I had a good debate with Umbongo in the comments to this post on what Land Value Taxers mean when they say "the unimproved value of each site assuming optimum permitted use" and how we could work it out.
As I tried to explain, 99% of the value of any plot of land (minus the cost/value of any buildings thereon) relates to the value of the planning permission*, which is at the whim of the local council under pressure from NIMBYs, subject to certain legal overrides.
This recent court case (unearthed by Tim W, and featured on BBC London News yesterday) illustrates the point nicely:
The current market value of the land, as a public open space, was independently set at £15,000, but Greenweb's legal team invoked an obscure clause in the Land Compensation Act 1961 which gives automatic planning permission for the rebuilding of houses destroyed by German bombs. That meant the value of the land suddenly shot up to £1.6m, even though the council would never allow it to be developed.
Even if we assume that there were no such Act and the council had acquired the land for £15,000, there is still the question of the land's value to the community.
With an average density of 52 homes-per-acre, there are around 337 homes within a 100-yard radius of the little park. If the presence of that little park enhances the value of each such home by £5,000, it's still good value for money. If all those homes are rented, and the presence of that little park enables landlords to charge an extra £5 a week in rent, it's still good value for money. And if the benefit to surrounding property owners is not worth that much, the council can just sell on the land to a developer again, can't they?
* The value of the land/planning permission is actually dead easy to work out within a 10% or even 20% margin of error (as my earlier post showed). As the other variable - the LVT % rate that would be applied to that notional value is an arbitrary figure - it is politically expedient to use a lower notional land value (to minimise the number of appeals) and charge a correspondingly higher LVT % rate.
Which also deals with the argument against LVT that it is tantamount to nationalising land. The value of your land is derived almost exclusively from the planning permission; ergo a tax on the value of the planning permission is a user charge and not a tax in the sense of truly confiscatory taxes like income tax, VAT, National Insurance etc.
Tuesday, 23 September 2008
Land values = value of planning permission
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4 comments:
Having read the comments on the other post I'm a bit confused. If the LVT is levied on the value of land within it's current planning designation, how does that take into account land that COULD be developed (if the owners applied for planning) but currently is just farmland (say) or a large garden?
Say I own a house with a large garden, which could, given other planning applications in my area, be granted PP for another dwelling. I choose not to apply for PP and it remains my garden. Will I have to pay LVT on its value as garden or as a housing plot?
Because if the latter, all land would have to be assessed as to the the likelihood of PP being granted (for any one of a multitude of uses) and the value decided as the developed value multiplied by the likelihood of achieving it. Ie my garden is 90% likely to achive PP and therefore is valued at 90% of the value if it had PP.
My argument against LVT is rather like the argument against Communism. Given a supreme onniscient central controller, Communism could be more economically efficient than capitalism. Such a person/entity does not exist and we know the practical outcome. I suspect the same is true of LVT. It provides a theoretical perfect allocation of land use. In practice the system of valuation/appeals/planning/taxation level setting would be immensely complex, and provide all sorts of hardship cases, anomolies and scams.
In practice, you would just take actual selling prices in each postcode, minus off the rebuild costs per ABI calculator or insurance quote, tot up the net figures (total A), tot up the total surface area of plots sold (total B) and then divide A by B to give a value per square yard.
It is better to be roughly right than precisely wrong.
There is no need to work out theoretical additional value of PP, as that is already 'in the price'.
Further, if people know that local council is generous with planning, then OT1H that increases values (because you can squeeze more on to the land) but OTOH it depresses values because your neighbour might slap down a huge block of flats. These factors are also all 'in the price'.
Firstly a postcode can cover a number of houses (10-15 I believe) which in rural areas are not in anyway comparable. Even in urban areas there are variations within a street - different sizes/types of house, different size gardens, different views etc. You couldn't value property by postcode. Each house and square foot of other land would have to be valued independently if LVT was to have any degree of fairness.
Secondly with regards to rebuild costs, that is also totally open to argument. I could probably spend twice as much rebuilding a house if I chose all the top quality materials rather than the cheapest ones and added plenty of fancy touches. That would reduce the site value drastically, and hence the LVT.
Thirdly you haven't asnswered my point as to whether a piece of open land is valued on it's CURRENT planning status, or one that COULD be achieved at some point in the future. A small paddock on the edge of a village has little agricultural value (one could get a rent for grazing cattle of about 50 pounds/acre, which assuming a 10% return on capital gives a value of 500 per acre. Even if you grew fruit and veg and made 500 pounds/acre that would equate to 5K value) but massive potential value of hundreds of thousands if given PP. How is that value taxed under LVT?
I regard LVT as the equivalant of saying to people "You have an IQ of 125. You are therefore capable of earning x thousand a year and we are going to tax you as if you did so. If you choose not to use your God given talents to their full potential that's your problem." We don't do that, we tax people on what they actually earn. Equally we should tax land on the basis of what it actually produces, not what it could produce under optimum conditions. The easiest way to do so is to tax the income derived from it via the income tax system, as we do now. That way no one is forced to alter their lives for tax reasons alone.
S,
1. You're thinking of a postcode unit (a dozen addresses), I was thinking more of a postcode sector (thousands).
2. No, each square foot would not have to be valued independently. LVT IMHO should be a straight swap for Council Tax/Business Rates/Inheritance Tax/SDLT etc etc, it would be a lot more 'accurate' or 'fair' than those taxes are.
3. As to rebuild costs, that's why we'd have averaging. Assuming you spent your money wisely, the additional total property value increases by the amount of the extra spend. It does not affect the site value. It would all net off. LVT should be based on actual sales. If you splash out £50,000 and sell it for an extra £50,000, how does that affect the site value?
4. Land should be valued at actual current market selling prices with existing planning permission. Of course, there would be a premium on land which is likely to get more planning permission, the market dictates the value thereof all by itself. If there is a 10% chance that your valueless paddock gets planning and would be worth a million, then mathematically, somebody playing the long game might pay £50,000 for it. That is its market value.
5. All land produces something. Why do you think people are prepared to commit such huge sums of money to buying a house? All LVT would do is reduce the amount you have to pay to the bank in mortgage (as the land would be worth less) and increase what you pay straight to the local council. household's total tax bills should NOT go up. LVT should be a REPLACEMENT TAX.
Final point - the gummint wastes £100 billion a year, all in all taxes should come down a heck of a lot. But it's taxes on production and income that should come down, not taxes on property. If you e.g. scrapped Council Tax, Business Rates, SDLT and IHT, all that would happen is that property values go up. It's a one-of windfall gain to whoever owns property at the time.
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