The current Letwin review (popularly known as the land banking review) explores the gap between planning permissions granted and housing completions, with a view to increasing build out speed and ultimately housing supply.
One criticism of the review has been that it is misguided because it misunderstands slow build-out rates and so-called ‘land banking’. Several commentators have said that it is not rational for developers to hoard land to benefit from rising values. And that 'strategic land banks’ and slow build out rates are justified because they are a necessary part of housing delivery.
(Some say) hoarding land to benefit from rising prices isn't rational as cycles of boom and bust make it too risky. But given the short term incentives... why should we assume everyone defaults to a long term view in this way?
From this perspective, 423,000 homes with planning permission waiting to be built are a necessary, even insufficient, pipeline. The review, and the potential policy changes associated with it, are thus seen as betraying a lack of understanding of how things work in practice.
However, I think the review justifiably starts from the idea that policy can be used to change the way the market operates to benefit society. The following are some of the reasons the review is valuable:
1. In general, the market does not currently optimise build out rate for society
Instead it optimises build out rates to maximise sales prices. This isn't to say slow build out is a result of developers behaving immorally. According to this Lichfield's report and this blog from Philip Barnes of Barratt Homes, housebuilders are just doing what they need to do to secure a pipeline of land and maximise their sales revenue and thus profit. And they maximise in this way so that they can be competitive, particularly when competing to purchase land. It is entirely reasonable for them to restrict build out to what the market can absorb whilst keeping prices as high as possible. This is how they succeed in business.
However, this does not justify maintaining the status quo. It simply implies that since businesses cannot speed up build out whilst remaining competitive, policy intervention is needed to move the market (and incentives) towards this.
If all developers were forced to start and complete building more quickly, this might lower their sales revenues and short term profits. It might even challenge the viability of some sites where excessive prices were paid for the land. But in the long term it should lead to a downward adjustment in land prices, as bidders factor in the need to build and sell units as quickly as possible.
Issuing hundreds of thousands more permissions might lead to more houses being built. But it is likely they would not be located and developed built in a strategic way, leading to a range of problems, as demonstrated in our report Better Planning for Housing Affordability. A legitimate alternative strategy, as the LGA and others have proposed, is to explore ways that policy can force more efficient use of existing permissions.
2. The typical model of volume housebuilders isn’t the only way to deliver housing
Volume housebuilders may not be hoarding land to benefit from land value increase. But focus on this deflects attention from the more serious issues in the land market, in particular the control volume builders and land promoters have over land supply.
Strategic land banks and the use of options to secure land make total sense in the current market. However, this is not good for a diverse market and small and medium enterprise builders in particular. In economic terms we have a fairly oligopolistic housing market. This is not inevitable - policy aimed at tackling land banking could make it easier for smaller builders to access suitable land.
3. The housebuilding market isn't perfectly rational and won’t necessarily adopt a long term view
Lichfield's recent research made a strong argument that hoarding land to benefit from rising prices isn't rational as cycles of boom and bust make it too risky. But given the short term incentives of betting on rising land prices, why should we assume everyone defaults to a long term view in this way?
I think it is also reasonable to assume that where land prices are booming, some housebuilders might put aside longer term concerns about crashes and attempt to capture land value increases.
This is not to say developers are doing this. Indeed, most industry experts say it is not common practice, especially since prices for consented greenfield housing land have not risen much in recent years. But there clearly can be an incentive for it given the right market conditions. Therefore policy interventions to remove any incentives for it could be desirable.
If we assume the dominant model of housebuilding is necessary, we will create models that indicate that no alternative is possible. We must instead acknowledge that policy can change incentives and help deliver the kind of housing market we want.
If speeding up build out rates and increasing housing supply is our goal, then use it or lose it permissions, or other measures, could force the market to adapt. This is not to say there might not be downsides - in particular short term viability considerations. And there are other confounding factors – for example labour shortages, and the fact that building more market price homes as quickly as possible might not even be what society needs! However it is right to ask questions about how we can incentivise a market that works for society.
The RTPI is advising the Letwin review including submitting evidence on large scale housing and the core role of proactive planning plays in its delivery.
Policy Officer, RTPI
Tom Kenny leads on housing affordability for the policy and research team at RTPI. You can find him on twitter @tomekenny.