In a speech in Birmingham, he will suggest that building firms should be fined if they refuse to develop land that has been given planning permission. Councils could also be given “compulsory purchase” powers to buy back sites that lie empty for years, despite having been approved for development. The proposals will be examined as part of Labour’s policy review and could feature in the party’s next election manifesto.
Planning permission has already been granted for 400,000 homes across the country, equal to a city the size of Birmingham, but they have not yet been built, in a practice known as “land banking”.
No, that\’s not land banking. That\’s prudent stock management.
So, how many houses are built each year? Even in these depressed times, some 100,000 a year.
How long does it take to get planning permission? Three to four years.
So, what should be the size of the stock of building land that the industry should have? Well, if prudently managed, you\’d expect it to have enough land to build on while it waits for more building land to be created through the planning permission system.
We expect the agricultural system to have enough food in it to get us to the next harvest. Why not the building industry to have enough stock to keep it going until new supplies are available?
And if you want to reduce that stock that\’s being held the best way to do it would be to reduce the time it takes to get planning permission.
One reason that builders may be happy to have a stock of land is that as long as there is insufficient supply of it then it will appreciate in value.
So surely a good way to fix the incentive problem is to make more building land available (which we want to do anyway).
Once builders see the value of their land stock dropping, they will hurry to get the houses built.
But that would mean using market mechanisms to fix problems; Labour would, of course, prefer to bully private firms instead.
I don’t think the farming analogy is right. A developer has x acres with permission, on which he can build y houses. The rational thing to do is to build y houses as soon as he can, because it’s best to have your money sooner rather than later. Yes, next year he’ll have no houses to build, but he has the same amount of money, faster.
Unless of course selling y houses quickly rather than in stages would bring the price down…So subject to capacity constraints, I can see no reason to hang on to a land bank other than to keep prices high.
Tim adds: But the housebuilder has an expensive infrastructure to support. All the people that work in the company. You don’t use that all in one year and then leave it idle for three as you get your next permissions.
Luke,
Unless of course selling y houses quickly rather than in stages would bring the price down…So subject to capacity constraints, I can see no reason to hang on to a land bank other than to keep prices high.
That assumes they can sell y houses each year, and that they can get the number of specialists in to build the houses.
Also, trying to keep prices high isn’t going to work, because this isn’t a monopoly. If there was an unmet demand, and you could get the specialists, someone would increase the size of their operation temporarily.
Owning land that’s doing nothing really isn’t a good idea. You’ve got to buy it at commercial rates which are higher than the rate of inflation of land (slightly above inflation).
It’s why no-one has been able to produce evidence that builders are land banking (beyond the trickle feed of supply that Timmy is talking about). Because it doesn’t actually make sense.
One problem is assembling small plots of land into something suitable for significant development. I have a number of clients who have spent many years acquiring a bit here and a bit there, setting up options on the bits in between, maybe making an agreement with the chap next door…
It’s not land banking, it’s just that things do take a long time. Add on the Council taking ages about planning permission, and the clients who are ready to go but are waiting till the market picks up becuase someone else has recently built a big development nearby, and to be honest I’m surprised it’s only 4 years’ worth.
Also, some builders like to keep things in-house and so can only do so much work at a time. They don’t like to expand temporarily, they want to work with people they know.
@ Luke
You seem to be forgetting, builders actually have to build houses. You know, that mucky business where blokes get their hands dirty. It’s no different from any other manufacturing industry. Needs a labour force, machinery, supply of raw materials. Requires continuity. You csn’t really have all that standing around waiting for a planning officer to put his chop on a piece of paper.
The planning system already incentivises getting on with the job – planning permission comes with a deadline by which you have to have started.
“Tim adds: But the housebuilder has an expensive infrastructure to support. All the people that work in the company. You don’t use that all in one year and then leave it idle for three as you get your next permissions.”
Glad you’re suddenly so concerned about security of employment. But more seriously, why not use subcontractors? Hardly unknown in the construction business. All you need full time is someone to bribe the local authority. Planning consultants, architects, labour can be hired when needed.
Think about OPEC. They don’t reduce oil production so they have some oil next year, but to keep the price up. Everyone else pumps as fast as they can. The big developers are like OPEC, and Farmer Giles with his one field is like Britain and the North Sea, pumping as fast as we can.
BIS, “You seem to be forgetting, builders actually have to build houses. You know, that mucky business where blokes get their hands dirty.”
Fair point, but I did say subject to capacity. But right now are you seriously telling me house builders couldn’t find some blokes to get their hands dirty? No Irish or Spanish? No Poles, no Lats or Lits, Bulgarians, Romanians, or dare I say it English?
