Why we need five million
new homes in the next
With a foreword by Robert Bruegmann
1. HM Treasury, HM Revenue and Customs, and the Office of the Deputy Prime Minister, Planning Gain Supplement: a consultation, Norwich, HMSO, December 2005, Table 1.1: Value per hectare (£) of land by use type, in England, Scotland, Wales and Northern Ireland, p 7
2. University of Sheffield, Department of Town and Regional Planning, and The Halcrow Group, Valuing Planning Obligations in England - Final Report, Wetherby, Communities and Local Government Publications, May 2006, p 43
3. Valuation Office, Residential building land figures, July 2007 and July 2009, posted on www.voa.gov.uk
4. National Housing and Planning Advice Unit presentation
5. Peter Hall, Ray Thomas, Harry Gracey and Roy Drewett, The Containment of Urban England, London, George Allen & Unwin, 1973
Volume 1: Urban and Metropolitan Growth Processes or Megalopolis Denied
Volume 2: The Planning System: Objectives, Operations, Impacts
6. McCarrey Committee on the Taxation of Unimproved Land and on Land Prices, Land Taxation and Land Prices in Western Australia, Part 1, Perth, Government Printer, 1968, p 26
7. Ian Abley, 'We are witnessing a British built "housing crisis" that Government is powerless to resolve', 23 July 2008, posted here
8. Ian Abley, 'Predicting the future of British house building', 10 November 2009, posted here
Planning Gain is a loss
Planning gain is consequent on the fact that every new home built enters the inflated second-hand home market. If the cost of management from land acquisition through building to sale, the cost of the land, and the cost of constructing that new home is less than sale price into the existing housing market, the developer is seen to have gained by the planning approval. The planning gain is substantial.
In 2005 the Treasury clearly recognised the substantial uplift in value that follows from farmland being awarded planning approval for new house building. (1) The Housing and Planning Minister John Healey was then at the Treasury, and Yvette Cooper was then Housing and Planning Minister at the Office of the Deputy Prime Minister. Their figures were averages, but they give the order of magnitude of "planning gain" that was available two years before the peak of the last housing bubble:
Farmers who own land granted planning approval for a change from agricultural to residential use are fortunate. It has become customary for developers to negotiate with local and regional planning departments to pay a share of the value of the benefit of planning approval back to the public body awarding the approvals. This is formalised in a Section 106 agreement, or a "planning obligation" on the part of the developer. Not all agreed obligations are actually fulfilled, of course, because the planned development may not go ahead, but after the valuable uplift in the price of a hectare the vast majority do proceed and are honoured.
Figures are not readily available. However Communities and Local Government, the department that under Cooper replaced the ODPM as the planning ministry in 2006, have acknowledged that '... using a range of estimates the total value of planning obligations agreed in 2003/04 lies between £1.5bn and £2.5bn.' (2) If 80% of Section 106 agreements end in a payment from developers that public share of "planning gain" would be between £1.2 and £2.0 billion. That is for England alone. Scaled up for Britain as a whole, "planning gain" receipts might have been roughly between £1.45 and £2.45 billion to the Treasury. By 2007/08, with the housing market inflating and a few more homes being built, Section 106 receipts may have easily peaked at between £2.0 and £3.0 billion.
This may be an underestimation, and it would be good to identify accurate and published figures on the value of "planning gain" to the Treasury. 200,000 homes were built in Britain in 2007, of which around 175,000 were private. If the Section 106 agreements were negotiated at mostly between £20,000 and £30,000 a home, the public share of national "planning gain" that year may have been over £4.0 billion.
Today the total "planning gain" will be lower, since housing production is halved, and Section 106 planning obligations have been renegotiated down. That is a loss of revenue for the Treasury, which they must make up in other ways after the general election this year. For house builders, of course, a planning obligation payment of say £25,000 a home means £1.0 million a hectare at 40 homes a hectare, in addition to buying the land. If those homes sell at £250,000 each, the development is worth £10 million a hectare. If the homes cost £100,000 to construct, there is still a £5.0 million fund of "planning gain". That is shared between the house builder and the fortunate farmer in their negotiation. Supported by their surveyors many farmers will negotiate for more than half that.
