Land financialisation and rays of light amid the gloom
The ‘land question’ is no longer niche. We obviously won’t take (all) the credit, but since the publication of our book on the topic a year ago today, there has been an eruption of proposals, data, policy announcements and commissions that suggest we may finally be getting to grips with the role of land in the UK housing affordability crisis and wider economy.
And not before time. Despite cooling house prices in the second half of 2017, housing affordability — driven by increasing land values as we argue in the book — remains at crisis levels, in particular in the UK’s cities. In London last year over 25% of all new homes bought by first-time buyers in the capital were at or above half a million pounds, compared to just 8% in 2012 and well beyond the majority of Londoners on middle incomes. Meanwhile Manchester saw a rise in urban land values of 24% and house price increases of 9% (more than double the national average of 4.2%).
Rising land values are driving up intergenerational inequality. Recent research from the Institute of Fiscal Studies found that in 1996 two-thirds of 25–35 year-olds on middle incomes owned a home; but by 2016, this had fallen to just a quarter. The ‘Bank of Mum and Dad’ is now equivalent to being the ninth biggest mortgage lender, supporting more than 25% of UK property purchases. Recent research by the Resolution Foundation has shown how the cost of renting is hitting the young ever harder. The millennial generation — aged 18–36 — typically spend over a third of their post-tax income on rent compared with 5–10% of income spent by their grandparents in the 1960s and 70s.
Against this gloomy reality, what are the rays of hope in regard to understanding the dynamics of land?
One problem we pointed to in the book is that we don’t have good information on land, who owns what and what it’s worth, limiting policy innovations. A couple of developments in the last year may help rectify this issue. Firstly, the Office of National Statistics for the first time began to separate out the value of land in its annual wealth reporting. The results (figure 1) are startling.
Since 1995 the volume of capital stock has flat-lined at 150% of GDP, while the value of land has increased by two and half times to 250% (£5 trillion in market prices). Housing (the buildings on top of land) has increased gently from about 60% to 90% of GDP and been stable since the financial crisis. In other words, the biggest increases in wealth in the UK are flowing in to something that itself is inherently scarce, unreproducible, unproductive and regressively distributed: land. This is an inherently unsustainable economic model and should raise serious questions for policy makers across government.
In addition to this welcome development from the ONS, the Autumn Budget announced a new £80m ‘geospatial data commission’ to consolidate and eventually open source HM Land Registry and Ordinance Survey data so that it is freely available to the general public and firms. Given that only a few years ago it looked like the Land Registry would be privatised, this is exciting news. The excellent online projects that have emerged in the past year to increase the transparency of land ownership, including publically owned land, should then have a much richer dataset to exploit and be able to help engage more communities to take action to support better land use.
Encouraging signs on land value capture
Having this kind of information is one thing, doing something about it another. But there have been some promising developments. In particular, both major political parties have begun talking seriously about ‘land value capture’. This raises the question of who benefits from the increases in land value once planning permission is approved or other public investments are announced — in particular transport infrastructure — which typically drive up the value of land many times. A hectare of agricultural land worth around £20,000 in the south of England can sell for closer to £2m if it is granted planning permission for housing.
A key problem in the UK, which we outlined in the book, is a speculative development model whereby landowners, investors and developers trade land based on the maximum imagined possible future sale price they could achieve for building on a development (such as building exclusively luxury flats). Because landowners are permitted (since legislation passed in 1961) to price in this maximum expected future gain — ‘hope value’ in the jargon — in the sale price, developers take on considerable risk when the purchase land. They are then in turn incentivised to negotiate against public bodies who try and use the planning system to maximise ‘public value’, such as by requiring the provision of affordable housing and decent infrastructure.
Once planning is agreed, developers also have little incentive to build out quickly — instead they have a preference for drip feeding completions and sales of new homes in order to keep prices high. This arrangement also encourages land hoarding and ‘strategic land banking’ whereby developers or investors buy up land with a view to future capital gains appreciation with little interest in actually bringing it in to use.
