Reflections on the ‘less than market value’ debate

The first in an occasional series considering some of the finer points of land compensation reform

Kit Malthouse, the recently-appointed housing minister, appeared before MPs on the Housing, Communities and Local Government Select Committee this week in the final hearing of its inquiry into land value capture. He made it pretty clear that reform of the 1961 Land Compensation Act to disregard ‘Hope Value’ was not on his agenda. The government has already undertaken some streamlining of the compensation code in order to properly enforce the ‘No-Scheme World’ provisions and, although he wants to see how that works out, he evidently thinks that is as far as things need to go. When pressed, he said that he would keep an ‘open mind’ but he also made plain that he thinks the No-Scheme World — in which landowners are paid what would have been the market value in the absence of the scheme for which a compulsory purchase order is being undertaken — offers a ‘sensible balance’. Removing Hope Value — the value a piece of land attracts in anticipation of a future residential planning consent — would be a step too far, he seemed to imply.

(You can watch back the exchange around the 1961 Act here.)

So that’s where things stand with the housing minister on this issue. But it was interesting to note the way in which he rationalised his position because it reflected a defence of the status quo — and the payment of Hope Value — that has been trotted out a lot recently and is not nearly as straightforwad as some of its proponents seem to think. This is that, if the state were to remove Hope Value from compensation payments when it compulsorily purchased land, then it would be paying less than market value. And from here it is argued that such a move would be a breach of human rights laws, given that Article 1 of the European Convention seeks to protect the peaceful enjoyment of property.

‘All of this hinges on what market value means, and if an individual is selling land voluntarily and the market perceives that there is future benefit likely to accrue to that land then it will pay more than the current use cost,’ Mr Malthouse told MPs.

‘And that seems to me a good basis on which to start a valuation. If you have a willing buyer and willing seller, what price will they realistically settle on as it stands? If the government is to seek to take that land at a discount, that situation might create difficulties.’

This is the boilerplate argument of those who are lobbying for the retention of Hope Value and there is a superficial appeal to it. The planning lawyer Simon Ricketts, in a spirited piece last week, said it was ‘obviously’ the case that ‘Market Value minus Hope Value = < Market Value’. In fact it’s not quite as obvious as all that, for reasons I will explain below. But even if you did subscribe to this logic, as the minister appears to, then you have just shot down the case for the No-Scheme World, which also results in landowners being compensated at less than market value according to this line of reasoning.

To understand why this is, consider that when the state has plans for an infrastructure project, the market value of the land in that area increases. With a scheme like Crossrail, for instance, that additional value has flowed straight to commercial property owners and other owners of land along the new line. But where land is to be compulsorily-purchased in order to facilitate the scheme — as with a new town, to take an example pertinent to this discussion — the No-Scheme World rules mean that the compensation awards to landowners disregard any increase in the value of the land arising from the scheme in prospect.

In the absence of those rules, a willing seller and a willing buyer would trade land in the vicinity of a new scheme at a price that would include a premium to reflect the new infrastructure that is planned or in development. What the No-Scheme World rules do is disregard that premium so the state can pay less than the price at which the land would be voluntarily-traded if they were not written into the legislation. Those arguing that Market Value minus Hope Value = Less Than Market Value must be furious about this because it’s been the law since 1959. And yet we hear little complaint about that. Indeed Mr Malthouse seemed quite enamoured with the No-Scheme World rules when he appeared before MPs.

So, for all the jumping up and down about ‘market value’ as defined by the minister and the defenders of the status quo, that cannot be the principal objection, not unless they also want rid of the No-Scheme World — or unless, perhaps, they haven’t thought through their arguments to their logical conclusion.

In any case, the truth is that neither the No-Scheme World nor the abolition of Hope Value mean (or would mean) that the landowner is paid less than market value, even going by Mr Malthouse’s definition. To all practical purposes what each of these provisions do (or would do) is change the market value at a given point in time — in just the same way that all manner of policy constraints and tax considerations do.

Because the No-Scheme World is already enshrined in legislation, where land faces the prospect of being CPOed the price at which it will be traded, if at all, will take account of the land compensation rules (if it doesn’t, and the buyer takes a risk, they face losing the premium they have paid). The price at which a willing seller and a willing buyer would be prepared to settle is now lower, but it is still a market price. If the land compensation rules disregarded Hope Value, then the market value in such a situation would fall further still — excluding now the premium attached to the expectation of planning gain. In either case, to return to Mr Malthouse’s reasoning, the market would adjust its perception of the future benefit the owner is likely to accrue from that land.

So the choice here is not between paying market value or paying less than market value. The market value at any given point in time is a function of the policy parameters and those policy parameters can — and sometimes should — change. The choice for policymakers is which elements, and how much, of the increase in land values should be excluded from land compensation awards. There appears to be a consensus that the uplift that is directly related to the scheme in question should be excluded. The reason for this, I suppose, is that it is plain for all to see that this increase has been generated by current taxpayers at what is usually great, and often high-profile, expense.

The case for excluding Hope Value too, and so enabling the purchase of land at something closer to its existing use value, is based on the fact that most, or even all, of the increase in value above that in its existing use has in one way or the other been generated by the community, not the landowner, and so should flow back to the community. This is a less visible cost — it is not itemised in our annual tax statements and newspapers do not tend to run scandalised front-page stories about the mounting overruns — but it amounts to free-riding in just the same way. It is as justifiable that the land compensation rules disregard this increase in value as it is that they disregard the more obvious infrastructure-related benefits.

So the question for public policy is not ‘what is the market value under the current legislation?’, but ‘what should the current legislation be?’ The fixation on the former, and the human rights debate that seems designed to ignite, is a diversion from the much more interesting debate, which many are once again beginning to explore, which is this: just how much of the increase in land values do we think is due to the enterprise and hard work of the landowner, how much to the activities of the rest of society, and so how can we share the proceeds fairly?

Let’s have that debate.