York’s great £1 billion giveaway

Under our planning system, York’s house building plans would give away a fortune to land owners. Time for planners to wake up, says Geoff Beacon

My family say I’ve more money than sense and they know I’m not wealthy. Once, after a meal in one of those nice restaurants in Fossgate, I left a tip of £45 and left feeling guilty. Why?

I had been discussing the rise in house prices with the waiter, a man in his mid twenties. He wasn’t a property owner and I was. As a result, I promised to leave him a tip of one day’s rise in the value of my house. Yes, I was being patronising. Years later, I still feel shame for that.

The second shame is that I cheated. At the time my house was increasing in value by £90 each day so I only left half the promised sum. I like to think I did that so I was not really really really offensively patronising.

But the message is still the same. House owners have seen hundreds of thousands of pounds added the value of their assets, more-or-less tax free and without doing very much. We are in a system that gives to the old and affluent – and even more to the rich – leaving out the the young and the poor. The high price of houses suits us home-owners fine.

Why are house prices so high? One element is the cost of land, or rather the cost of planning permission. Giving planning permission for one house on a plot of land enhances that value of the land by about £50,000. (In a discussion at the York Property Forum, the MD of a leading York property development firm told me it was “only £40,000”. I had previously estimated £60,000. I choose £50,000 here because it is a nice round number.)

The plan for proposed housing developments in York, more than 22,000 houses, potentially gives away over a £1 billion. That is more than £5,000 for every man woman and child in York.

Who benefits from this? It’s the land owners (or those that have purchase options on the land). With planning permission the land can immediately be put on the market “with planning permission” at values hundreds of times its previous value.

Achieving this value does require that the market should not immediately be flooded with new houses that will depress the value of houses and consequently this valuable planning permission premium. That would be bad news for land owners and us home owners alike but it would be good news for the young and the poor.

The maintenance of a high planning permission premium (PPP) does mean that the owners of the PPPs must exercise some monopolistic power and be able to restrict the supply of new houses to suit market conditions. If planning permission for 22,000 were distributed to 22,000 people each with their own plot of land the value of the PPP would crash.

The commentator Tim Worstall, a senior fellow at the Adam Smith Institute, (which works to promote libertarian and free market ideas) has a straightforward solution – issue lots more planning permission. In an article in the Telegraph last year he said:

Building a house costs, for a reasonable three-bedder, perhaps £120,000. It’s possible to do this much more cheaply with factory-built housing but that’s a reasonable number for current general practices.

Can you find a three-bedroom house south of Birmingham for under £250,000? Perhaps, in particularly blighted or Welsh areas, but that’s most certainly not the general experience. So half the value of such a house is the chitty that lets you build on that particular piece of land.

He goes on to say:

So, we should get on with issuing more such permissions, which will lower the cost of housing: for it is quite simply the artificial restriction that government places on the number of planning permissions that increases the cost of housing.

But if all the permissions are given to just a few land owners (or option owners) the issuing lots of planning permission may not lower the cost of housing because there will be a monopoly.

I have had a few meetings with officials in York council to discuss this issue. The last was included the chief planner, Darren Richardson. He seemed reluctant to consider the issue of land ownership. A subsequent note I sent reiterating the points I made in the meeting said:

Point 1: The new local plan allocations for development, particularly for housing, should avoid land owners and option owners being in a position to demand high prices for land. Monopolistic allocations of planning permission should be avoided.

Point 2: The land ownership and option ownership in York should be available to members of the public who wish to participate in the York local plan. This is relevant because the Government now wishes the cost of land to be a consideration in the planning process.

On Point 2, I added

You suggested at our meeting there may be a problem of discovering the land/option ownership or there may be a data privacy problem. Do you still consider this an issue?

I did not receive a reply but subsequently our MP Hugh Bayley received a reply on my behalf:

The main purpose of the allocation of land for 22.5k homes is to address housing shortage and affordability issues in accordance with the growth aspirations and not to make the relevant land owners wealthier, which unfortunately is a side effect.

This does seem to say that the cost of land has not been used in the formulation of York’s local plan. From a previous meeting, which included an official from the Department of Communities and Local Government, I believe this is contrary to Government thinking.

The think tank at which planning minster, Nick Boles, was a founding director raises this issue. Alex Morton writes in Why aren’t we building enough homes:

Developers hold land for hundreds of thousands of homes as a) land prices rise as the
planning system releases too little land, and b) land takes time to get through the planning system. Developers land bank due to planning…

Developers borrow to buy land as they think land prices will rise. This model only works when land prices are stable or rising. But land prices only rise when too little is being released to satisfy demand. By definition therefore the current model can never build enough homes over time. It needs to change.

A recent report in the Guardian, Ed Miliband issues warning to developers over ‘hoarding’ of land, also says:

[Ed Miliband] will point out in his speech that planning permission has been granted for 400,000 homes – equivalent to a city the size of Birmingham – which have not yet been built. In London alone 45% of land with planning permission for housing is in the hands of firms that do not build.

He will set out proposals to give councils powers to charge developers fees for unnecessarily sitting on land or, as a last resort, serve them with a compulsory purchase order.

Time for the planners in York to wake up and smell the coffee.

A last word from Tim Worstall: “Free up the planning system if you want to unleash Britain.”

Putting £50,000 on the price of a new house in York, stifles development.

It also imposes unfair burdens on the young and the poor.

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