Perhaps I am wrong when it comes to housing policy. There is an elephant in the room, but it receives no attention. Why? No one, not even the Treasury seems to put a cost on buying the building land we need and the financial consequences of these costs, so essential if the government is to remove the housing shortage. It is salutary to do so. This essential ingredient to building lots of new homes has grown year by year. Land costs increase exponentially as house prices go up. A lottery like outcome of a daft land supply system. The burden it creates is the second biggest barrier (after lack of local support) to explain the shortage of new homes.
So here is my land cost analysis. Produced to identify the elephant. Using echoes of the simple financial viability analysis I did in the mid late sixties as a residential land buyer before recommending a land purchase all those decades ago. The figures below are market indicators. It is not even a primer, but reminder that core viability analysis is not difficult but it is essential to choice of the next step.
Let me first list the working assumptions the hypothetical developer, English Government 2024 Limited must use to solve the housing shortfall. (And I use acres because the market does. It is my certainty zone, reflecting my own time and university practice in the mid-sixties. Sadly old men are slow learning new tricks!)
Assumption 1 4,500,000 new homes to be built
Assumption 2 15 year building programme
Assumption 3 15 new homes per acre density. Or 37 units per hectare. A medium density level.
Assumption 4 A £1 million per acre market value of building land including hope value; OR …….
Assumption 4 B £2.5 million per acre market value of building land again including hope value
Assumption 5 £10,000 per acre existing use value, excluding hope value if any exists, typically the value of open countryside in agricultural use.
To construct 4.5 million new homes at a density of 15 units per acre will take 300,000 acres of land. To put this number into context, it is about the size of Berkshire. That looks big, and it is. But in the context of the whole of England, it is not. For example, it also theoretically means no more building anywhere afterwards and the excess house price problem is permanently solved. In terms of future prosperity that is a massive step forward.
Annually how much land will be needed to construct 300,000 new homes? At a density of 15 new homes per acre, the answer is 20,000 acres will be needed each year. Based on England being 50,000 square miles, and 640 acres per square mile 20,000 acres is 0.0625%. That is tiny. After 15 years the accumulated total land used to build is about 1% of England’s land mass.This outcome looks good. But there is a very different financial consequence. It is the cost to English Government 2024 Ltd of buying 20,000 acres of building land each year using the existing system? Without change the land cost is a show stopper.
Based on Assumption 4A above (land cost of £1 million per acre) the yearly land cost will be £20,000,000.000 or £20 billion. Based on Assumption 4B (land cost £2.5 million per acre) the annual land cost will be £50 billion. In each case these land costs assume 100% of the hope value is paid to the land owners. If Assumption 5 is adopted, the cost of the building land is far less, a mere £200,000,000 (20,000 x £10,000 per acre).
Comparing the two costs of the land, two hundred million a year or twenty (or possibly up to fifty billion) each year for fifteen years is overwhelming. But it is so often overlooked.
Based on these scary land purchase costs including hope value how is the developer, English Government 2024 Ltd going to buy the building land it needs to deliver the growth the country needs? The only way practical way forward it seems to me is to buy the land at existing use value excluding hope value . But how can this be achieved equitably; without harshly treating landowners legitimate expectations as dispensable, thereby being accused by them, and rightly so in my opinion of unfair abuse of power, in effect of land sequestration? This is a painful dilemma for the government.
My answer, is set out in HOUSING MANIFESTO 2024 blog dated 29 April 2024. Or see the latest TCPA Journal published a week ago. The solution is based on a transition from the existing broken planning system to the new HM24 system over a period of 10+ years. . The earlier local councils take control and plan for their spatial future after their existing local plans end, the lower their future land costs will be. Adoption of HM24 ensures that policy U-turns, the bane of long term planning wither away and powerful, local vested interests no longer have an incentive to delay, waiting for another policy reversal. This is a policy based on patience. It can be accelerated with cross party co-operation.
Ian Campbell
29 September 2024
