Wednesday, 30 January 2008

The cost/value of an average plot of residential land

As I suggested here, the best way to look at house prices is to look at the ratio of house prices-to-earnings. The cost/value of a property consists of two elements, the bricks/mortar and the land/location value of the plot itself. The way that plot values have changed as a multiple of earnings since the early 1980s looks like this (click to enlarge):

NB - there are two ways of estimating the cost/value of the average residential plot:-

1. By looking at the cost of building land ("how much a builder will pay"), which can be taken from the VOA's Property Market Report (figure for E&W, excl. London), divided by a typical density of 12 homes per acre, as suggested here.

2. The residual method is subtracting the rebuild cost of an 'average' new home (say, a terraced house with 750 sq ft) using the ABI's calculator, expressing this as a multiple of average earnings (2.8, in this example) and deducting it from the chart of house-prices expressed as a multiple of earnings (see first link).

As you can see, the two methods come to pretty much the same figures.


pommygranate said...

what goes up...

Mark - i write now at the Australian Libertarian Society - a lively blog with much economics/politics debate. Pop over some time.

Mark Wadsworth said...

Have you given up on the L&DP?

pommygranate said...

no. with the election out the way, there's little to do there for the moment.

The Sage of Muswell Hill said...


Slightly OT but connected with one of your favourite subjects: doesn't your post highlight a problem for LVT valuation? In other words exactly how does one value the "unimproved" value of land which is, I believe, the basis on which the LVT would be levied.

The value of a plot in the real world can, as you say, be either the sale value of the house less rebuild cost or the resale value of the plot to a developer. However, "unimproved" value is value without any development or prospect of development. Accordingly, if I knocked down my house and - by some quirk of the London Borough of Haringey (not beyond imagination) - I (and anybody I sold the land to) was prevented from rebuilding on that plot, the site would be worth far less than the value of the house before I knocked the house down less cost of rebuild.

The vacant plot would be worth something to the neighbours as a garden or parking lot but not much else besides as long as there was no prospect of it being developed. Once you introduce the possibility of development, the value of the plot bears little relation to its value as "unimproved" land. So to obtain a valuation for unimproved land (and thus get an agreed basis for LVT) the valuation should omit that part of the value dependent on the land's "improvability". Is this possible? And if it is possible, are there other factors which should be included or omitted?

Mark Wadsworth said...

U, yes, factually you are correct, nearly 100% of the value of land is decided by what planning permission you have. Farmland goes for £4,000 an acre; residential land for an average of £1.2 million an acre.

I could expand the definition and say LVT is a tax on "unimproved site-only location values assuming current planning permission is fully utilised".

In your example, we'd have to make the reasonable assumption that if your house gets knocked down (gas explosion etc), the local council would automatically give you permission to build a new house that is much the same as the old one, or in keeping with surrounding properties.

But what's wrong with using the residual method for plots with a house on and market value method for unimproved land (with planning permission)? If in doubt, keep it simple and verifiable!

The Sage of Muswell Hill said...


"But what's wrong with using the residual method for plots with a house on and market value method for unimproved land (with planning permission)?"

Call me Mr Pedant but the valuation obtained by those methods is not the unimproved value. It might be that it doesn't matter but LVT enthusiasts have always harped on the purity of unimproved value. Plot A with planning permission is not identical in value to Plot A without planning permission. Unless the LVT advocates are saying (as I believe Henry George implied) that there should be no such thing as planning permission (ie you can do what you want with your own land) then there is a problem of valuation. In practice it might be that LTV even after dropping the classical "unimproved" valuation would still be an efficient tax (more efficient than council tax, income tax, IHT, VAT etc) but I think that's another argument. Or, it may be that LTV enthusiasts, faced with the difficulties of valuation, have have already dropped the pure "unimproved" requirement.

Mark Wadsworth said...

U, the wording that the LVT enthusiasts use is "Optimum permitted use".

The word "unimproved" just means that you ignore the cost/value of bricks, mortar, carpets etc. it does not mean that you ignore the value of planning permission; planning permission makes up 99% of land values, to ignore this value would be to make the tax meaningless.

