Want to resolve the UK's housing crisis? Here's how | Larry Elliott

Our system favours landlords over communities. The PM must side with the many, not the few

Theresa May is right. Britain’s housing market is broken and needs fixing. Homelessness and rough sleeping are rising and owner-occupation levels for the young have collapsed because homes have become unaffordable.

The average private rent in London accounts for more than a third of household income. The bill for housing benefit has risen eight-fold since the early 1980s after inflation is taken into account. House building has risen since the lows reached during the financial crisis of a decade ago but needs to almost double to hit the government’s target of 300,000 new homes a year by the middle of the next decade.

Yes, the housing market is broken all right and for the Conservatives, a party that sees itself as the party of the homeowner, it is a serious political headache.

A crisis has been brewing for decades – and left unattended the problem can only get worse. Britain has a rising population and the trend is for smaller households, both of which mean demand for housing will keep on rising. The weak growth figures for the first three months of 2018 will keep borrowing costs on hold for now but sooner or later the Bank of England will raise interest rates. That will make it still harder for people in their 20s to get a foot on the housing ladder.

Yet sketching out the problem is one thing. Coming up with solutions is trickier.

Replace a regressive council tax with a land value tax? Labour is thinking about a LVT but there is no chance the Conservatives will introduce what they have dubbed a “garden tax” that would hit millions.

How about giving some of the anonymous farmland in the green belt over to housing development? The thin end of a wedge that will result in the south-east being turned into one big urban sprawl.

Make prime residences eligible for capital gains tax? Are you kidding? Politicians know that Britain’s housing market is broken but mess with it at their peril.

The problem is so big, however, that changes have to come. London’s mayor, Sadiq Khan, wants to increase the supply of lower-cost homes in the capital, so under City Hall guidelines private development proposals where affordable units make up at least 35% of the total will be fast-tracked through the planning process. Under 35%, and developers can expect a much tougher time.

But as Daniel Bentley argues in a new pamphlet for the thinktank Civitas, the problem goes deeper than the planning system. Forcing councils to grant more planning permissions in high-demand areas doesn’t guarantee that the supply of new homes will markedly increase.

The reason for that, Bentley says, goes back to the 1961 Land Compensation Act passed by Harold Macmillan’s government. This enshrined in law the right of landowners, in the event of compulsory purchase, to be reimbursed not only for the value of their land as it stood but for its potential value if it were used for something else in the future.

A system so heavily weighted in favour of landowners had two consequences. First, it provided them with an incentive to wait, often for years, before selling their land for development because they would get a higher price. Second, house-builders had to recoup the costs of buying the land and did so by building more expensive properties that were drip-fed into the market to keep selling prices high.

If the aim is to build more affordable homes, this makes no sense. A site with planning permission for housing is worth more than a brownfield industrial site and 100 times more than agricultural land. Research by Thomas Aubrey of the Centre for Progressive Policy found that landowners made windfall profits of more than £9bn in 2014-15 on the sale of land. That meant for every home built that year, an average of £60,000 went to the landowner.

Bentley says the entitlement of landowners to this “hope value”, the prospect that it will be worth a lot more if used for something else, means public authorities are powerless to enforce development priorities that are in the interests of the community.

“This was not always the case. The new towns that were initiated before the 1961 act, and much of the local-authority output of the late 1940s and 1950s, was underpinned by a land values policy that meant landowners were compensated at values reflecting the existing use of the site,” he said.

“This meant land for new homes could be acquired at or close to its much lower agricultural or industrial use values. It also doused speculation and prevented the withholding of land.”

Reforming the 1961 act so that public-sector bodies can purchase land at less than its prospective residential use value makes sense because it would enable developers to get hold of land more cheaply and so build more affordable homes. Nor would it be an especially controversial move politically.

Judging by their 2017 manifestos, Labour and the Conservatives think the current system is weighted too heavily in favour of landowners, who see the value of their holdings increase not through their own efforts but through those of others.

Adam Smith and David Ricardo, darlings of the free-market right were critical of the “unearned increment” that landowners enjoyed. So was Henry George, who the left laud for coming up with the LVT.

May should seek bipartisan support for a rethink of the 1961 act. Sure, Conservative-supporting landowners would object but if the prime minister is to make good on her pledge to fix the housing market she has to side with the many not the few.

Contributor

Larry Elliott

The GuardianTramp

Related Content

Article image
Housing crisis: more than 200,000 homes in England lie empty
Birmingham is the city outside London with the most unused properties, followed by Bradford and Liverpool, new figures show

Phillip Inman

20, Apr, 2017 @6:15 PM

Article image
Lack of housing, not credit, is root of property problem

A closer look at year-on-year figures shows that the market is still some way from another crash, despite Help to Buy fears

Phillip Inman

14, Jul, 2013 @11:00 PM

Article image
Boom in office-to-home conversions drives rise in housing stock
Leap of more than 10% in new dwellings aided by commercial properties being turned into flats, official figures suggest

Patrick Collinson

15, Nov, 2016 @10:33 PM

Article image
L&G and Oxford University team up for £4bn housing scheme
Construction of affordable homes for staff and students to take place over next decade

Julia Kollewe

27, Jun, 2019 @1:30 PM

Article image
Housing sales forecast to fall sharply this summer after Brexit vote
Royal Institution of Chartered Surveyors finds ‘significant’ decline in buyer interest in latest market survey

Hilary Osborne and Angela Monaghan

13, Jul, 2016 @11:01 PM

Article image
Oxford once again tops list of UK's least affordable places to live
Homes in the city cost more than 10 times the average local income, as home affordability in the UK hit a nine-year low

Julia Kollewe

25, Feb, 2017 @8:01 AM

Article image
London tops cost-of-housing survey at 14 times average earnings
Cambridge and Oxford follow the capital at over 13 times earnings while Glasgow and Liverpool have lowest income-to-price ratio

Hilary Osborne

25, Nov, 2016 @12:01 AM

Article image
The UK housing market's perfect storm, and five steps to avoid it | Larry Elliott
With ownership plummeting, rents unaffordable and homelessness on the rise, action is needed to stave off a crash

Larry Elliott

08, Oct, 2017 @11:29 AM

Article image
Housing crisis will halve number of young homeowners in five years
Housing charity Shelter warns only 20% of 25- to 34-year-olds will be on the property ladder in 2020

Hilary Osborne and Rupert Jones

21, May, 2015 @11:01 PM

Article image
Build-to-rent – the solution to Britain's housing crisis?
Purpose-built block of rental homes, including affordable units and extensive facilities, are fast becoming a hot investment

Julia Kollewe

14, Sep, 2017 @5:00 AM