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.

Wowzers! Who would have expected that?

From The Sun:

THE Government’s Help to Buy scheme has benefited more rich than poor households, a new report found amid claims that the scheme is a “major failure”...

Shockingly, around one in 20 households who use the scheme earn over £100,000.

The flagship scheme has also boosted profits of the country’s three largest developers – Persimmon, Barratt and Taylor Wimpey.

According to Shelter, all three have managed to more than double their reported profits in under six years, with Barratt seeing the greatest profit rise of 325 per cent.

When is land banking not land banking? (2)

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.

When is land banking not land banking?

When City AM says it isn't:

Hammond said the government will be commissioning a review of the gap between the number of planning permissions granted and the number of new homes being built. If developers are holding back land for “commercial, rather than technical” reasons, the government will intervene, Hammond said, using compulsory purchase powers if necessary...

According to analysis by Shelter, the current land bank of the ten largest listed developers could provide 404,040 homes. At the current rate developers build at, this land would take six years to develop... So, it is beyond doubt that developers own land they haven’t built on yet. But are they deliberately holding onto it to push up house prices?

Anthony Codling, a property market analyst at Jefferies Bank, says land-banking is a “myth”. He argues there are many other limiting factors behind the surplus land. Obtaining planning permission is difficult, there is a limited workforce, and there may be inadequate infrastructure at large sites. Utilities companies, for example, can also be accountable for a delay.

Alan Brown, chief executive of housebuilder CALA group says tying up capital in land with no houses on it “simply isn’t in our financial interests”. Instead, the delay is caused by cash-strapped local authority planning departments, he said. Housebuilders need evidence of cash-flow to drive investment; this is also a reason why they need to acquire land in advance.

They whitewash the issue by redefining "land banking" and as per usual blaming it on local councils.

Hammond, himself indirectly a land banker, defines it correctly as "holding back land for commercial reasons". House builders are profit maximising enterprises with a monopolistic position, so of course they keep new supply at whatever the profit maximising volume is - which Neal Hudson worked out was one new home for each nine existing homes bought and sold in the year. The ratio has been constant for decades, and was the same decades ago when there were lots of small home builders instead of today's oligarchy.

This is smoking gun #1. In 2008-09 when home sales plummeted, home builders mothballed a lot of their developments to maintain the one-to-nine ratio. They gave spurious reasons such as lack of finance, which is clearly a lie - if you have lenders snapping at your heels, the best thing to do is to get developments finished and sold and the debts paid off. Conversely, if you have agreed to lend somebody £100,000 to finance a project, you would be mad to lend them half the money to half-finish something and then refuse to hand over the rest. At that stage you've got to keep going.

As output is decided by external factors, if new planning permissions exceed this level of output (as they do), then these companies will accumulate land banks - the land banks are evidence of profit-maximising behaviour (Hammond's "commercial reaons") and not a crime in themselves. If there were plenty of affordable housing, then it wouldn't matter whether the large home builders have land banks for one, ten or a hundred years' worth of output.

In a report on land-banking, the Home Builders Federation said: “A house building company will be judged by investors on the land that is available to it. If one considers land to be a housebuilder’s most important raw material, a company seeking investment with little or no viable land in its ownership would be unlikely to attract the investment required to finance construction and generally operate as a well-functioning business.”

This is a straight forward admission that his members are land banking, he just says it's for a different reason.

Philip Hammond v Philip Hammond

From (rather surprisingly) The Telegraph:

A housebuilding business founded by Philip Hammond has been accused of sitting on an undeveloped plot of land which has been granted planning permission for four new homes.

Castlemead Limited, which was co-founded by the Chancellor in 1984, builds new homes and doctor’s surgeries. It has been reported that Castlemead Group, which is majority-owned by the company, was granted permission to build four homes in north Wales in June 2010 on the condition work on the site would begin within five years...

The revelation comes after Mr Hammond gave an interview with The Sunday Times this week, in which he hit out at house builders who are sitting on hundreds of thousands of undeveloped plots of land which have planning permission for new homes...