The Valuation Office provides up to date regional information on the price of a hectare of land with planning approval for residential use. This is presented for small sites, "bulk land", and sites for flats and maisonettes. The peak in July 2009 was for Inner London sites at around £8 million a hectare, while "bulk land" was around £6.3 million where available. In July 2007 sites for flats and maisonettes in Inner London had peaked at £13.8 million. At that peak "bulk land" in Outer London's suburbs was £7.0 million a hectare. In July 2009 in the South East a hectare of developable land was between £2.4 and £2.6 million, down from between £4.0 and £5.0 million two years earlier. In the Eastern region land for housing ranged from £2.5 to £2.8 million a hectare in 2009, while it had peaked at between £3.8 and £5.0 million. Only on Merseyside could a hectare be bought for £900,000 at the bottom of the drop in the housing market. (3) With a hectare of most agricultural land ranging between £5,000 and £15,000 the "planning gain" is high. The National Housing and Planning Advice Unit led by Stephen Nickell usefully produced a map of England showing these residential land prices per hectare in 2007. (4) The NHPAU do not seem to have publicised it widely.
Map of residential land price per hectare, Source: NHPAU (4)
Planners have long struggled with "planning gain", or what until the 1970s was called "betterment". Peter Hall, Ray Thomas, Harry Gracey and Roy Drewett wrote the two volume study of the effects of the 1947 Town and Country Planning Act in 1973. (5) The Containment of Urban England ends weakly with a revealing recognition that the publication of a plan, favouring a few farmers with the prospect of planning approval for residential land use, is effectively the preparation of a "speculator's guide". The authors credit this accurate appreciation of plan created uplifts in land value to the Australian McCarrey Report of 1968, the report of a Committee appointed by the Premier of Western Australia. (6)
Steve Daley, a friend and critic of audacity, has argued that it is better to understand speculator's "planning gain" as the flipside of the planning system destroying the development value of greenfield land in general. In other words, it is "planning loss" to the majority of freehold owners who would be only too willing to sell or develop a site every now and then for a fraction of the prices that the NHPAU recognise across England. In 2010 we are going to explore that idea further, and develop the lively discussion we had at All Planned Out, the international event we organised in London in 2007 to mark the 60th anniversary of the 1947 Town and Country Planning Act. We met in May, as the last housing bubble was still inflating. The substantial "planning gain" that the Treasury enjoys comes from local planners legally denying farmers the freedom to sell their land for housing. Those farmers fortunate enough to have development rights reallocated to them make millions selling their "bulk land" at the expense of their neighbours, who have their land values held down by agricultural use designations. It would be easy for most farmers to sell a hectare at £5,000 a plot, which at a suburban 20 homes a hectare would raise £100,000 a hectare, or around ten times agricultural value. However the plot purchaser is denied the planning approval to legally build a family home. Illegal buildings are demolished.
Through our collaborative work over the last decade as audacity we have recognised the planning predicament the government can't resolve. (7) Darling can't force new house building from the private sector developers, who share his interest in "planning gain". He can't easily afford to pay for very much more new housing through Registered Social Landlords and the negligable public sector. He knows that the failure to build only serves to strengthen his effort to reinflate the housing market. He will not like the political consequences of building so few homes every year, but he would like the housing market to deflate even less. He hoped in 2008 that renewed house price inflation would revive the ability of developers to realise "planning gain", with some of it recovered by government. But those revenues will be reduced. (8)
While the Treasury will see a loss in their revenues from the national planning system of land use reallocations, the losses are elsewhere. Farmers with no prospect of their land being drawn into a plan will never gain development values by selling up to house builders, both large and small. The larger house builders may prefer a business model that is predicated on "planning gain", but it is getting increasingly difficult for them to build in volumes. Their business is half the size entering 2010 than it was in 2007. The smaller builders really struggle to pay the price per hectare for land with a chance of residential use, while they know that they could be building more on plots of farmland. The new home buying public have no choice but to pay for the government's "planning gain" via their builder. The problem is not solved by building the home themselves. The problem is not in the construction, but in the inflated price of land within the areas drawn into local plans.
The loss to British society is the ability to house ourselves at prices that relate to household incomes. The national negotiation over "planning gain" is a loss to a society that runs rather more for the benefit of the members of the Council of Mortgage Lenders than for farmers.
The map of England is being planned to suit the CML.
Farmers don't seem to complain enough about that.
Odd, when it is farmers who own most of the land on the map. If they could sell a hectare every now and then for house building they might be better able to pay off the mortgages on the remainder of their farms.
Ian Abley 01.01.2010
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