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.
To fight him on his chosen turf, this is part of the explanation of why some projects are mothballed in a downturn. We 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 time-honoured profit maximising level of "one new home for every nine existing homes bought and sold".
So this has naff all to do with land banking, as such. It certainly does not refute the observation that house builders are ruthless profit maximisers, unaffected by anything as troublesome as "competition". As I said in the earlier post, these land banks are just symptoms of their monopolistic position and not a problem in themselves.
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To go into a bit more depth...
1. 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). Which would encourage development.
2. 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).
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 viability assessments 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.
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.
3. 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.
4. Even if Sobers' conclusion were correct (it isn't), this is still no explanation for why the home builders cartel kept output low once the downturn finished and why they have since acquired enough surplus land to cover ten years supply.
Let's contrast home builders with a free(ish), competitive market, like car manufacturing.
Ford, Volkswagen et al want to sell as many cars as possible; new cars have to sell for slightly more than cost to be viable, that's about it, the rest is about volume (spreading the fixed cost of development over as many units as possible) The price of new cars, and the number of cars available dictates the price of second hand cars. Which is quite the opposite of the situation with housing.
And yes, luxury sports car makers restrict output to keep prices high, which means that their cars maintain their resale value much better than Fords or Volkswagens - but as sure as heck, Porsche and Ferrari don't have massive warehouses somewhere, stashed with ten years' worth of raw materials.
Ford and Volkswagen don't have ten years' worth of finished cars that they are sitting in car parks, wailing that it's really difficult getting them through the initial MOT and blaming bureaucrats. Which, again, is quite the opposite of the situation with housing.
Christmas Day: readings for Year C
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22 comments:
...Annual new supply is less than half a percent of all supply, to suggest that the selling price of new homes influences the selling price of all the others is completely arse-backwards. The selling price of existing homes dictates the selling price of new homes,...
Trying to explain this to the 'build more homes to increase supply and get prices down' brigade is nigh on impossible.
Viability assessments should be done on a rental value basis, not selling cost. Rents don't fluctuate wildly like prices so very few sob stories. And would encourage build to rent as well.
L, it is nigh impossible.
M, agreed. Or done simply on basis that land has no relevant cost. What the current owner paid is irrelevant, it is only future costs that should influence decisions.
"So this has naff all to do with land banking, as such. It certainly does not refute the observation that house builders are ruthless profit maximisers, unaffected by anything as troublesome as "competition". As I said in the earlier post, these land banks are just symptoms of their monopolistic position and not a problem in themselves."
They certainly are ruthless profit maximisers, I totally agree. But so is the State. It demands its cut of every development, in fixed cash terms, at whatever level the housing market will sustain at that point in time. For a housing development in the SE of England it will be many times that of one in the North East. The State doesn't let the market decide the house prices, and take a % of the profits, no it demands a fixed amount, regardless of whether the scheme adds up financially or not.
You could add 100 national housebuilders into the mix, and everyone would be in the same boat - they all have to deal with the State to build houses. The State controls the planning process, the s.106 process, the house construction regulation process and the taxation system. All the developers have the power to do is say 'We can't make money at this level of house price so we're going to stop building them'. Everything else is in the gift of the State.
Housebuilders don't care what houses sell for, as long as they can make a profit. The State on the other hand wants as much £££ as possible so has a massive vested interest in house prices being as high as possible. Don't forget also that the cost to the State in terms of provision of State services is the same if houses sell for £100k each or £1m. The same number of people still need schools and hospitals and council services. The cost of a school place doesn't drop just because house prices halve.
S "The State doesn't let the market decide the house prices, and take a % of the profits, no it demands a fixed amount, regardless of whether the scheme adds up financially or not"
That is simply not true and you know it. You know a lot about your patch in Swindon, don't assume that the same planning fees, s106, CIL etc applies everywhere.
For example, new builds in Newcastle cost about £150,000 last time I looked. For sure, the local council has collected £10,000 of that (or whatever). Do you really think that the taxes on a new houses in London costing £1 million is also only £10,000? The council's slice is their best estimate of what they can get away with i.e. not push developer into mothballing (Which happens in marginal situations only).
"It demands its cut of every development, in fixed cash terms, at whatever level the housing market will sustain at that point in time."
Hang on, the state has just handed the landowner a huge windfall gain by awarding planning permission. Why should they not take some of that back? Are you saying it is impossible to make money building houses and that all profits come from the uplift in land values? In which case why would anyone buy a plot with planning?