A spokeswoman for Mr Hammond said: “Any shares in Castlemead are held in a trust. The chancellor has no direct influence or involvement and so is unable to comment.”

Redrow - not land banking in the slightest.

From page 26 of their accounts to 30 June 2017:

LAND

The Group added 5,419 plots with planning permission to our owned and contracted land bank in the year. This more than replaced the record 5,319 legal completions (excluding JV) and we ended the year with 26,100 plots in our owned and contracted land bank.

This was a small increase on the very strong closing position in the previous year and represents about five years output and a Gross Development Value, based on our 2017 average selling price of £8.2 billion.

Forward land again made a significant contribution, comprising over 60% of the 5,419 additions in the year across 22 sites. This included the important strategic 'Plasdwr' site - Cardiff's new Garden City.

Despite transferring 3,356 plots to the owned and contracted land bank, we still increased our forward land bank by a net 766 plots to 26,400 plots. Over 40% of these plots are allocated for housing in Local Authority plans.

To sum up, that's ten years' supply, with a book value/cost of £1.339 billion.

"Central London housebuilding collapses 75% as prices continue to fall"

From Property Investor Today:

The number of new homes breaking ground in central London has plunged by 75% year-on-year as house builders put planned projects on hold, and in some cases, scrap them altogether, in light of falling prices in the capital.

According to fresh data from JLL, just 1,270 residential properties were started in zones one and two in the final quarter of 2016, the lowest total for five years, as the “particularly low” figures seen in central London during the first three quarters of the year continued.

Stamp duty, in particular, continues to have a detrimental effect on the housing market in central London where properties command a price premium, resulting in a 10% levy up to £1.5m and 12% above that figure, which largely explains why fewer property transactions and lower prices are being achieved.

The number of homes changing hands in central London has been plummeting, illustrated by the 24% drop recorded in Q4 to just 1,880 transactions, while prices for newly built homes have fallen by 5.7% year-on-year, JLL found.

As Dinero commented to my post of Saturday: You don't need collusion and meetings for effects that are similar to that from a cartel. Just a restricted number of similar minded people with the same goal and information.

The end effect is indeed the same. When new homes are built and sold, it depresses prices in the very short term. Developers have found out by trial and error that this effect can be minimised if only one new home is sold for every nine existing homes bought and sold 'second hand', which is why they cap their output at this level. So if buyer interest falls, prices and volumes fall, and developers put projects on hold, maintaining the one-to-one ratio.

A explicit cartel is required to restrict supply and maintain prices if supply restrictions mean current revenue is lost which cannot be clawed back in future years. If hairdressers collude to restrict supply and push up prices, then people will let their hair grow longer between visits or learn to cut it themselves. Overall, hairdressers will lose revenue. Whether their profits are increased by this tactic depends on whether the reduction in marginal costs is more or less than the fall in revenue.

But the large developers are just land bankers, so they don't need to worry about whether they realise the profit from a site this year, next year or some years into the future. They can only sell each site once, there is no loss of revenue and as the land element is pure profit, there is no loss of profit. This also explains why the cartels for oil and diamonds have been relatively effective - you can only extract and sell oil or diamonds once.

Rail-powered rent-seeking

From City AM:

Housebuilders have added to the call for the government to firmly commit to Crossrail 2, saying it will be crucial in helping address the capital's housing crisis.

Some 66 homebuilding and property figures, including representatives from Taylor Wimpey, Berkeley, British Land and Derwent have written to the government saying the infrastructure project will help unlock new homes, as well as commercial space...

In the letter, the homebuilding and property representatives, argue the new railway will transform transport capacity, as well as connectivity, for underdeveloped areas of the capital like the Upper Lea Valley. Housebuilders said it would give them the certainty to accelerate the development of up to 200,000 new homes.

Tony Pidgley, chairman at Berkeley, said: “Crossrail 2 is a fantastic opportunity to improve London and the South East’s infrastructure, and will help us build the homes this region desperately needs."

Could they be any more blatant when they are holding out the begging bowl?