The Autumn Budget announced that it would set up an inquiry, led by Oliver Letwin, into why planning permissions are not built out faster. The Chancellor also announced that Homes England — the body that funds affordable housing — will be given Compulsory Purchase powers to free up land for housing. The Communities and Local Government Commons select committee has also launched an inquiry into the ‘effectiveness of current land value capture methods’. And the government is rewriting the National Planning Policy Framework which sets out the rules local planners must follow, including how much affordable housing and infrastructure developers must incorporate once planning permission has been granted.
More recently the Communities Secretary Sajid Javid said he would consider levying a tax against this uplift in values to support infrastructure investment. Labour has gone one step further and announced it would create a new English Sovereign Land Trust with the power to buy sites at closer to agricultural prices — a policy we described as a ‘Land Bank for Britain’ in our book.
There have also been exciting developments on the idea of a land value taxation, one of the book’s key proposals. In February 2018 the shadow Chancellor John McDonnell announced that Labour is considering a tax on land values to potentially replace the highly regressive council tax that is no longer viewed as a sustainable source of finance for cash-strapped councils. Tony Blair’s think tank also backed the idea late last year.
In Scotland, a new public body — the Scottish Land Commission — has been established to gather evidence and carry out research and recommend policy changes on any matter relating to land in Scotland. The Commission is looking closely at both land value taxation and other mechanisms of land value capture.
There was also welcome news from Scotland around renting with indefinite security of tenure to be provided to all Scottish tenants, moving them well ahead of England where Westminster has so far failed to walk the talk on this issue.
Overall, it would appear that the problem of economic rent extraction from land — something the British classical political economists identified 250 years ago as a key barrier to economic development — is finally being recognised by British policy makers from across the political spectrum.
The problem of the financialisation of land
Sadly there has been less progress on the other key problem we identified: how to break the positive feedback cycle between mortgage lending and speculative finance and rising land values and house prices. There has been little discussion of how to wean the UK’s big banks off real estate lending. Meanwhile property in London and the South East remains a popular speculative asset class for international investors despite the ongoing Brexit-related economic uncertainty.
There was little in the Autumn budget aimed at reducing the demand for housing and mortgage credit. The flagship policy of raising the stamp duty threshold to over £300,000 for first time buyers was widely ridiculed as self-defeating, with the Office of Budget Responsibility (OBR) immediately responding that it would push up house prices just as such demand-side subsidies have done in the past. The chancellor also announced another £10bn for the Help-to-Buy scheme just as new research showed that the previous tranche of funding initiated in 2013 by George Osborne had mainly lined the pockets of Developers and inflated prices further.
Across the whole country, mortgage borrowing is at a record high relative to incomes, at 4.1 — up from the previous record of 3.6 at the height of the financial crisis. With the Bank of England set to raise interest rates as the global recovery boosts prices, a recent projection from the independent OBR suggests that household debt servicing costs are set to climb 29% by 2023.
Given that such a large proportion of UK bank loans are backed by property, a key issue is how to reduce the value of land in the UK without causing another financial crisis just as there are tentative signs of the economy picking up steam. One proposal is that a publically owned land trust — perhaps the same body discussed above which could acquire land for development at agricultural prices — could buy up the land from property owners facing negative equity as prices fell. The land could then be leased back to them meaning they could stay in their homes and use the additional funds to help pay back their mortgage. Such an approach might also help households or housing cooperatives who are currently unable to raise a deposit for a mortgage.
But to maintain demand in an economy that has become used to propping up consumption via home equity withdrawal against rising property prices (something that has seen a recent uptick), policy makers will need to find alternative ways to stimulate productive investment. From that perspective it was encouraging to see the launch of the Scottish National Investment Bank. Similar institutions are needed for the rest of the UK to wean our financial sector off its property addiction.
Combined with more sensible policies on land value capture that now seem to be gaining momentum, we might then be a step closer to rebalancing the economy away from its dependence on rising land values.
Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane are authors of Rethinking the Economics of Land and Housing published in 2017 by Zed Books. For 30% off from the Zed website please apply the code LANDHOUSING on the checkout.