Land banking logic

Further to my post of two days ago...

Let's assume in their neo-lib fantasy world, we abandon planning restrictions and everything in a radius or two or three miles around each town is zoned for residential development.

For simplicity, let's assume that all land in this zone is owned by one feudal landowner, who hitherto has just been selling off the odd acre here and there to developers to expand the town. Which is exactly what Prince Charles and his ancestors have been doing for centuries. His ancestors were doing this long before they invented planning laws, and if he really wanted planning permission, does anybody think he wouldn't get it?

Why does he drip feed it? To maximise the total value that he and his heirs can wring out of it. He might sell off the most valuable fraction of a percent each year (the parts immediately adjacent to the towns) but his remaining land, in particular the bit that is now adjacent to the expanded towns, goes up in value by a larger percentage.

Does the fact that he could theoretically sell all his land to developers or anybody else tomorrow mean that he will do so, and that tens of thousands of homes would be built? No, why would he? Developers have a steep input cost curve, if they try and increase output, their input costs rise dramatically, which reduces their gross profit, which reduces the amount they are prepared to pay for land. And they don't want to depress selling prices short-term by flooding the market. So they are only prepared to pay full price for small amounts of land each year.
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Does it make much difference, if any, if the land surrounding the town is divided into smaller and larger farms, each with a different owner? No, why would it? Collectively, their wealth-maximising strategy is to do the same as the monopolist, i.e. drip feed it, starting with the most valuable bits.

Let's look at three farmers who are thinking of offering some land to developers.

1. Farmer A owns land adjacent to the developed area. Homes in the area sell for £250,000, each home costs the developer £100,000 to build and he expects £50,000 profit per home. At ten homes per acre, he is prepared to pay max. £1 million per acre for the land.

2. Farmer B owns land a mile out of town, same numbers as above, but it will cost the developer an extra £40,000 per home to build/widen the narrow track out of town (or pay the council to do so under a s106 agreement) and connect it up to the normal utilities a mile away (water, sewage, utilities, internet etc), which will involve also sorts of hassle, costs, ransom and wayleave payments. So the developer is only prepared to pay £600,000 per acre for this land.

3. Farmer C owns land two miles out of town, it will cost £80,000 per home to hook it up to the town two miles away, developer is prepared to pay only £200,000 per acre.
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Which Farmer is most likely to sell and/or which land is a developer most likely to buy and actually build houses on it?

1. Farmer A has an offer of £1 million on the table. That land has reached its maximum value - it's next to the developed area and can't get any closer - so future increases in value will be minimal (might even fall temporarily if a developer buys other favourably situated land and builds a new estate there). A developer who buys it will be able to get the houses up and sold, recoup his outlay, and bank his £50,000 per home profit fairly quickly. There are few uncertainties involved here.

2. Farmer B has an offer of £600,000, but if the town expands a mile towards him over the next decade it will be worth £1 million. So if he hangs on for a decade, his compound growth is 5% per annum. Maybe he wants to sell anyway, but whoever buys it (another farmer, a developer, a speculator) will probably decide to hang on and bank the 5% compound until the land has reached its maximum value. The large developers do this, and they explain in great detail in their published accounts how these carefully chosen marginal sites are steadily ticking up in value.

3. Farmer C has an offer of £200,000. If he is lucky and the town expands towards him, in thirty years it might be worth £1 million. So if he hangs on for thirty years, his compound growth is also 5%. Maybe he wants to sell anyway, makes no difference, same as 2.
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So Farmer A is most likely to sell, and whoever buys it might as well get those new houses up and get his money back ASAP, there is no advantage to hanging on. This also happens to be the most efficient strategy in economic and environmental terms as well (lowest costs, least additional car use, least land being covered with roads etc).

While the developer is busy building and selling these homes, no developer is going to be particularly interested in buying land from Farmer 2 or Farmer 3 - they'd risk having to sell for lower prices and will face higher input costs (on top of the high connection costs).

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.
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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.

Clever definition of "land" in economic terms

One KLN (Killer Argument Against LVT, Not) which I have heard too many times is that 'land' (in the physical sense) is 'not so important any more in a modern economy'. The proponent then plucks something out of the air like intellectual property rights (copyrights, patents etc), points at a few companies who make large amounts of money from them (Facebook etc) and says that is what we should be taxing.

