Tuesday, 8 June 2021

Apologists for land bankers at work.

More nonsense from Centre for Cities, the opening sentence contradicts the headline just to warn you that you are about to ride the rollercoaster of flawed logic:

No, landbanking does not cause the housing crisis – here’s why

Landbanking is caused by the current discretionary planning system. A new flexible zoning system will end landbanking and the housing crisis.

So, er, landbanking does not cause the housing crisis (which is not a crisis, it's deliberate); but the planning system causes landbanking... which in turn causes the housing crisis?

The key paragraph appears to be this:

The rational strategy for developers is to build at a slow rate which maintains high prices for their product and avoids swamping the local market with new supply. Crucially, this behaviour is possible because every other competitor faces the same bottleneck on accessing land for development. They are not able to swoop in, buy another piece of land, and quickly build and sell homes for a cheaper price... If a new flexible zoning system were introduced those behaviours would disappear.

Land is land, whether it is owned by a farmer, a speculator or a home-builder/land banker; whether it has planning; is likely to get it or is just a long shot. Whoever owns it is the landowner. They all have the same incentive, to drip-feed it onto the market.

It's like having money in the bank which is earning interest (those were the days!). You only withdraw what you need when you need to, and you leave the rest in the bank. You don't earn interest when you withdraw it, you earn interest by not withdrawing it. In the same way, landowners maximise their long-term wealth by not selling land while it is steadily increasing in value (earning interest).

So in their neo-liberal fantasy world, let's assume the government grants blanket planning for all land within a mile or two of each town or city, enough to build tens of millions of homes.

What is the profit maximising strategy of Barratts et al now? It is to continue drip-feeding their existing land bank onto the market*. No change there.

Once Barratts et al have used up their land banks, they'll have to go to farmers and speculators to buy more. And the farmers and speculators will adopt exactly the same profit maximising drip-feed strategy. So the 'land' bottle-neck just moves up one level and the 'labour and materials' bottle-neck is unchanged.

It's not a cartel or collusion, all landowners have the same incentives and they all behave the same. If one landowner breaks ranks and decides to sell all his land and buy a Ferrari or a yacht, it will just be bought by somebody else with exactly the same drip-feed incentives.

* It's not just that new-prices fall slightly if they build 'too many', it's also that their inputs are very inelastic, a small increase in demand for labour, bricks, timber sees wages and prices shoot up. I remember chatting to plasterers and electricians in east London in the years after Canary Wharf was completed and they reminisced fondly about earning silly amounts of money at the time.
They also trot out the usual nosense about seventy percent of homes in Austria being 'self-built'. They are nothing of the sort! It's a tax reduction strategy - instead of buying land-plus-house from a builder as one package and incurring stamp duty and VAT on both elements, people buy the land from the builder as one transaction (stamp duty, but no VAT) and then get the same builder to build the house (VAT but no stamp duty) as a separate transaction. And it's not like houses in Austria are cheap either. So they haven't given it much original thought.


mombers said...

There's a large development near me (> 1000 homes). It's being built over TWENTY YEARS so that the developer can trouser a higher and higher margin on each home built. Could this have been opened to the free market temporarily and basically anyone who wanted to could buy an approved plot and build a home on it? Given a use it or lose it covenant on the title, all of the homes could be built in a tenth of the time, avoiding the waste of unused land for decades. But once built, it would become a monopoly like any other location

Mark Wadsworth said...

M, good example of drip feeding... but it does not matter how land is allocated - by lottery, market pricing, corruption, theft or conquest.

Once somebody owns it, his incentives are exactly the same as all other landowners (and that includes owner-occupiers).

Bayard said...

What they fail to point out, either because they don't see it themselves, or because it contradicts their argument, is that if the government removed all planning restrictions tomorrow, all that would happen is that the price of agricultural land would shoot up, but the price of building land would stay the same.

Mark Wadsworth said...

B, yes, that's going to be my follow up post.

George Carty said...

Mark, could you address the case of red-state America (Paul Krugman's "Flatland") in your follow-up post, as that is the usual poster child for those who argue that liberal planning laws make for low house prices?

Is the real issue there that land values are lower due to extreme dependence on the car, and/or other factors that make the red states unattractive places to live, such as the extreme continental climate of the mid-west, or the bigoted culture of the deep south?

mombers said...

