House building: how much impact does the cost of land have?

I was listening to "Cross Question" on Iain Dales' LBC show, and I was really intrigued by the debate from the panel on the subject of house building. You can listen below:

This week's panel was made up of policy think-tank experts from across the political spectrum. There was discussion on a range of matters concerning house building, including looking a tenant rights, improving the quality of homes (insulation, etc), and upping the number of social housing / council-owned homes.

The part that really struck me though, was the debate on the land price as a component of the cost of a house. Will Tanner, Onward thinktank, spoke about how the cost of land used to be 50% of the total cost of your house 20 year ago, but this has risen to 70% currently. This has arisen due to more land owners selling their land for a market value + future development value premium (essentially!); Will calls it "Hope Value".

It is interesting in the context of banking, since businesses are often frustrated that Banks will only lend against MV, rather than any future upside. It is also interesting though as it begs the question of what a government solution to this issue might mean. The panel was clearly of the view that some sort of interventionist strategy was needed, with a suggestion that the local authority could try and effectively price control (strong term, but stick with me) the market to ensure that land traded at lower values.

The theory here is that the local authorities could effectively purchase land themselves to either develop for social housing at a lower price, or they could buy lots of co-located land plots and help to create new villages / towns. Here they would invest in infrastructure around these pieces of land, and then sell the land on to developers – helping to cover their costs. This, the panel suggests, would mean we might see more “Milton Keynes” in the future… with the prohibitively high land costs currently acting as a barrier to local authorities or national governments (remember garden cities?) doing this, as land owners are holding out for too high a price.

As someone who firmly believes in a free-market approach, this does seem like a very interventionist approach to me. However, what struck me was the unanimity with which the panel agreed on the issue… suggesting that it clearly is something which needs addressing, and with cross-party support to ensure that any reforms aren’t rolled back under a future government of a different colour.

The debate helped to highlight just how many areas there are which aren’t getting the air time at the moment due to Brexit. Here’s hoping we can move on to talk about these in the near future!

*UPDATE* Interesting article in the Telegraph on this subject: https://www.telegraph.co.uk/business/2019/11/17/berkeley-group-founderbacks-radical-reform-laws-ending-land/

One of Britain’s top housebuilders has backed radical reform of property laws to reverse the decline of home ownership by ending the hoarding of land and triggering a new wave of development.

Tony Pidgley, the founder of Berkeley Group, said landowners and developers should be forced to share “planning uplift” with local authorities.

The move would upend the residential construction industry but Mr Pidgley said the system is “in dire need of reform” to meet demand for hundreds of thousands of new homes.

“We need a central body that buys land, awards planning permission, then passes on the returns to the local community,” he said. “The whole of society should capture that value – it’s about decency.”

There have been growing calls from council leaders and campaigning groups for the state to claim a much greater share of land value increases when residential planning permission is granted – which can see values rise several hundred-fold. MPs warned last year that the current rules, created in 1961, encourage speculation and reduce revenues for affordable housing and local infrastructure.

Mr Pidgley said in Home Truths, a new book, that the Government should “bring it on”.

He said: “We’re in the building business and that’s where we should compete, not in trading land – as long as there is room to make a decent margin on housebuilding.”

Polly Neate of homelessness charity Shelter said: “The case for land reform is now so urgent and compelling that voices from every corner of the housing sector are demanding change.

"We need a new system that gives landowners a fair price but also works for communities and encourages building, not land-banking”.