Clearly, in financial terms, this is nonsense, IP is in distant second place. Facebook's world wide profits are $16 billion (about $3 per user), so even if everybody in the UK is on Facebook and generates $3 profit, that's about £150 million a year. Compare that with the total site-only rental value of UK land, which is about £250,000 million a year. That's not physical land value (undeterminable) but location value (easy to measure and can only arise if the government provides 'public services').

Under general Georgist principles, government protection of copyrights and patents should either be watered down OR if we decide that it is desirable, the extra profits accruing to the rights holders should be taxed at higher rates (they ought to pay the government for enforcing and upholding these rights). This goes without saying and shows that the proponents of the KLN really haven't done any homework whatsoever.

Under general Georgist principles, there are other things that are good sources of taxation, be it oil and minerals; exclusive right to use certain radio frequencies; personal number plates; taxi driver permits, it is a very long list.

What do all the things on the list have in common?

They are all things which have no cost of production, where supply is limited (whether by nature or by the government), and quantity cannot be increased by the productive sector.

You can work hard and make a car or a table or a CD player and sell it, so those aren't 'land'. But however hard you work,
- you cannot increase the surface area of the earth at a particular location*;
- you cannot print and sell Harry Potter without JK Rowling and her publisher's permission;
- the amount of oil and minerals under the earth is a fixed (albeit unknown) amount.
- you cannot increase the width of the radio spectrum;
- you can get a physical number plate made for less than £10, but you can't choose which letters and digits are on it (so you can't just make a load of 'A1' number plates and sell them for £10,000 each);
- the council can restrict the number of people allowed to drive taxis/mini-cabs in their area.

And all these things wouldn't have value if supply were not restricted and if governments didn't do what governments do. Their value bears no relation to the efforts of the owner.

- Oil and mining companies and their employees work very hard extracting the stuff, but however hard they work does not affect its value. The current world market price of oil or gold just is what it is, and might be above or below the cost of extraction from any particular well or mine.

- When the telecoms companies bid for radio spectrum, they guesstimate what end users are willing to pay for mobile services, deduct a guesstimate and their costs and the residual value is what they were prepared to bid.

- For sure, Microsoft have created some neat software, but without copyright and patent protection, they might not have bothered so it would have much lower value.

- I'm sure taxi drivers work hard, but they understand supply and demand, which is why they lobby heavily against the likes of Uber. The extra they earn because of restrictions is unearned, it is 'rent' and they rent they get is from 'land' (in the economic sense used here), the council or city could reduce their earnings by this much at the stroke of a pen.

* Don't bore me with the notion that you can create new land by chucking rocks and concrete in the sea. That does not increase the surface area at that location. This is an expensive process, and is only worth doing if location values are very high. So it's worth doing off the shore of Monaco (and within its jurisdiction), it would be ruinous to do the same exercise half a mile down the coast if you were merely creating more France.

English Wine

Yes I know this is more my thing, but there is a land thing in here, so read on:-

"Champagne sales are going to decline here, and English sparkling wine will eventually take half of champagne’s share.” So predicts Ian Kellett, once managing director at the investment bank Dresdner Kleinwort Benson and now owner of Hambledon Vineyard in Hampshire. He’s convinced that England’s advantage is its lower land costs (Champagne’s are €0.9m to €2.1m a hectare). And he maintains there is no shortage of suitable land in England — “if the farmers will sell it”. He also expects champagne prices to continue to rise along with the debt burden of maturing their stock.

The thing is that the only reason Champagne's land prices are so high is because of demand for the land. You'd think a former banker would get this.

A little background to those not in the know:

To call your wine Champagne, it has to follow the rules of the Appelation d'origine contrôlée of Champagne. That includes a list of rules, like what grape varieties you can use, but more importantly for this, it also defines the geographic area. And that is a rather artificial area. Some land inside of it really isn't much good, some land outside would be better. You can grow a damn' good sparkling wine just outside using the same processes and grapes but you can't call it Champagne.

So as Champagne attracts a premium just on its name (a combination of ignorance and it being a Veblen good), what do we think the effect of that is on land prices inside the Champagne area? Yeah. Also worth noting: there's a similar battle to developers and Homeys with this: people with land just outside want the region expanded, people who own land in the region don't.

