One of the things we would like to see the upcoming housing whitepaper address is the growing tendency to treat housing as an asset rather than a dwelling. Obviously that ‘ask’ on its own is quite bold and unhelpful, but there are specific measures that can be taken to promote housing’s traditional use, one of which I will explore below. Before I do I want to show you four graphics which - taken together - suggest to me that the stars have aligned when it comes to accessing the value tied up in property for the benefit of the community.
First is a story we are by now familiar with: housing completions are far below where they need to be if government is to reach its target of 1 million additional homes by 2020.
At the same time public sector debt has been on a sharp incline since the economic downturn, which has made successive governments (notwithstanding the Chancellor’s announcements in the autumn statement) reluctant to adequately fund a national program of housing delivery.
Source: Office for National Statistics
Despite this level of debt Britain’s record of infrastructure investment rates poorly when compared with other countries, with a stock of 57% of GDP against 71% in Germany. This lower level of infrastructure is also one of the reasons why Britain’s rate of housebuilding significantly lags its European counterparts in both the short and long run. The two are fundamentally intertwined as large scale housebuilding generally requires new transport schemes and additional amenities to be constructed.
Source: Mckinsey (2013), Infrastructure productivity: How to save $1trillion a year
However, there is not an overall lack of capital in the country, it is just locked up in existing assets, particular residential property.
Source: Michael Edwards, UCL
In sum the current situation looks like this: there is a significant annual shortfall in housing supply which is impacting house prices and rents; there is a squeeze on public finances; there is a relative lack public of investment in infrastructure; but there are huge amounts of capital flowing into existing assets.
This confluence suggests that if we are interested in reaching stated housing targets while bridging the infrastructure gap, we need to channel value away from existing assets towards public benefits.
Given that government is unwilling to recategorise spending on infrastructure and housing as different from normal public debt, and is keen (although refreshingly less keen than the Cameron government) to keep the deficit down, is there a way to increase investment in infrastructure and housing that doesn’t require public spending? We have previously mentioned Land Value Capture (LVC) as an efficient and fair way of doing this in theory on this blog, but now that all of the above stars have aligned, is it time to revisit the idea in upcoming policy announcements?
How does Land Value Capture work?
Simply put using an LVC mechanism on publicly owned land would allow local authorities to partner with construction firms, who can actually build high quality houses instead of financing the acquisition of high-cost land. Local Authorities can then sell off the units to pay for the construction, and pocket any jump in land values to fund further infrastructure.
Case Study: Enfield Council Meridian Water
Enfield de-risked sites and made them viable and now the developer (Barratt) is building homes. The council have taken major steps to turn unviable land into a major opportunity, and the Scheme is now valued at over £2.5 billion. The next 20 years will see the delivery of 8,000 new homes, 3,000 jobs, community facilities, and a train station.
On Privately Owned Land LVC allows Local Authorities to acquire land at a low cost, enabling them to harness the value created by housebuilding to pay for infrastructure, high quality design, and affordable homes. LVC allows public authorities to assemble land at its use value. LAs can then borrow from the bond market to finance the infrastructure, pay back the debt using the uplift in land values created by the project once it is completed. As the Centre For Progressive Capitalism has pointed out, in order for this to happen in the UK the 1961 Land Compensation Act could be changed to ensure that land is sold at values close to use value. This would ensure that the rewards of productivity flow to the broader community rather than landowners.
Case study: Amsterdam City Council, Ijburg
Built on a series of artificial islands, Ijburg is a meticulously planned and executed sustainable urban extension to the east of Amsterdam. The City Council assembled the land at existing land value and sold it in pockets to different developers who work within the council’s masterplan. The strategic planning context which selected Ijburg as a major growth area, with extensive transport infrastructure installed by the municipality enables developers to have confidence in the level of demand.
So with respect to the four graphics I showed you at the outset: using land value capture would allow local authorities to be more proactive in their assembly and/or use of land to increase the supply of houses; the uplift in lands value could be reinvested in infrastructure at no cost to the public purse; and crucially this is all value that is dormant within land so schemes funded in this way would not require any public sector spending.