@GC reducing land values by forcing people to spend money on expensive, dangerous cars is not a good result IMHO. Wastes so much time as well, an hour in a car is dead time vs an hour walking and on a bus/tube offers many more options. And of course you shrink your labour pool as people who don't drive won't live in a car dependent city. I'm case in point

Lola said...

M. Cars - personal transport - need not be expensive. I live in |Suffolk. Lots of small settlements. And lots of people using cheap used cars to arbitrage their employment opportunities. You can buy something small, reliable and cheap to run for a few hundred quid. The parallel in the US is the availability of big cheap cars with poorer gas mileage but gas is cheap in the US. It may be attractive to trade an hour for all that space.

I well might.

mombers said...

@L average cost to run a car in the UK is ~£3400 (~£5750 if you're unfortunate enough to have to borrow to buy it). Chimes a bit low for the missus' car (bought with cash luckily). That's going to put a big dent in how much landowners can extract from you every month :-)

Mark Wadsworth said...

GC, yes.

L, it's always a trade off between space and convenience. Each to their own. I'm an outer-suburban fox and would hate to live in the countryside or in the middle of a city. You are a country gent, Mombers is an inner-suburban fox etc. No point in arguing the merits.

M, that depends on the car. My average cost per mile is a horrendous 65p (including initial purchase price, which was negligible) because they keep needing repairs and spare parts :-)

Lola said...

M. You can buy a serviceable car for £1000 which will last you several years. Let's assume 3. Average miles / yr say 7000 @ 40+ mpg @ £1.35 / litre = £1000 pa. Ins 350 Tax 180 = £1863. Say £2K if you chuck in servicing by your mate and maybe a tyre or two. Ignore depreciation because if you get 4 year use you're up on the game.

House rents round here in sticks maybe 400 / 500 quid per month..

(N.B. That motoring method was mine for yonks - with four daughters etc - my second job was 'fleet management'. )

BTW - no regular bus service - at least of any use - out here.

Mark Wadsworth said...

L, "You can buy a serviceable car for £1000"

Or... you can buy a 20 year old MX5 or Honda Del Sol.

Mark Wadsworth said...

B and GC, here is the follow up article with a worked example.

Lola said...

MW. My budget for a 'cheap car to last us a few years' was £500. And they were always mainstream things like Fords. And I have a network of cheap repairers to fix them, often from recycled scrapyard parts.

A best buy was a Honda Civic for £2250 (!) for a daughetr that lasted about 12 years with no major fixes and only regular maintenance and tyres etc until the gearbox main input shaft bearing failed.

Mark Wadsworth said...

L, you can get lucky. In 2008 I bought a 1996 VW Golf on the spur of the moment for £2,000, it ran fine for the 8 years I owned it, only one expensive repair for about £1,000, the rest was just an occasional worn tyre or something.

Bayard said...

"So, er, landbanking does not cause the housing crisis (which is not a crisis, it's deliberate);"

It's not even deliberate, it doesn't exist at all. All "the housing crisis" means is that the current generation of housebuyers can't buy as cheaply as their parents (or, by now, their grandparents, so long this non-crisis been going on) and have their home make more money during their working life than they ever will. My generation got lucky, but it won't happen again, not in the lifetime of anyone alive, or even the lifetime of their children.

Mark Wadsworth said...

B, the "housing crisis" is exactly as you describe.

It is the direct and intended result of Home-Owner-ist policies, which gradually replaced earlier Georgist Lite policies between the 1970s and the 1990s.

It clearly does exist!

The likes of thee and me could afford to buy for sensible prices back in the day precisely because of deliberate Georgist Lite policies intend to keep prices down and increase the spread of owner-occupation (at the expense of landlords).

Bayard said...

Agreed that it's deliberate, but it's not a crisis by any definition of the word. Indeed, the glorious Georgeist past was more of a housing crisis as Georgeism Lite made being a landlord so unattractive that it was almost impossible to find anywhere to live if you couldn't afford to buy. There's more fuss made these days, as the "crisis" affects the articulate middle classes, who have grown up in the expectation of being able to buy somewhere relatively cheaply like their parents did and not the less articulate working classes who, back in the day, were simply looking for somewhere to rent.

Mark Wadsworth said...

B, we keep disagreeing on the same point.

Back in the good old days, there was plenty of council housing!

For sure, short term, if you wanted to rent privately, you could only rent somewhere crappy, but at least you had the knowledge that it was only temporary - after a couple a years, a nice council house or an affordable mortgage beckoned.

And if you think that simply renting somewhere nice short term nowadays is easy (or cheap), you are very much mistaken.