City AM makes the fundamental error of believing its own propaganda, it is so hard-core Home-Owner-Ist that it somehow thinks this is normal, that the point of spending taxpayers' money on railways etc is to generate bigger profits for land bankers.

The other point being that all these lovely new roads and railways will do naff-all do "address the capital's housing crisis", it will merely stoke demand and attract yet more people/businesses and rents and prices will not fall in the slightest, they might even go up on the whole. To put it crudely, if they really wanted to do something about "affordability", they could just shut down London transport and rents and prices would plummet.

Supply and demand in the housing market

From City AM:

Developers have put the brakes on house building in central London as house prices in the capital dropped at the end of last year.

In the fourth quarter of 2016, construction started on 1,270 housing units in the centre of the city, a drop of 75 per cent as compared to the same quarter the year before, according to a report from JLL.

And home sales fell 24 per cent in the final quarter of 2016, with just 1,880 transactions taking place. Prices in London have fallen 5.7 per cent year-on-year.

Hooray for free markets and allowing supply and demand to allocate resources most efficiently, but this is no such thing, is it? In a truly free market, super-profits would be competed away - what the oligopolistic land bankers are doing is carefully drip feeding bits of land onto the market so as not to allow prices to fall and thereby maintain their super-profits (as easily measured by the value of land).

And it must be clear to all but the most rabid Faux Libertarian that some areas will always be more desirable than others, for whatever reason, so while land prices at the very margin (low wage, high unemployment areas without nice scenery) are pretty close to zero, anything above that represents a monopoly/rationing position.
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My other thought for the day is that the idea that "building more homes will cause prices to fall - it's supply and demand, innit?" is clearly nonsense if you remember that rents (and hence prices) are largely dictated by local average earnings (putting holiday areas aside). Wages go up, rents and prices go up and vice versa, it is that simple.

Would building more homes in high price areas (London, commutable parts of south east, M4 corridor, nicer parts of any large town or city) cause wages to fall?

No of course not. Why would it? Wages are higher in those areas largely because of agglomeration effects*, so more homes = more people = more agglomeration effects and the two effects (more supply and more demand) will always more or less cancel out. Rents and prices will only fall in areas which younger/more ambitious people are abandoning.

* All those people making a handsome living in London in financial and legal services would struggle to earn a fraction of that anywhere else in the country. They can only earn that because they are in London. This applies to me in spades.

More landbanker LOLZ

From the BBC:

The chairman of one of the UK's top housebuilders, Redrow, has rejected accusations of land hoarding by the industry and called the government's housing White Paper "disappointing".

Steve Morgan said the planning system was the biggest barrier to new houses. The suggestion that housebuilders were sitting on landbanks in order to maximise profits was "completely incorrect", he told Radio 4's Today...

The company reported that completed house sales were up 13% in the six months to December 2016 to 2,459 compared with the same period last year and pre-tax profits were up 35% to £140m...

The planning problem stemmed from difficulties in moving from outline permission - where a council says land is OK for housing - to detailed permission, when the builder can start work.

"This can take normally one year, but up to two years," Mr Morgan said. Redrow has just short of 26,000 plots in its landbank. "At one-third of them, we just can't get on site."

Jolly good, so by his own admission, Redrow have built up five years' supply. They could be building on two-thirds of them = 17,000 homes, but they'd rather drip them onto the market at 5,000 a year. That's their profit maximising level of output, end of. Can't really blame them for playing the game, but at least they could admit it.

The planning process was also inhibiting supply by dissuading smaller builders from doing more.

"It's not so bad for the big builders like us, but small companies face a wall of bureaucracy. If I was starting out today, I could not build up Redrow as I did."

What happens to smaller builders? The Chairman's Statement in Redrow's 2017 interim accounts explains all:

In February 2017 we acquired Radleigh Homes, a regional housebuilder based in Derby. Radleigh Homes completed 188 homes in the year to December 2016 and has a pipeline of over 1,300 plots with planning, and a further 1,200 plots controlled under options in its strategic land pipeline.

Radleigh Homes is an excellent fit given its geographical location and its high quality market position, similar to Redrow. This acquisition will form the basis of a new regional division for the Group: Redrow East Midlands.

