Debate Magazine

When is Land Banking Not Land Banking? (2)

Posted on the 30 November 2017 by Markwadsworth @Mark_Wadsworth

When it isn't, says Sobers. As a landowner/developer he sticks to the party line that it's all the government's fault:
... there is no way the developer can build houses for much less than he has budgeted for, once the planning is signed and sealed. If the market drops, and houses aren't worth enough to cover the already agreed s.106 costs (or indeed any site specific infrastructure costs) then the project gets mothballed. No-one is going to build houses if it means you lose tens of thousands on every one.
That is why developers have large banks of land with extant planning permissions, they have to keep the price of houses up to make the numbers add up. The State already HAS a development land tax, its called the s.106 agreement system. That is why the price of houses is so high, the State is setting a fixed tax on every house that is sold. Not a % of the value, a fixed cash amount. And if the house doesn't sell for enough to cover that fixed amount plus the cost of building it, then it doesn't get built, as simple as that.

It's not just the s106 payments/obligations. Between bare site and finished, occupied home, the farmer pays CGT on his profit, the developer pays SDLT on the land he buys, the council charges planning fees, imposes an affordable housing quota, charges Community Infrastructure Levy and s106 agreements, and the new owner pays another layer of SDLT.
These all act as a kind of "development land tax", which clearly discourages development. On the other hand, home builders can reclaim all input VAT (but do not have to charge it) and benefit from Help To Buy and similar subsidies.
It can't be too difficult to work out what the net revenues are (taxes minus subsidies) and replace it with a flat rate LVT that is approximately fiscally neutral, and applies as soon as planning permission is given (with maybe a grace period of a few months or a year).
We also know that if there's any sort of a downturn, developers do go back to councils and haggle them down with so-called viability assessments. These always start with the original price paid for the land as a "cost", which ought to be taken as zero in all cases - or else developers can wriggle out of their commitments by selling to another developer for a higher price. Funnily enough, councils don't haggle them back up again if there's a subsequent upturn. So it is not a fixed cash amount anyway.
But that's all by the by.
As I learned at the one-day RICS conference I attended, it is quite clear that town planners know perfectly well that by granting planning, they are also granting massive unearned windfall gains to landowners and they try and claw as much of this back as possible (planning fees, affordable housing quotas etc).
It is, as Sobers says, all a kind of tax. But it is a million miles from being a "fixed cash amount", it is very much a percentage of the available windfall gain. Councils in the south east can claw back up to £100,000 per home; in Newcastle it's only £10,000 per home.
In real life, the selling price of existing homes dictates the selling price of new homes; which in turn dictates the amount of planning gain the council can claw back. Sobers gets it completely arse-backwards and suggests that the amount the council claws back dictates the price of new homes; which in turn dictates the price of existing homes.
Even if Sobers' conclusion were correct (it isn't), this is still no explanation for why the home builders cartel owns enough land for the next ten years, it is nothing more than an explanation of why some projects are mothballed in a downturn (which has some validity). It certainly does not refute the observation that house builders are ruthless profit maximisers, unaffected by anything as troublesome as "competition" - freely competing businesses can't increase their revenue by restricting their output to a certain percentage of the total market.
We also note that the downturn was the period 2008-2010. Since then, prices have been ticking up in most areas, shooting up in some. Funnily enough, volumes have not increased, they have stuck to the profit maximising level of "one new home for every nine existing homes bought and sold".

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