Now, what is "permitted use" is up to the local council (as influenced by people who live near that site) to decide. If you are a NIMBY, then sure, you are perfectly entitled to prevent any more development in your village, so your site value remains high, so you pay more tax.

Or else, you are happy for planning permission to be granted for other sites in the village to be developed, the owners of the other sites then have to pay more tax, so all things being equal, your LVT bill goes down.

Anonymous said...

So if you are prepared to live in a tent, land's not too pricey? Thank God for global warming.

Mark Wadsworth said...

D, there ain't no global warming.

And how come the Tories are happy to talk about replacing taxes with 'user charges' but ignore the most obvious one of all?

Anyway, sod it, LVT is a young man's tax. I am old and rich, and from a personal, selfish point of view I would be dead against. If only the other opponents thereof were honest enough to admit that they oppose it out of purely selfish motives ...

The Sage of Muswell Hill said...


"planning permission makes up 99% of land values, to ignore this value would be to make the tax meaningless."

You make my point exactly in that uncertainty as to value undermines the concept. I'm (sort of) with you on LVT but I have a real problem in constructing an internally consistent argument in its favour (which convinces me let alone Mrs U) where the concept of unimproved land value remains fuzzy.

The value of land is unreliable for LVT purposes because local authorities or, worse, Whitehall are able (more or less) arbitrarily to grant or with-hold planning permission. The party controlling my local authority doesn't only fail to gain my support but my local ward has councillors of a different political hue from the governing party. So, I might be a NIMBY and seek, say, to conserve a conservation area (at, in LTV terms, a cost to myself) but a local authority or Whitehall can effectively "unconserve" such an area, change the value of the land and change the LVT levied.

I have experienced (to my aesthetic cost) an inspector from the Planning Inspectorate overturn a refusal of planning permission by my local authority. The inspector overruled a known and well-established conservation area rule because in his (IMHO) dubious opinion "not many people" were affected. [I declined to spend £50,000+ to seek judicial review.]

Mark Wadsworth said...

U, LVT is like a licence fee, you pay for what you are using (or have permission to use). And what you are using is a function of a) what's around you but doesn't belong to you in any legal sense (natural beauty, shops, employment opportunities, transport links) and b) the amount of it you are allowed to use.

Working out the land value is easy - you use the more appropriate of the two methods. For sure, these would have to be averaged out across a ward or a postcode sector or something sensible, and be based on actual selling values in the year.

Sure, it's all a bit rough'n'ready, but better roughly right than preceisly wrong. In any event, a sensible system would update values at least once a year, so you'd win some and lose some.

And if the value of land is reliable enough for millions of people to take out 25-year mortgages every year, surely its reliable enough for a system of domestic rates? I mean, LVT would be mainly intended to replace Council Tax. I have three problems with Council Tax:
- it is totally regressive
- it is totally skewed by Nulab so that Tory & Lib Dem low spending councils get such measly grants that they have to charge higher council tax than high spending Nulab councils
- silly discounts for e.g. students that merely allow the landlord to charge them a higher rent.

So however rough and ready the basis of calculation, it would be a lot fairer than council tax (and SDLT, IHT and all the rest).

As you say the location value might go up or down; a new railway station opens, values go up; the council builds a huge council estate at the end of your road, values go down. Look at the Chelsea barracks example, imagine that the council decides to have the last laugh and refuse any planning permission, what is that 12.8 acres worth? Nothing.

And finally, one thing that Tories say is "LVT is tantamount to nationalisation of land". Well, is that any worse than nationalising half your hard earned income via income tax, NI and VAT? Methinks not. Secondly, look at the chart again, the markets took away two thirds of your land value between 1989 and 1995, it just vanished in a puff of smoke!

So better to have low, stable land values and an end to these land value/credit bubbles, such as the one that is now unwinding at huge cost to the economy.

Mark Wadsworth said...

Sorry, re Chelsea Barracks, if the council decide to refuse planning, the value of those 12.8 acres drops to zero, but at least the owners have to pay no LVT.

OTOH, the council might say, sure, build a 100-story block of flats, rather than a ten-storey block, in which case the land value would rocket even higher and the LVT would go up, which would compensate society at large for the extra crowds on the local Tube station each morning, the shadows that the buildings cast etc.