In short, smaller developers are even less bothered about building anything, the game is to build up a nice big land bank and then sell out to a major for £££loads. It was a private sale so the amount paid won't be known until somebody trawls through their next set of accounts. As a rough guide, Redrow has a market capitalisation of £1.75 billion* (at today's date) and Radleigh is about one-tenth the size.

* £1.75 billion divided by land bank 25,600 plots = a staggering £68,000 per plot.

Land bankers' myths gradually starting to unravel.

From The Daily Telegraph:

Developers will be ordered to use planning permission or lose it under government plans to speed up the building of hundreds of thousands of new homes. Ministers will next week publish proposals encouraging developers to build on plots more quickly rather than sit on land which has already been earmarked for new properties…

The news comes as it has emerged that the number of empty homes in the UK is at its highest level for 20 years, calling into question whether the countryside needs to be concreted over for new developments. The "housing surplus" has nearly doubled from 800,000 empty homes in 1996 to 1.4 million homes at any one time in 2014. These “empty homes” are typically second homes, or vacant properties which are either left empty or are awaiting for tenants or home owners to move in…

Currently builders lose planning permissions after three years unless work has started. However, they can maintain planning permissions on sites simply by “digging a trench”, sources said. This means that more than 700,000 homes which have been granted planning permission since 2006 are yet to be built. Under the new plans permission would be linked to the completion of homes by certain dates, rather than the starting of work…

A report last year by Civitas, a think-tank, disclosed how developers and landowners used a controversial relaxation of planning rules in 2012 to hoard planning permits rather than build more homes. More than two million planning permits were issued between 2006 and 2015 – a rate which would be enough to build an average of 204,000 new homes a year but foundations were only laid on 1.3 million of them.

Daniel Bentley, editorial director at Civitas, said councils had approved more than 200,000 homes a year for the past four years, and yet last year there were still only 164,000 new-build completions.

He said: “This would be a really bold step by ministers and suggests they are not prepared to tiptoe around developers anymore - for too long planning permissions have been granted with no obligation to build. This has meant that landowners and developers have been able to secure huge windfalls and then maximise their profits still further by drip-feeding new homes into the market at the highest prices they can.”

They're still making the following flawed assumptions:

1. That nudging up new supply (relative to existing housing stock) from half a percent to three quarters of a percent will make the blindest difference to rents and house prices. Even if it did, it would do nothing to reduce inequality, it would merely shift the gains from one favoured group to another at the expense of the same people (i.e. younger people).

2. That The Hallowed Green Belt must be preserved at all costs. Just look at the picture and caption at the start of the article! You wouldn't even notice 57 new homes in those thousands of acres of rolling countryside.

3. That's there's nothing we can do to encourage more efficient use of existing land and buildings.

But it's a start at least.

I'll be pleasantly surprised if this gets past the City AM moderators.

Kristian Nimitz wheeled out his Faux Lib nonsense for the umpteenth time.

Shooting the messenger: Rent controls have always and everywhere ended in failure

Quite clearly, in the real world they haven't, sometimes yes, usually no, depends on other factors.

My actual comment:

Badly wrong on at least two counts.

The UK had rent controls for most of the 20th century, but that did not mean that housing supply disappeared. All that happened was that landlords left the market - meaning there were more homes for owner-occupiers to buy, who also acquired all new supply.

(In European countries, rent controls coupled with yet another "government interference" i.e. minimum building standards have also led to favourable outcomes.)

This is a large part of the reason why owner-occupation rates doubled in the decades after 1945 and the number of private tenants halved.

Another major reason was that mortgage loans were capped at low income multiples, which set a natural cap on house prices.

His other glaring error is that granting even more planning permission will make no difference, it is pushing a piece of string. Land bankers/home builder have a profit maximising level of output of about 150,000 a year. If more permissions are granted, these are simply banked, which is why the largest home builders are sitting on land banks with planning sufficient for ten years' supply.

If Mr Nimitz left his ivory tower for a few minutes and took the trouble to read the accounts of Barrats, Persimmon et al, this would be obvious to him.

