Christine Lagarde of the IMF has just suggested that Britain should allow more development in rural areas to help solve the UK House Building Shortage.
UK housing shortage threatens recovery, IMF warns
By Richard Johnstone | 6 June 2014
The International Monetary Fund has warned that imbalances in the housing market present a risk to the UK’s recovery and called for planning reforms to increase the supply of land for new homes.
With all due respect, she is almost totally incorrect in both her diagnosis and proposed treatment.
The idea that Britain has a substantial house building deficit emerged with the Barker Report in 2004 which suggested there was a deficit of approximately 120,000 homes per year. The scale of that deficit has accelerated, to the point that pundits now claim it is of the order of 260,000 homes per year with a total deficit of around 1 million homes in the UK.
It is pretty clear that we are not building enough homes, either to replace those that fall derelict, to improve the average energy balance and amenity value to modern standards, or for the migration and movement of our own population, let alone population growth.
These homes are not evenly distributed, and are mostly in the South West where there has been rapid increase in job creation leading to internal and overseas migration to the south-east of England.
The easy solution of taking away planning controls and allowing builders free for all over the countryside is often touted, usually because it is the solution preferred by the British Housebuilders Federation, and all of the major building companies. Understanding how they operate, and what their motives are helps us all to understand why we should resist their lobbying.
Almost all of the things that house building companies have claimed turn out to be untrue:
- it is untrue that relaxing planning rules leads to more properties being built
- it is untrue that applying higher standards of building increase the costs of builders
- it is untrue that asking for better energy utilisation in homes increases the costs of builders reduces their profits
The motives of house builders
What is true, is that house building companies have been appallingly badly run, have racked up massive pension deficits (to the tune of £1 billion) and have been consistently overleveraged in order to pay out dividends and executive benefits and bonuses. They failed to reinvest their profits in improvements to their businesses, improvements to the houses they build, or improvements to the society in which they live.
It is absolutely fundamental to understand that the huge borrowings of these companies have to be supported by a very large assets on their balance sheets. Since they sell the homes they make, the only substantial assets on their balance sheets are the development land in which they have invested. This, peculiar quirk, is a feature of the UK planning process whereby a field which is worth around £10,000[i] without planning permission per acre is suddenly worth over £1 million with planning permission. The total cost of that transformation is around £4000 in an outline planning application. [ii]
And therein lies the enormous problem with the British house building crisis: by far the greatest margin that you can create occurs in the first few weeks when you submit a simple piece of paper to your planning authority. After that, the long slow grind of actually building generates very little more actual profit, but does create an awful lot of costs, risks, delays, and management headaches.
Right down at the root, the motives of the housebuilding companies are almost directly at odds with that of the country which needs more houses.
The great landbank deception
So, in many ways, the large British house builders are really large British landowning companies whose main incentive is to get large areas of land cheaply, obtain planning permission for them, and then use that asset to borrow billions of pounds. It is very much not in the interests of house builders to develop that land quickly. Their major incentive is to sit on the land for as long as possible. To a very real extent the major business of the large companies is land banking.
However, as soon as the individual developers release the figures it becomes abundantly clear that the actual size of the landbank is many times this: a single developer alone as a landbank of over 110,000 plots. In fact, the UK landbank is probably well in excess of 1 million plots given that the quoted 350,000 plots is only those for the top 6 housebuilders, and they account for only around 1/3 of homes built in the United Kingdom.
And that is only the plots that currently have planning permission granted, there is approximately 2 or 3 times that amount of land which has been speculatively purchased, or for which the planning and design process has started but not yet resulted in permission.
It is important to remember that outside of the big 6 builders who make all of the media noise, there are tens of thousands of small building companies, and private individuals doing the same thing on a smaller scale. Indeed the self-build market alone accounts for around 40,000 to 70,000 new houses per year, each of which represents a huge profit in terms of the land gain alone.
The key point is, we have already granted planning permission for more than enough homes to satisfy the deficit for the next decade, assuming everything else proceeds at a steady state. There does not appear to be any need to make it easier to obtain land, or to obtain planning permission upon it.
If this is the case, then, why are we not building more houses?