"Hang on, the state has just handed the landowner a huge windfall gain by awarding planning permission. Why should they not take some of that back?"
Indeed why not take some (or 99% or all) of it back? But don't do it in the worst possible way.
In the absence of the State taxing the windfall gains via the s.106 system the State could just dole out planning permissions willy nilly and the price of development land would collapse - the market would be saturated, house builders could get land at cheap(er) prices and build cheap(er) houses.
If the planning gain was entirely taxed via the CGT system the State could still flood the market with planning permissions, and also reduce the value of development land.
However by putting a fixed price of S.106 payments on every development at the point of planning, that gums the market up - bakes a high cost into every development from day one. It matters not how many planning permissions they grant, if every one has a high s.106 price tag attached. The houses can never get any cheaper, as the CANT be sold cheaper.
Basically you cannot collapse the price of development land while State demands such a large % of the planning gain. The market has no room to work. The only way prices can drop is if the whole housing market drops nationally. If you removed s.106 costs, maybe introduced higher CGT taxes for such gains, then issued loads of planning permissions, initially a few people would make out like bandits, if you happened to be at the point of selling your land and the new cheaper houses hadn't hit the market to collapse house prices. But very soon the supply of new planning permissions would collapse development land values and houses could be sold for cheaper prices.
But in that scenario the State then has to fund all the social infrastructure costs itself - schools, hospitals, leisure centres etc, because the money currently paying for them from higher house prices would no longer be there. If the State collapses land development values, it still has exactly all the same costs for the State services it must provide in an area for the new houses occupants.
Who is going to pay for them? (and don't say council tax - it provides a small % of the expenditure of local councils, and only just covers ongoing running costs, not the capital investment in new buildings etc).
"In the absence of the State taxing the windfall gains via the s.106 system the State could just dole out planning permissions willy nilly and the price of development land would collapse - the market would be saturated, house builders could get land at cheap(er) prices and build cheap(er) houses. Yay! What's not to like about that? (And we are assuming that all the S106 stuff would go as LVT was introduced).
"Yay! What's not to like about that? (And we are assuming that all the S106 stuff would go as LVT was introduced)."
Whats not to like is someone has to pay for all the social services that all the new houses need. Schools'n'hospitals etc. At the moment the new house owners pay via the higher house prices. If the house prices are lower and they aren't paying for them who does? The rest of the houses in the area via vastly increased council taxes? Higher central taxes via income tax/vat etc?
This is the point - building lots of new houses creates massive new demand for State services in any given area, somehow that has to be financed. At the moment the new householders pay. If not them, who?
"That is simply not true and you know it. You know a lot about your patch in Swindon, don't assume that the same planning fees, s106, CIL etc applies everywhere."
S.106/ CIL applies wherever you are. The level of contributions will be different of course, but relative to local house prices. So the contribution in Newcastle will not be the same as Swindon, but it will help maintain the price of houses at the level they are in Newcastle, just as the level of s.106/CIL applicable in Swindon will keep prices up there too.
Houses can't move. So a development tax of X in one location and 2X in another can't be gamed by shifting the low tax house to the high tax area.
Imagine the State said that instead of an income tax of a % of your income it was demanding a fixed amount per person in each location instead (and assume people can't move from where they live). The amount demanded in Doncaster would of course be less than Dulwich, but what would be effect on wages? It would be to ensure there was a bottom in the market - no-one could afford to work for less than the tax plus their minimum living standards so they would always have to demand those wages, the market could not operate below that level.
Thats what S.106/CIL does, it puts a floor in the housing market below which the market cannot operate. Its effectively a poll tax on every single development given planning permission in the country.
S! LVT is designed to raise 'enough' tax to fund those sorts of things. It's a tax on rents, location premia, not 'house prices'. The double bubble is that you get lower house prices / land rents AND all those lovely services. (Or not the latter - as funded and run by government - if I had my way - but that's a separate topic).
I can see the sense in what Sobers is saying, the figure of the s106 payment is initially calculated from the historic market price, but because it is historic, and set before future sales actually occur it then becomes a cost to be recouped by the developer which influences the developers behaviour and asking price.
Redwood alert!
Meanwhile John Redwood is over on his own blog talking about all the lovely house price rises and rent growth of late.Perhaps a visit from economic realists is called for!
"Indeed why not take some (or 99% or all) of it back? But don't do it in the worst possible way."
