Reader's Letter Of The Day

From yesterday's Evening Standard:

Developers on rely [sic] high house prices

Regardless of how liberal planning laws are, developers will cap their output at a level which does not lead to any significant falls in prices [Letters, April 18]. If they can sell new homes to wealthy overseas investors, then so much the better.*

This is not a housing crisis — it has been deliberately engineered. After 1945 UK housing policy was to limit rents, protect tenants, cap house prices indirectly by capping mortgages at two-and-a-half times earnings and ensure a ready supply of social housing. This led to a rapid increase in owner-occupation, the nigh-extinction of the landlord class and a small and stable banking sector. This was eventually reversed.

London First may call for more houses to be built but the backers on its website — banks, large landowners and property developers — are the very people who will do anything to ensure that rents and prices in London stay sky-high.

These people know full well that simply building more homes in itself solves nothing.

Mark Wadsworth​, Young People’s Party.

* They edited down my original opening paragraphs which explained the more subtle point:

Real-world evidence shows us that rents and prices in every country in the world are the highest in the largest cities. When more people will move into the new homes, this means a larger pool of potential employees and customers for businesses, which in turn means more job, leisure and social opportunities, all of which lead to yet a self-reinforcing cycle of even higher rents and even higher prices.

Real-world evidence also shows us that - regardless of how liberal planning laws are - developers will cap their output at a level which does not lead to any significant falls in prices. If they can sell the new homes to wealthy overseas investors who will leave them empty or merely collect the rent from younger workers, then so much the better. If prices show any sign of dipping, then projects are simply mothballed.

Land Speculation and Housing Design

In an earlier post our host stated:

It's private, profit maximising developers who bash out the tiny homes because they can get away with it; ...

But why?  He then stated that:

...they arise because of the absence of state intervention. If local councils reintroduced minimum room sizes or better insulation requirements, this twat would still be shrieking about state controls and state rationing.

I do not think that this is the full story.  I think that the cri de cour for more state intervention is on top of existing failed state intervention, and policy failures.  Successive layers of intervention cannot surely be the answer?

It is generally observable in the free market that the magic happens and quality goes up as prices fall.  More is done for less every day. Cars are a good example of this.  There is no - as far as I can tell - state intervention in space standards or quality standars for cars.  (I am of course aware of 'safety' and 'emissions' standards).  Competion is pretty fierce between manufacturers.  And I will also concede that the car makers are the recipients of an awful lot of government subsidy, notably GM.

In the comments to MW's piece I related how I had known well two spec. house builders, and both were exercised as to how they could build good houses. The one I knew best, each year as part of his business planning sat down and worked out if he could build what he considered to be a suitable First Time Buyer three bedroom house and make a profit. His standards were close the Parker Morris Standards and were based on the analysis that the first house bought by a young couple may have to be suitable for ten years or so, and that this implied the need for at least three bedrooms to give space for children. By the late 1980's he could no longer do this.

You will recall that the Parker Morris Standards were space standards for public housing which were abadoned in 1980 under MW's favourite P.M.

So what is going on?  As regards house prices/space standards there are seemingly two factors that mitigate against competion delivering its magic.  One, that land is in finite supply and two, state interventions and policy failures.

We on here generally accept that LVT would sort out the unearned scarcity and exclusivity premium enjoyed by landowners.  We also know that existing tax policy favours land over production.

We also know that planning constraints driven by bureaucratic incompetence and nimbyism further restrict supply.

We also know that bad money and inflation (and that inflation is a function of money) drives asset prices, and specifically land price speculation. (We also know that speculators per se are not a Bad Thing in that in other areas of the economy they act as a form of insurance shouldering risk for others).

And with incipient inflation "honest work and sound production will tend to give way to speculation and gambling. There will be a deterioration in the quality of goods and services and in the real standard of living" [Henry Hazlitt - Man Vs. The Welfare State].

Surely then by removing the interventions and correcting taxation and policy errors developers would not be able to profit from speculation and standards would rise and prices fall.

Discuss.
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MW adds: "By the late 1980's he could no longer do this."

Yes of course, because by then full-on Home-Owner-Ism was taking off, banks and building societies were lending higher and higher multiples; rent controls were being abolished; NIMBYism was becoming rampant; council housing was being sold off.

So from 1945 to the early 1980s, builders lived off volume and 'earned' profits (good design etc) not land price speculation. Selling prices were effectively capped (at approx. half today's unregulated prices), but the builders were still happy to build 200,000 - 300,000 new homes per year.

Killer Arguments Against LVT, Not (325)

Caroline Lucas was harangued by somebody from the Home Builders Federation (or similar) on the radio, who claimed that Land Value Tax would make building new homes unviable.

She didn't actually rebut this with the obvious point, so here it is:

From designingbuildings.co.uk:

Residual valuation is the process of valuing land with development potential.

The sum of money available for the purchase of land can be calculated from the value of the completed development minus the costs of development (including profit).