I imagine that the third mechanism adopted by UK governments to put a natural cap on rents and hence house prices will be completely unpalatable to Mr Nimitz. That was the easy availability of low rent social housing, which enabled millions to opt out of the land price Ponzi scheme altogether.
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UPDATE, re Anti's comment.

The more complete list of policies which the UK had in one form or another for most of the 20th century until the Home-Owner-Ist era is as follows:

- rent controls (came in hard after each war, were then gradually whittled away)
- tenants were protected from eviction, as long as up to date with rent (until 1996 or so)
- as a result, neither banks nor building societies would lend to buy-to-let landlords (until 1997 or so)
- higher taxes on landlords' rental income
- private landlords not subsidised by Housing Benefit (until 1990).
- Domestic Rates (until 1990)/Schedule A tax (until 1964), which together were more like LVT than like Council Tax.
- little or no bank lending on land/mortgages.
- building societies had stricter criteria on minimum deposits and maximum loans-to-income multiples. If you can't borrow more than twice your joint income, that caps house prices at just above twice your joint income.
- there was the opt out from the whole Ponzi scheme i.e. social housing (peaked at 30% of all households in the 1970s).
- lower house prices meant that builders increased profits by increasing volume/quality; not by restricting supply to prop up prices, so little or no land banking.
- general political assumption that owner-occupation is the best form of tenure
- general cultural assumption that landlords were a bit sleazy, barely a step up from brothel owners or benefit claimants.

The inevitable result was low rents, low house prices, small and resilient banks and building societies…

… and rapidly increasing owner-occupation levels, which is where this Georgism-lite contained the seeds of its own demise and tipped over into Home-Owner-Ism again. The country is run by politicians who want to buy votes as cheaply as possible, so from the 1960s onwards, there was a political advantage in allowing house prices to increase year on year - a notional profit for a majority of voters and an invisible cost for future generations, all requiring zero tax increases.

Fast forward to last year, the scales were tipping the other way, more people were losing out from Home-Owner-Ism than were gaining, so the then Conservative chancellor started withdrawing tax breaks from buy-to-let landlords, ostensibly to shift the balance from landlords back to would-be owner-occupiers. If the shift from Home-Owner-Ism back to Georgism-lite takes as long as the other way, we will have Georgism-lite again by the middle of this century.

Reader's Letter Of The Day (2)

Another letter which is not remarkable in itself, anybody who bothers to look at the numbers knows it, what is remarkable is that it is from Civitas, a fairly right wing Home-Owner-Ist lobbying group/think tank.

From today's The Evening Standard:

Rohan Silva is right to draw attention to the shortage of affordable housing in London but he is mistaken about its cause.

There is no shortage of land with planning permission for residential development as he suggests. Councils [in London] are approving in the region of 50,000 new homes for development each year - right in line with what most economists think London needs to keep up with demand.

The real challenge lies in getting those sites built on much more quickly once permission is granted. This is being frustrated by speculative land traders siting tight in anticipation of further price rises, and developers who drip-feed new homes onto the market so as to maximise sales prices.

Daniel Bentley, Civitas.

Observation tells us that in the medium term, additional supply in high demand/high wage areas creates its additional own demand and the overall effect is to push up rents and prices, but his point stands.

Good work by Shelter on land banking.

Somebody at Shelter has trawled through the accounts of all the large land bankers home builders and confirmed what we had already guesstimated.

From The Guardian:

The government wants to build 1m new homes in England by 2020. This would mean building 200,000 a year, but the existing construction levels of just over 150,000 are well behind that.

Despite the fact the nine listed housebuilders hold more than 600,000 housing plots, they sold just 66,881 homes between them in their last financial year.

The annual figure of 150,000 is not unduly low by historic standards, the average since 1945 is about 160,000 private sector completions. The years when annual completions were nearer 300,000 was because of council house building.