Aside from the land banking argument, there is a value-based argument. Developers want to build homes that maximise their profits on the land that they have in their land banks. This means building to very high densities, minimising gardens, minimising internal space, and maximising the height of each home. These do not make for very nice or well-built times that people want to buy. What they do make is for lots of cheap small homes that are very nice for buy-to-let investors to purchase. And this, paradoxically, makes it even harder for people to move out of the rental space into the homeownership space and it further restricts the market in that it is unlikely to provide mid-sized family homes.
So what can we do?
Well, for a start, we could force the release of the over 1 million empty properties in the United Kingdom, 350,000 of which (an entire year’s demand) have been empty for more than 6 months. It would appear that estate agents are not really doing their jobs either. To do this, we should consider a battery of forced acquisition by local authorities, high rates of taxation on empty dwellings, and flexible temporary letting arrangements.
We could also remove all the benefits of owning a 2nd home, and encourage those homes to be taken up by people living in the area. Certainly, there is no reasonable justification for any form of tax break, Council tax relief, or interest on a 2nd home in the United Kingdom.
And finally we properly should insist that local authorities rebuild to replace any council homes that are sold.
Will that be enough?
No. An awful lot more will need to be done to solve the bottleneck in the current housing process.
I would suggest that we first look at finding ways to motivate those who have land with planning permission to develop it faster.
Time limit planning permissions
Once granted, a planning permission is effectively perpetual. It is a simple matter to refresh and renew it, or to take a digger and dig a little hole, then stick a wooden post in and claim that you have started work. That huge jump in value that is baked-in when planning permission is granted is effectively permanent. And while it is permanent it can be used to support masses and masses of borrowing.
By making planning permissions temporary, and making them far harder to renew without substantially developing on a site, the incentive to cling onto land banks as an asset will be reduced.
While this will initially make borrowing harder, and therefore damage the cash flows of the large builders, once they start to understand the process and sell more houses more quickly, their profits should rise, and they will therefore generate enough cash that they can reinvest to support further building. Paradoxically, shorter planning permissions should reduce their reliance on expensive borrowing and make the larger housebuilders more secure.
At the minute, a landbank attracts no taxation. However once land is built on, it does attract taxation, council taxes, business rates, and other charges. This seems to be illogical, given that so much profit is created once landbanks have planning permission.
By making a charge on the landbank roughly equivalent to the business rates or council tax take that the land would generate once it has been properly built, the incentive will be on the builder to build, sell, or let, extremely rapidly.
This charge will also help fund the planning departments of local authorities, social gain, community facilities, and all of the things that builders most normally forget are part of life once they have washed the dust off their boots and walked away from a soulless empty housing estate that lacks schools, playgrounds, shops, Scout huts, churches, or community space.
Tax wealth in property
Since the 1960s the population of the United Kingdom has come to believe the entirely false idea that their wealth is entirely tied up in their homes. This has led to all sorts of dysfunctional investment behaviour by individuals, banks, and governments. Sadly governments (since they take tax on expenditure), banks (since they are basically entirely supported by the value of homes and their mortgages), and individuals (who have seen their traditional pensions evaporate) have no incentive to address the problem.
A wealth tax on the value of property is very desperately needed in the United Kingdom. Boris Johnson and others may bleat on that it would unfairly hit little retired old ladies in Kensington. The simple answer to that is to start that tax at a high level and slowly move it down over decades. I would suggest starting such a wealth tax on properties of more than £10 million, and moving that down towards £3 million over a decade. It would be very simple to collect, very hard to evade, and universally fair. The mechanism to collect it through council tax already exists.
Is that all?
Probably not, as there are certainly some major structural defects in the mortgage market that need addressing. There is a huge emerging structural defect in the transfer of private wealth from equity and guilt portfolios to fund pensions and into buy to let schemes which are assumed (with no evidence of the future whatsoever) to rise in value and provide for retirement. The impact of student loans on homeownership is only just beginning to be felt, but will no doubt be entirely negative and unpleasant for future generations. The absolutely artificial market for property in London, which is basically a safety haven for foreign capital totally unrelated to the purpose of building as a home, will have to be addressed at some point.
It all sounds awfully difficult!
That’s probably because it is. This is a problem that has built up over 50 or more years, and in which none of the major partners has any incentive to actually tackle the problem. It needs a brave political leader to take hold of the situation, stop listening to the special pleadings of the banks and housebuilders, and actually force through a solution.
The simple, knee-jerk, answer of Christine Lagarde and the IMF – to allow free for all building on rural land – does a grave disservice to the people of Britain, our beautiful countryside, and those of us who live here.