Gathering the windfall
How changing land law can unlock England’s housing supply potential
19 September 2018
4 minute read
Over the last few years there has been a growing cross-party consensus that to raise the rate of housebuilding, England needs to increase its investment in infrastructure, thereby opening up land for more homes. There is also a growing consensus that a greater share of the uplift in land value resulting from planning permission awards should help fund incremental infrastructure investment including affordable housing.
CPP's latest report shows that landowners in England made more than £13bn in profit in 2016/17 alone. In 2014/15, the figure was £9bn, the research from the Centre for Progressive Policy has found. This means that profits have increased by around £4bn in only two years.
Infrastructure investment on vacant and derelict land enables more homes, including more affordable homes, to be built that are connected to jobs, while ensuring access to schools and hospitals. The challenge is that providing infrastructure for larger developments is costly which is why the increase in land values as a result of planning permission awards needs to play a greater role in funding these kinds of projects.
The awarding of planning permission dramatically increased average agricultural land values from £22,520 per hectare to £6.2m per hectare for average residential values for new builds in 2016/17 across England; an increase of more than 275 times.
Our research based on recent Ministry of Housing, Communities and Local Government (MHCLG) figures indicates:
- Pre-tax windfall profits of £13.4bn in 2016/17 were generated as a result of land being granted planning permission. By contrast, only £5bn was captured directly from the uplift in land values or 27% of the total uplift.
- Residential land values for newly built homes increased by 50% from £14.8bn to £21.5bn between 2014/15 and 2016/17 due to a combination of increased output and rising land values.
- Assuming that all tax receipts are collected on these windfall profits, up to an additional £2.8bn could be generated for central government. This implies the post-tax windfall profit for landowners and other stakeholders as a result of land being granted planning permission is £10.7bn for 2016/17. If this windfall were redirected to help fund infrastructure investment and affordable housing, then up to an additional £214bn would be available over the next 20 years.
- Assuming similar tax levels for 2014/15 and 2016/17, windfall profits per unit resulting from the uplift in land values rose by 36% to £68,300, equivalent to 29% of the value of the average house in England in 2017.
Total uplift per LEP region, excluding land value already captured
Note: Birmingham City Region is an aggregation of the Birmingham & Solihull, Coventry & Warwickshire and Black Country LEPs.
In order to unlock this huge funding potential and dramatically increase investment in affordable housing and infrastructure, three key steps are necessary.
First, every functional economic area needs to develop integrated transport and housing plans. These plans should aim to increase housing supply while ensuring that households have access to improved public amenities and are connected to places of work.
Second, the relevant public authority needs to lead the land assembly process in partnership with developers and other key stakeholders to put in the necessary infrastructure before releasing serviced plots to housebuilders and individuals for self-builds.
Third, to fund the much-needed infrastructure, the public authority will need to capture the £10.7bn of windfall profits per annum given current section 106 and CIL contributions are insufficient to help fund large scale projects. This can be achieved through further reform of the land market by removing prospective planning from the compensation arrangements. Such a reform builds on the existing no-scheme world principle set out in the 1961 Land Compensation Act.
By redirecting the annual gains of £10.7bn from the granting of planning permission to help fund more infrastructure, housing output can rise further providing huge opportunities for SME builders and housing associations. Prior analysis indicates this could increase the rate of new builds to somewhere close to 280,000 units per year with sufficient funding for around 100,000 affordable housing units (1). This would bring total output for England including conversions to the government’s target of 300,000 units a year.