I'm very much in agreement with you here. I think the state should get 99% of the gain , minus the cost of obtaining the PP (in the same way as you can offset costs against CGT: if you hadn't gone to the trouble of obtaining PP, the uplift wouldn't have happened).
"In the absence of the State taxing the windfall gains via the s.106 system the State could just dole out planning permissions willy nilly and the price of development land would collapse - the market would be saturated, house builders could get land at cheap(er) prices and build cheap(er) houses."
I'm very much in disagreement with you here. The value of land is set by its location, not supply or demand. The need for PP is simply a restriction on its use that reduces its value. Remove that restriction, by granting PP and the land returns to its true value. So if the concept of PP was removed, along with PP, all the farmland round the major cities would be worth what land with PP is now worth.
PP acts just like a restrictive covenant. In my village, the school has just closed. The school's playing field is subject to a restrictive covenant that it can only be used as a playing field. Even with no PP, that field will be worth far more if the covenant is lifted. There is nothing that sets that field aside from any of the other fields around the village, so as a field without PP, there is no greater demand for it than any of those other fields, so that increase in value has nothing to do with demand and everything to do with permitted use and location.
"So if the concept of PP was removed, along with PP"
Sorry, I meant "along with that of Green Belts"
"This is the point - building lots of new houses creates massive new demand for State services in any given area, somehow that has to be financed. At the moment the new householders pay. If not them, who?"
Well, the state, funded out of the 99% CGT on granting PP, of course, to the extent that the state ever ring-fences any income.
L and B, thanks for stepping in and of claiming it to him.
Din, these agreements can be renegotiated.
DBCR. Yes and No. Yes, he's as big a rent seeker as always, but what he's really stating is that all the Brexit doom mongers on house prices (sic) and construction have been proved wrong.
"Well, the state, funded out of the 99% CGT on granting PP, of course, to the extent that the state ever ring-fences any income"
Fine, but if the State nicks all the planning gain you'll probably find that landowners aren't that inclined to sell land for development. Why bother if there's no more money in it than selling it without planning permission? Assuming a free market (ie landowners aren't forced to sell against their wishes) then you have to have some incentive for them to do so. What that figure would be relative to the non-development price is open to question, but I'm pretty sure than at 99% tax not much land would be brought forward for development. Not as much as now for sure, which wouldn't help the house building numbers.
"So if the concept of PP was removed, along with PP, all the farmland round the major cities would be worth what land with PP is now worth."
Of course it wouldn't. There would be a massive extra amount of land available to build houses on. No-one would want to build houses right next to the existing edge of town, they'd want to build them in nice little spots away from urban areas, but within reasonable travelling distance, say 5 miles? Draw a circle of radius 5 miles round a town and see how much open space there is, and compare how much land has been granted PP in that area within the last 10 years. The former would outweigh the latter by a huge amount.
In the absence of any form of PP, the price of a good site for development would be a fraction of what it is today. The only premium anyone would pay would be whether the land had good road access and utilities close by. There's no way anyone would be paying a million an acre to buy land to cram as many houses on it as possible close to other houses. The current planning system forces them to do that. In a free for all developers would want land away from other developments, to provide as amenable environment for the house buyers as possible. There's a reason that houses in small villages near urban areas are considerably more expensive than houses in large estates crammed into the spots right up against the urban area.
"Fine, but if the State nicks all the planning gain you'll probably find that landowners aren't that inclined to sell land for development."
Why is that a bad thing? Just like anything else, really. You only sell something if you either have no more need of it or you need to raise cash. Why should land be any different?
"Of course it wouldn't. There would be a massive extra amount of land available to build houses on. "
What difference would that make, since the value of the land is dictated by its location? There is absolutely no evidence that, outside a very small radius, supply has any effect on the price of land and plenty of evidence (the UK in the 60s and 70s, Spain and Ireland more recently, that it doesn't).
If the value of houses was set by supply and demand, you would expect to observe either of two things: no estate agent or developer would have empty houses on their books for more than a few weeks: i.e. there was insufficient supply of housing, both new and old, onto the market to satisfy the demand, and this was forcing up the price, or alternatively, that if there was plenty of second-hand housing on the market, but there was a shortage of new housing, that new houses would sell for a markedly different price to second-hand ones. Neither of these things do we observe, therefore we can conclude that there is not a shortage of housing coming onto the market and therefore the high price of housing land is caused by some other factor.
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