And Gareth, planning permission is time limited, but it’s 5 (?) years or so, and once land has had it, it would normally get it again. So it limits but does not prevent delay.
So are people seriously suggesting that there is only a supply-side problem on housing right now? No demand-side problem at all? Cash and mortgages are easily obtainable. And of course it’s a great idea to build lots of houses only to have them standing around empty…
Luke,
I’m not sure your argument holds. Yes, a builder should build as many houses as he can as fast as he can. And separate from that he should be sourcing new land and he should be sourcing enough of it to provide new places to build next year and the year after that.
You seem to be arguing that because the sourcing operation is working, the building must be below capacity.
There are two sorts of housing development. Smallish ones up to about 50 houses, usually village extensions, urban infill, brownfield sites. These can be built immediately upon planning, and will be, it makes no sense for a developer to have spent a fortune getting planning and then sit on the land, paying financing costs all the time. Such numbers of houses are unlikely to materially affect prices locally, and therefore the incentive is to get them built as soon as possible.
Then there are large urban extensions. The sort that will have hundreds if not thousands of new houses eventually when they are finished, and cover hundreds of acres of land. These will typically be applied for as a whole in outline (as the planners like to see the overall scheme, what is going to go where, where the roads will go, the drainage, how the entire scheme fits together), and then slowly be actually built over a long period, often decades. So yes the developer will be holding ‘land with permission’ for a long time prior to building, but there is no other way in such cases. Does Ed M think that if a consortium of developers get planning for an urban extension of 5000 homes they are going to build them all in 2 or 3 years? Apart from it being practically difficult, who on earth would buy them, and where would the jobs come from? Urban growth can’t just be put on fast forward. It has to happen slowly, allow firms to relocate, people move to new houses for the new jobs. You can’t just press a button marked ‘More houses’ in isolation to everything else.
Its a typical lefty politician thought process to think that you can just pull levers and the economy will respond like a piece of machinery.
Emil, you say “So are people seriously suggesting that there is only a supply-side problem on housing right now? No demand-side problem at all?”
Well, if there is a demand side problem, how about dropping prices? That’s what most businesses do if people don’t buy their stuff. (Btw, I don’t think that SE prices suggest a demand side problem – “key workers”, first time buyers [insert your favourite worthy group] may not be in the market, but plenty of BTL investors.)
Mr P, you say “You seem to be arguing that because the sourcing operation is working, the building must be below capacity.” Well, given that less houses are being built than pretty much any time post war, I reckon the building could be below capacity.
Tim A, “That assumes they can sell y houses each year, and that they can get the number of specialists in to build the houses.” See answers above. You also argue that it doesn’t make sense for house builders to restrict supply artificially. Well, it works for OPEC.
You (and maybe other commenters) are assuming we have a fully functioning free market here. We don’t, as Tim has frequently pointed out. With a more liberal planning system, house builders would have less incentive to hoard land. Milliband should be having go at planning rules, not evil capitalists.
luke,
“Well, it works for OPEC.”
OPEC is a cartel.
And while I would fully support a more liberal planning system, what’s your evidence that builders are hoarding land beyond the sort of “trickle feed supply” that we’re talking about here?
The other factor in the mix is the issue of ‘developer contributions’ aka bribes to the local authority. These will be negotiated at the beginning of a large scale development in a section 106 agreement. If house prices/the economy/development costs move against the developer after the agreement is signed it may well mean they have to put a development on hold in order for house/land prices to recover so there is enough profit in the scheme to pay the local authority demands.
The biggest factor in the provision of housing is the State. It controls the planning system, the town planning system, the building regulation system, the ‘planning gain’ system. When the State is such a large factor in the whole process it ill behoves it to complain about the other lesser parts it doesn’t control.
Tim A, I have no evidence at all that they are deliberatley withholding supply to keep up house prices, or that they are not.
My original point was that Tim’s farming analogy did not really work for house building. My follow up point was that in an imperfect market such as UK land, it might be in their interests to restrict supply. And if that’s in their interest, that’s what they’ll do. No need for a formal cartel. (Most OPEC members cheat anyway.)
And”trickle feed supply” sounds like deliberately restricting supply to me. It may even be legal – luxury goods manufacturers do it.
Put it this way. – if you had a massive land bank, would you build as fast as possible? If you had one plot for one house, would your answer be different?
There are huge problems with the planning system in New Zealand, to the point the government is on the virge of taking control of in away from councils who do not approve new applications fast enough. Quite how anyone can think you can limit how big Auckland is and keep pouring people into it without seeing house price sky rocket is something only a planner can understand.