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Financial Topics

Land reform can put the cost of housing back on solid ground

When we talk about sky-rocketing house prices, we’re not quite getting the description right. The prices that are rocketing are not so much the bricks and mortar as the land they sit on. House price inflation is really land price inflation. Between 1994 and 2007, according to Oxford Economics, land with planning permission quadrupled in real terms from £1.3 million a hectare to just over £5 million.

It’s a crucial distinction. If politicians want to fix Britain’s “broken housing market”, as a white paper put it in February, they need to start by fixing the trade in land. In a paper for Civitas, a think tank, Daniel Bentley argues that reform of the Land Compensation Act 1961 is required.

At first glance, it’s hard to find fault with the legislation. It ensures land is valued at a price that “could reasonably have been expected to be granted” at a later date, forcing developers to pay residential-type prices.

This principle of “hope value” was ratified in a legal battle over a compulsory purchase order for the 2012 Olympic Park. In 2007, the London Development Agency bought a goods depot owned by Rooff, a building contractor, for its value as industrial land (which it was). Five years later the courts ruled that the site might one day have been a more valuable residential development. The LDA had to stump up.

Fair enough, you may think. Nobody should be forcibly deprived of their property at a discount to potential. But there is a logical non-sequitur here. If every piece of land were residential, where would all the offices, shops, train stations and, for that matter, goods depots be? Besides, the value of land has much to do with its surroundings, including the roads, rail, streetlights and parks — public spaces paid out of the public ledger.

Moral quandaries aside, the Land Compensation Act is having unfortunate consequences. Landowners won’t sell at anything less than full “hope value”, which in turn encourages developers to undersupply the market and target higher prices. The system ensures that wealthy Chinese investors are catered for while Britons on middle incomes struggle to buy a home and those on benefits are moved into private rented accommodation at ruinous cost to the taxpayer.

The London mayor is trying to address the problem with fast-track approval for private schemes that set aside 35 per cent for affordable housing. Those that don’t will be scrutinised to establish if anyone is profiteering. The idea is to embed the reduced profit the developer can expect into the land price. But there is a catch. Landowners can hold out in the knowledge that councils are under pressure to deliver homes. If threatened with compulsory purchase orders, they can fall back on the Rooff judgment.

If the 1961 law was changed to permit compulsory purchase at existing use values, it ought to result in cheaper land. Councils could then demand more affordable housing or even buy land themselves to develop council houses at lower rents than the 20 per cent market discount for “affordable housing”.

Capital Economics has argued that council houses would be good for the long-term public finances, by replacing the £25 billion housing benefit bill (a transfer from the taxpayer to landlords) with a lower-cost asset.

Reform of the 1961 law is not even that fanciful. Housing, we’re told, will be the centrepiece of the budget and the Tories pledged to make compulsory purchase orders less expensive for councils in their manifesto. It would be a brave move. Private landowners, the party’s natural constituents, made an estimated £9.3 billion profit in 2015, according to the Centre for Progressive Capitalism, or £60,000 on every new home built that year. How bold does the government feel?