The simple way to end land hoarding:
How taxation can help to stabilise the supply of much-needed land
Morning Star : February 1, 2006 : Jerry Jones
Reproduced here by kind permission of Morning Star.
The high cost of land is a major reason for the shortage of affordable housing in Britain. This reflects a shortage in the supply of land for housing in relation to demand.
The escalation of house prices over the last 25 years is not due to the higher costs of construction, which in real terms has changed hardly at all, but due to the huge increase in the value of the land upon which the buildings stand.
This drives up the prices of rented accommodation. And it also makes almost impossible for local authorities to expand their housing stock, even if they wanted to. Unfortunately, that is hardly the case right now.
Indeed, the government is actually forcing them in the opposite direction – but that is another story.
One reason for the rising value of land and therefore its price is the nature of land itself. Unlike goods and services, if demand is high in a particular area, it is not possible to increase supply, so that the price is more or less bound to rise.
Prices are driven up even more by speculators creating artificial shortages by sitting on land that they own, waiting for the price to rise further in order to realise a higher profit when eventually they do sell or develop it – much like speculators in other commodities or assets when in short supply relative to demand.
Finally, land prices in towns are higher than otherwise due to artificial shortages created, in effect, by Britain’s planning system, which places heavy restrictions land use.
If there were no such restrictions – if there was a market free-for-all – land for building would be a fraction of the price it is now.
According to the Valuation Office Agency, the average price of land designated for agriculture in England is £9,287 per hectare, compared with £630,000 to £749,000 for different kinds of industrial and commercial use, and £2.46 million for residential.
These prices would tend to converge if planning constraints did not exist.
It would make prices of agricultural land, especially in the so-called green belt areas around towns, much higher, and, the price of land already built on, eventually, much lower, especially on the outskirts of towns, as supply of land for building on caught up with demand.
But it would lead to a vast urban sprawl spreading deep into the countryside like in the United States.
Furthermore, derelict or brownfield sites in towns would be even more of a problem than now – also a characteristic of US towns – because they involve the extra costs of demolition and clearing compared with developing greenfield sites.
In Britain, across the political spectrum, nobody advocates a land free-for-all, with a general consensus that the countryside should more or less be protected for agricultural and recreational purposes.
How therefore may the supply of land for affordable housing in towns be increased that is consistent with planning regulations?
Much attention has focused on releasing some land in a controlled way from the green belt. This could certainly contribute.
However, the first priority surely should be to ensure the efficient use of land in towns, especially brownfield sites, which are not only a waste of resources but also an eyesore.
By far the most effective and proven measure would be the introduction of an annual tax on land values, as well illustrated by the US city of Harrisburg.
In Britain, the value of a site is highly dependent on its designated use by local planning authorities.
If designated a public park, its value would be zero, because it could not be bought or sold, and building on it is not permitted.
If a former industrial or commercial site were re-designated residential, its value could jump fourfold or more.
And if designated for a multi-storey block of flats rather than low rise semi-detached houses with gardens, the value of the site would rise even more, perhaps ten- or twentyfold or more.
If, unlike now, the owner of a high value site, had to pay an annual tax set at an appropriate level whether or not he or she brought it into use for the designated purpose, there would be a powerful incentive to start developing it as soon as possible, or else sell it on to someone who will.
In effect, this will increase the supply of land, and therefore tend to dampen its price. And derelict land in towns would soon become a thing of the past.
Moreover, over time, as buildings in an area came to the end of their useful lives, if there was the need, planning authorities could re-designate the land for denser housing – or if the priority were more jobs, for commercial use.
In short, it is not true that an annual land value tax is incompatible with Britain’s land planning system, as asserted by some vested interests opposed to such a scheme.
On the contrary, the two together could go a long way towards overcoming the chronic shortage of affordable housing.
Government plans to resurrect a failure
Kate Barker was appointed by the government in 2003 to conduct a review of housing supply. She is a former was chief economic advisor to the CBI, and currently an external member of the Bank of England Monetary Policy Committee,
Her final report, published nearly two years ago, is still in the process of being considered by the government. But the decision seems to be to take up her main recommendation, which was to introduce a so-called planning gain supplement (PGS), otherwise known as a land development tax.
This is totally different from an annual land valuation tax, which Barker did consider in her interim report, somewhat superficially, but ended up rejecting it.
The PGS is a one-off tax on the difference in the value of a site before and after planning permission has been granted to build on it, or following a change of permitted use.
As figures in the main article show, this can result in a two-hundredfold increase in value or more.
The aim of PGS is to capture for public benefit a part of the uplift in price that results from a change in permitted use – perhaps to build affordable housing or develop infrastructure.
In fact, such a tax was introduced by previous Labour governments on no less than three occasions. Each time, it was an unmitigated failure.
The problem is that unlike an annual tax on land values, which is paid whether or not the site is developed for its permitted use, a land development tax acts as a disincentive because developing the site would result in a large one-off tax bill.
Better for the landowner to sit on the land, watching its value increase through no effort on his or her part, and cash in the higher profit when a new Tory government gets elected that abolishes the tax, which more or less is what happened each time previously.
This has often been blamed on the tax being set at too high a rate – 100 per cent in its first incarnation in 1947 – so it is believed that the government will set it at a relatively low rate, perhaps 20 per cent.
If that is so, its revenue effect will be trivial, especially as there is talk that it will be possible to offset it against corporation tax and possibly other taxes.
In fact, compared with the annual land value tax alternative, the revenue impact would be low anyway.
Consider a site on the edge of town re-designated residential from agricultural.
Slightly adapting the figures given previously to take account of speculation and the fact that the site would be some distance from the centre of town, the change in value could be something like £20,000 per hectare going up to £120,000.
In other words, the uplift would be £100,000. A PGS rate of 20 per cent would give a total revenue, of £20,000, which would be one-off.
A land value tax, on the other hand, at a rate of, say, 2 per cent, on the £120,000 site would yield an annual revenue of £2,400, which, spread over, say, sixty years, a typical lifetime of a new development, would amount eventually to £144,000.
In fact, since it is likely that the value of the site would increase considerably over the years as a result of improved amenities and so on, the amount would likely be double or treble that.
It would be larger still if LVT were seriously adopted to cover eventually the entire economic rent of land, but this would be offset by the equivalent reduction of other taxes, such as income tax, which would have a beneficial effect on enterprise and therefore economic development.