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Land reform could save billions on the cost of a major council housebuilding programme

The upfront cost of an affordable housebuilding programme could be reduced by more than a third through reform of the land market, a new analysis by the cross-party think tank Civitas shows. The bill for building 100,000 homes could fall by about £9 billion if councils had the power to acquire land at fairer prices.

Such a programme would fill the gap that has been left in the housebuilding market since local authorities started winding down their own construction projects from the 1970s. Annual output has never hit 300,000-a-year since then – last year the net supply of new homes was 217,000.

Much of the cost of housing development currently consists of the price of the land, which can increase 100-fold when planning permission is granted for new homes. This cost could be reduced substantially if local authorities and development corporations could purchase land, before planning permission is awarded, at something closer to its existing use value.

This was the basis on which the new town developments and much of the council housebuilding of the post-war years, were carried out. The land compensation rules have been changed since then, however, and entitle landowners to all of the unearned windfalls that arise when planning permission is granted.

New calculations by Civitas suggest that a 100,000-home building programme could cost in the region of £23.5 billion under the existing land framework. If, under a revised land framework, landowners were only paid a 50 per cent premium on the current value of their land, this could fall to £14.5 billion.

This would cover the construction of 20,000 flats on brownfield land in London and 80,000 houses on greenfield land across the rest of England, but with a strong emphasis on the South East and the East of England where housing pressures are greatest. It is envisaged that many of the greenfield developments would form part of new towns, garden cities and urban extensions.

Daniel Bentley, editorial director at Civitas, said: ‘It is clear that the only way to consistently build 300,000 homes a year is for the public sector to supplement market provision with a steady supply of new affordable homes. This would provide a much-needed alternative to the insecure private rented sector for low-income families, and by stepping up supply it would bear down on housing costs for everybody.

‘Ministers have repeatedly suggested that council building needs to be part of the solution, but seem to be put off by the upfront costs. But these costs could be dramatically reduced if landowners were prevented from pocketing the unearned windfalls that arise when sites are designated for new housing.’

The analysis considers how much it would cost to build two- and three-bedroomed houses on newly-developed greenfield sites in different parts of the country, and one-, two- and three-bedroomed flats on brownfield sites in London. This varies a lot by location, with those areas where house prices are higher having higher residential land values.

In London and the South East it is not uncommon for the land costs to be close to half of the total development costs. On an estate housing development in the South East, for instance, it might cost an average of £233,000 per unit at present. Reducing the land cost to existing use value plus 50 per cent would bring the total development cost down to £123,000 per unit. In central London, a high-density apartment scheme might on average of £381,000 per unit, which would be reduced to £255,000 per unit in the revised land framework.

According to official estimates, residential land in England is worth an average of £2.1 million per hectare – in agricultural use the same piece of land would be worth in the region of £21,000 per hectare, while a brownfield site in industrial use would be worth £514,000 per hectare.

The residential value of the land reflects the market value of the homes that can be built on that land, minus construction costs and the developer’s margin. The landowner’s entitlement to that residential value is currently enshrined in case law and legislation dating back to the 1961 Land Compensation Act, which determines that the price paid for land compulsorily-purchased by the state must reflect any prospective use to which it could be put. This prevents local authorities from purchasing land before planning permission is granted at anything less than its residential value.

In a previous paper (The Land Question, November 2017), Daniel Bentley proposed reform of the Land Compensation Act so that valuations excluded potential future planning consents. This would give local authorities the ability to strike deals for sites at prices closer to existing use value. Today’s analysis illustrates the impact such a move could have on public-sector development costs.

Reform of the land compensation rules: How much could it save on the cost of a public-sector housebuilding programme?

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