The complexity lies in the calculation of inflation, finance terms, interest and cash flow against a programme time frame.

Here's a real life example:

I helped a company which was selling an acre of semi-derelict land in north London, they were unsure how much they'd get for it. Somebody from a larger homebuilder told me - blurted out in a meeting, really - that when they were buying land in that area, they'd pay up to £50,000 for each flat that they could build on it (it would be double that now).

In round figures, each flat could be rented out for £7,000 a year, less costs = £6,000; they could be sold for £120,000; the pure build costs per flat were £50,000; and the developer expected a profit/contingency per flat of £20,000.

That leaves £50,000 which the landowner gets under the "residual valuation" method. The developer has to finance that purchase somehow, so he ends up paying £3,000 or £4,000 a year in interest to his own financiers (bank, bond holders etc) for the duration of the build
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Now, what if the developer knows that for the duration of the build, he is going to have to pay full-on LVT for each flat/equivalent of £4,000 (net rent £6,000 less bricks and mortar allowance of 4% x £50,000)?

1. Let us assume that the shift to LVT pushes down the selling price of the flat to £80,000.

2. The builder will simply stick that into his calculations, deduct the £50,000 build costs, the £20,000 profit margin/contingency (the tax due on these elements would be much lower, so the £50,000 and required £20,000 would be lower, but by an unknown amount) and the £4,000 LVT he would have to pay (assuming project takes a year to complete) and offers (say) £6,000 per plot.

3. The developer's profits are entirely unaffected. And as it happens, the £4,000 LVT he has to pay is a straight swap for the £3,000 or £4,000 interest he would have had to pay to finance the purchase of the land under current rules.

4. The landowner has to accept the offer of £6,000 per flat; his alternative is paying [£4,000 x number of flats] each year for the privilege of owning a derelict site. In theory, there might be a flood of landowners literally giving away their brownfield sites.

5. Clearly, there will be marginal situations where the theoretical land value dips below zero (the finished selling price might be lower than £80,000 or the project might take much longer); so even if the developer is given the land for free, his profit margin of £20,000 will be so eroded that it's not worth the hassle.

6. Well, in that case, the council can simply waive the LVT for the duration of the build, or for the next one or two years or whatever, pushing our developer back into the black. That will just be part of the usual negotiations and haggling between the developer and the planning department/local council (the LVT exemption is like a Section 106 payment, but in the other direction).

Sorted.

Hurrah ! Up by "10%" year on year ! [but please don't look at the small print though, please don't]

The number of new starts of public housing construction is up by 9.8 per cent year on year, according to statistics from the Office of National Statistics published on Friday.

Wow!  Impressive or what ...

The figure for building starts in quarter two 2012 was 1,018 and for the same quarter in 2013 the number was 1,118.

Output in the Construction Industry, June and Q2 2013

"It is mad, mad, mad, yet much of Britain's economic structure and culture are invested in the madness"

"The government will build no homes itself: it confines itself to measures such as build to rent or Help to Buy, where new homes are a hoped-for consequence of its guarantees and measures. But it will take no direct action. A useful stimulus, but I am told George Osborne only endorsed Help to Buy, with its Keynesian overtones, when he was assured it would help create rising house prices and a feelgood factor for Tory voters. Disappointing.

Almost every dial on housing policy is on the wrong setting. A government that wanted to break into a saner world would move on a number of fronts. It would devise mechanisms to wean the financial system off its addiction to residential property lending, probably setting overall limits to the growth of categories of credit, such as mortgages, and controlling mortgage loan-to-property price ratios. It would revalue properties to today's values and then introduce a graduated system of taxation".

Will does however suggest that it isn't really, as some suggest, bonanza time for Landlords ...

"But because house prices are so high, the buy-to-let company Paragon – speaking for most private landlords – complained, in evidence to the select committee on communities and local government, that the yield it gets is a mere 6%. Although these figures may be higher than the yields gained from investing in stocks and shares – so Paragon should complain less – they are hardly at profiteering levels. To end up in a situation with both close-to impossibly high rents for tenants and moderate returns to landlords takes some doing".

... before returning to 

"The taxation of property is stuck at 1991 values because no politician will entertain the political fallout of organising the council tax on proper, up-to-date valuations, let alone entertain introducing a rational system of property tax".

Joined Up Thinking

6th June 2013
He (Milliband) will say: ‘We can’t afford to pay billions on ever-rising rents when we should be building homes to bring down the bill. Thirty years ago for every £100 we spent on housing, £80 was invested in bricks and mortar and £20 was spent on housing benefit. Today, for every £100 we spend on housing, just £5 is invested in bricks and mortar and £95 goes on housing benefit… We can start to bring about the shift from benefits to building. Bringing the housing benefit bill down for the long-term too.’

6th June 2013

"Local communities should decide where they want new homes and developments to go and then give their consent in the form of planning permission,” Mr Benn said. “It’s the difference between having a say and having it done to you.”