What is interesting is comparing what their PR people say to the media with what they say to shareholders in their annual reports:

Taylor Wimpey also pinpointed the “slow and complex” planning process and said all sides of the housing debate needed to be patient if more homes were to be built. A spokesman said… "Whilst it is improving, the planning process is slow and complex and a number of conditions need to be fulfilled before development can commence on our sites. A shortage of resources in planning departments also often means that delays occur in this process."

Ho hum. From their 2015 interim report (download from here):

Land bank - movements in period

Brought forward +75,136
Plots acquired +3,620
Strategic land conversions* +5,666
Completions -5,898
Land sales -297
Scope changes -655
Balance at end of period =77,372

Planning status
Detailed planning +45,787
Outline planning +22,508
Resolution to grant +9,077
Total =77,372

So in their accounts they boast that they have enough land with planning for about six years' construction.

* The land bank figures only include land with planning. It does not include 'strategic land' which they bought on spec; in this period they managed to obtain planning for 5,666 plots of 'strategic land' which is transferred to their official land bank.

To cut a long story short, TW have no interest in getting planning any faster, their profit maximising output level is whatever it is (taking all house builders together, they restrict their output to one tenth of total sales in any year) and there is no incentive to build more; in turn, there is no point in getting planning permission for land which they have no intention of using for the next seven or eight years.

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.

Correct.

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.

The ten-to-one ratio between overall market transactions and private housebuilding starts.

Via Peter Smith on FB, some research by Neal Hudson:

The level of private house building is closely linked to credit availability and turnover in the wider housing market. There has been a 10 to 1 ratio between overall market transactions and private house building starts for the last 25 years and it appears to have held firm despite recent policy interventions. The reasons for this ratio are poorly understood...

He then includes a chart showing that the ten-to-one ratio has held firm for a lot longer than that.

Fascinating.

I can understand that there would be some sort of correlation between the two, but not as striking as that...

UPDATE: Peter S explains why in the comments. Doh! Wish I'd thought of that.

Bovis Homes - unit sales and land bank 2005 to 2014

Prompted by an article in City AM, I did a quick summary (from here) of units sold, plots with planning consent and 'strategic land', i.e. plots where they are likely to get planning permission in the near future.

Total units sold over ten years = 25,124
Land bank in 2005 = 35,304 plots
Land bank in 2014 = 39,412 plots

So assuming typical annual sales of 2,500, they own enough land to keep them going for, er, sixteen years.

The Faux Libs and socialists both insist that if we liberalise planning restrictions i.e. grant these people more planning permission, they will increase output. The Faux Libs blame it on the government; the socialists blame it on the 'greedy developers'. Both sides blame it on the NIMBYs.

It strikes me that Bovis et al have a profit-maximising level of output and they will stick to it. If they get more planning permission for more, they will just park it to one side. Clearly they aren't too worried about planning permission lapsing again after three years, or else they wouldn't be holding onto 18,062 plots which already have planning.

Please also note:

The Group employed 928 staff directly at the end of 2014 and up to a further 3,000 sub-contractors work on its sites on a daily basis. In 2014, the Group legally completed 3,635 homes predominately on greenfield sites.

I have got the impression that it takes at least two man-years to build a house, so some of those sub-contractors will be medium sized businesses (with their own sub-sub-contractors) in their own right. Either way, they have off-loaded all their risks onto their sub-contractors, if they want to curtail supply because of falling prices*, they just lay them off.

* 2007: 2,930 units sold; 2009: 1,803 units sold.

Persimmon's land bank and number of completions

Using numbers from their investor relations page, I have cobbled together the following chart for your infotainment:



I think that Persimmon are fairly typical for the handful of large homebuilders, you can multiply it up for the others.

Land banking? Nah, not us mate.

From City AM:

York-based Persimmon added 11,500 plots to its consented landbank of 92,400 plots...

Legal completions increased by seven per cent to 6,855 new homes, while total revenue surged by 12 per cent to £1.34bn in the six months to 30 June.

Don't just take my word for it, here's what their Chief Executive has to say:

We concentrate on the fundamentals of our business: maintaining a high quality landbank, maximising our strategic land capabilities, building sustainable homes, continuing to improve margins and providing good customer care.

So their number one and number two priorities are..?