‘blockers’ who have thwarted development and economic progress.
In reality, the fight is just beginning. There are councillors affronted at the ‘overriding of local democracy’; environmentalists deeply sceptical about the nature restoration measures and reduction in legal challenge opportunities; farmers, developers and other landowners desperate to avoid the ‘hope value’ gravy train hitting the buffers. The noise levels will only increase as implementation comes closer. Beating back the anti-brigade will be a messy business and take some time. But the prize is a vital culture shift; a mindset change that finally recognises that development is good for the country and the economy, and for all those needing a decent and, crucially, affordable place to live.
Inevitably, it is the proposals around compulsory purchase that have provoked most immediate pushback. The changes, in other words, that will most clearly hit people’s dreams of gold.
The Home Builders’ Federation (HBF) warns there is a risk the CPO proposals will result in less land coming forward, not more. “The lesson of history,” it said in its response to the government consultation, “is that no landowner will enter into a commercial agreement…if there is any possibility that the land can be compulsorily purchased at a price below its market value.”
Well, yes. But what is ‘market value’? The classic economic dictum is that the value of a product is what someone is prepared to pay for it, which will fluctuate with market conditions. Yet the price of land in England is a staggering five times higher than 30 years ago, according to official figures. Is that a fair market value? Or is it, as the New Economics Foundation think tank has suggested, that we have got ourselves into a ‘negative feedback loop’, where the high cost of land is driven by the shortage of homes, and then expensive land makes it more difficult to build the necessary homes, driving up land prices still further?
It is this vicious circle the new government seeks to break. At the moment, land coming forward carries a huge ‘hope value’ premium, predicated on the rise in value when planning permission is granted. It may well be true that under the new rules, initially, landowners will be reluctant to bring more land forward. But, eventually, they will have to accept that conditions have changed; the ‘market value’ is not what it was. If we can reach that promised land, it offers the prospect of an improvement in housing market affordability that will benefit both individuals and the wider economy. The big housebuilders will still make their 15-20% margin, just on somewhat lower market pricing.
The social and economic benefits of cracking the existing damaging cycle are substantial. A paper by the New Economics Foundation last autumn argued that a ‘fair compensation’ policy of existing use value (EUV) plus 50% would cut the cost of land for development by around 40-60%, depending on region, compared to the present policy regime. A policy of EUV plus 50%, plus strengthened S106 (as the government also intends), could reduce the public grant required to build 90,000 social homes a year by £4.54bn a year. Alternatively, it would enable the same volume of grant to be stretched further, building an extra 27,000 social rent homes each year. The net economic and social benefit would be around £225bn over 30 years.
Compulsory purchase will always be a blunt instrument and should be a last resort. But it is well past time we revalue engineered land compensation premiums that even the sober Court of Appeal has described as based on ‘make believe’, with landowners grossly rewarded for planning permissions often not even yet sought. The proposed new rules should form a more grounded basis for negotiation around what represents market value.
In supporting the elements of the Planning and Infrastructure Bill that will bring obvious financial benefits to their businesses, housebuilders should also acknowledge the legitimacy of the government seeking to make the housing market operate better and more affordably for all the other parties with a big stake in this, including the social housing sector and its low income customers.
This article was first featured in Show House Magazine. Read more like this and the latest industry insight here.