See, this guy has it wrong. England's advantage isn't having cheaper lands, it's having lower demand for the product. The land is only more expensive because of higher demand. If more people switch to English wine, the price of Champagne will fall, and with it, the value of the land it's grown on. It's still probably more suitable land for growing sparkling wine on.

The rest of the article is quite interesting if you're into general wine stuff. It seems quite a lot of producers are hobby businesses - people who've made money doing something else and are now pumping money into them. And it's still precarious from a climate perspective. Personally, I've not found one I like yet, but some people do like them.

Reader's Letter Of The Day

From the FT:

Land is a significant omission from economic models

Sir, The debate about "the new economics" (editorial, November 13) fails to note the key omission from current models of the economy: the place of land as a separate factor of production.

Land, defined as all natural resources, should not be regarded as capital, since it is not a result of production and, unlike capital, creates rent, largely from location values.

Its omission from economic models has meant that land values have been ignored, even though these were the principal element in the house price rises that led to the creation of the subprime mortgages and other financial assets that caused the crisis of 2008.

A new analysis to include land, both in micro and macro models, would bring the whole subject into line with observable facts, including also the huge disparities of wealth in modern economies.

Brian J Hodgkinson, Oxford.

"It’s time for tech firms to end their insane global patent wars"

Allister Heath, good on details but gloriously missing the bigger picture as per usual:

Patents were originally designed to spur innovators by giving them a way of profiting from their inventions; but the current ultra-strict application of patent rules has turned into a major block to progress.

Rather than trying to innovate or launch better products, some tech firms are now endlessly accusing one another of violating obscure patents. In fact, patent hoarding to stymie competitors has become a huge growth industry; the only winners are lawyers.

Apple and Samsung are currently locked in a bitter war; Google bought Motorola for its patents and is now locked in legal battles with Microsoft. The energy and time wasted is proving hugely destructive; these firms could be making new products to make all of our lives better but are instead allocating far too many of their resources on trying to cripple their competitors via lawsuits.

Patents are state-granted monopolies on an invention; they are only acceptable as a means of promoting innovation, not as a means of slowing it down.

Sure, there is a lot of rent being collected and a lot of time being wasted here to the detriment of the economy in general, but you could re-write the whole article substituting "land owners" for "patent holders" and reach much the same conclusion, only the amounts and deadweight costs involved would be about twenty times as big.

Of course.

Colin Wiles on top form at Inside Housing:

 

I did some more digging and discovered that there are around 2,000 18-hole golf courses in England as well as hundreds of smaller 9-hole and pitch and putt courses, and at least 600 golf driving ranges.

 

Each 18 hole course requires up to 90 hectares of land (including practice courses, clubhouses, car-parking etc) so my best estimate is that golfing establishments take up around 270,000 hectares in England – that's 2 percent of England's total land area of 13.4 million hectares.

 

Accurate figures are hard to come by, so if anyone can contradict my figures I would be pleased to amend them.

 

But by my reckoning English golf courses use an amount of land that is equivalent to one fifth of England's total built up area (10 percent of England is built upon) and could provide at least 8 million homes...

 

But it's also worth bearing in mind that golf courses drink huge amounts of water, are not particularly brimming with wildlife and are generally closed to public access.

 

Yet many countryside campaigners argue that we should not touch any greenfield land whatsoever, either because of its wildlife and amenity value or because we need every scrap of land to provide for our present and future food needs, or both.

 

Well in the case of horses and golf the food argument is spurious, and in the case of golf the wildlife and amenity argument is tenuous, at best. Some golf courses spoil the landscapes they occupy.

 

At the risk of boring the readers of this blog I repeat: There is no shortage of land in this country.

From Heaven to Hell.

Notwithstanding all land in England ultimately belongs to the Crown, in English Common Law, freeholders property rights didn't just include their patch of earth. It included everything above and everything below. Gold and silver excepted.  Of course.

With the advent of air travel, the practicalities of this position became absurd.  The common interest was prime so the definition was changed so only to include the space immediately above a property.

When the economic importance of oil and gas became apparent, the rights to those were severed by the 1934  Petroleum Act. Uranium, for obvious reasons, was also severed. And again, perhaps as late as 1994, coal was also severed.

Which all goes to illustrate the arbitrary nature of how we've come to define land rights by excluding natural resources. Not so much the rights to exploit them, but the rights to their unexploited value.

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