Tuesday, 25 August 2015

Land banking bullshit

Spotted by JJ in The Estates Gazette:

Let’s take an example. Berkeley Homes at Woodberry Down in Hackney. It has permission for around 5,000 homes. Now you’re the boss of Berkeley Homes, do you A) push the button and start construction on the whole lot or do you B) built out 200-300 units per year over the course of 20 years?

Example A goes a long way to solving the housing crisis in the local area, but also causes the local housing market to burst with a huge over supply of homes and crucially leaves the developer with little or no profit. People forget developers are private companies with shareholders to account to and not philanthropists. So in short it’s B every time.


But A) would not leave developers with little or no profit. The 'profits' he is talking about relate to inflated land prices and not to the overall income of the construction sector. The sub-contractors doing the actual building don't get a penny of the land price gains, but most of them can still make a living from it - if construction output increased, then more actual builders would be able to make a better living from it.

Come to think of it, if it wasn’t for land banking there would be a lot more boom and bust, with prices more volatile than they already are.

Bollocks. Prices would be much more stable but at a lower level, just like any other mass-produced item. So he has just contradicted himself.

Say a developer has 10 sites, all of 1,000 units or so; they’ll build out 200-250 homes per year. That developer will contribute nearly 2,000 units per year. Give that same developer 20 sites instead of 10, their output will double, they’ll still be ‘drip feeding’ homes.

More bollocks. The amount which land bankers drip feed onto the market does not depend on how big their land bank is, it is set at the profit maximising level. We found out recently (h/t Peter S) that for every nine existing homes which are bought and sold, land bankers will drip feed another one onto the market. This ratio has been constant for at least forty years. The amount of land which they have in their land banks is just a balancing figure and of little relevance to output levels.

A few more thousand hectares of so called ‘green belt’ on the periphery of London which isn’t really very green is easy to find. But blaming builders for land-banking is much easier.

Blaming land bankers is missing the target. The reason for all this is the fact that land values are a free gift from society, and in the absence of a tax on them (instead of taxes on earned income to subsidise land values) too many people will be putting too much effort into getting their hands pin the fixed total pool of gains; land banking is just an extreme symptom of the underlying malaise.


mombers said...

"When was the last shop you went to where there was just one of everything?"
Well shops don't do this because it's a competitive market - they have no power to drive up prices by restricting supply, the shop next door will just gobble up their market share.
Developers on the other hand... They have a monopoly on the site and can drip feed it for as long as they like. Some competition could be introduced by granting permission for x number and allowing ANYONE to bid on individual units, subject to commencing work within a year. That would quickly clear the market, the monopolist developer would either have to buy the lot and develop quick quick, or frustrated homebuyers would cut them out and get on with it. Of course just levying a much less complicated annual collection of the land value would achieve much the same more efficiently.

Mark Wadsworth said...

M, LVT is always simplest and best, isn't it? There are dozens of work arounds, but each throws up more problems. It's like repairing a bucket with lots of leaks, it's not good enough to block one or two leaks, you have to block them all (which LVT does perfectly).

Bayard said...

"A few more thousand hectares of so called ‘green belt’ on the periphery of London which isn’t really very green is easy to find. But blaming builders for land-banking is much easier."

and just as wrong. The shortage is of cheap houses for owner-occupation. Building on the green belt will do nothing to alleviate that.