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Wednesday, 11 March 2020

of drastically reducing all PLOT PRICES and
hence FIXING the housing market
as the only way to have cheaper, better and above all MORE dwellings

I've been thinking about Liam Halligan's excellent book Home TRUTHS. Has he produced a narrowly focussed special theory of why house prices are soaring, and I’ve got the GENERAL theory? [I know! This makes it sound like Einstein--but bear with me. I think I am on to something]  

Supply in the Housing Market isn’t just New Build. As I explained previously

Second-hand properties are the MAIN Supply to the Market. Using an iceberg metaphor, I’m going to explain why concentrating on new-build and the effect of Planning Permission on Land values, doesn't give a complete explanation of the workings housing market.

Imagine the value of all the housing plots aggregated into one huge mass. This is the total of land value. Next think of this plot-value mass as a bit like the proverbial iceberg. While most commentators obsess about the tiny fraction that is visible ABOVE the waterline, the huge un-noticed bulk BELOW remains unexamined. Big mistake, because it is the main bulk of the iceberg, the totality of plot (land) values that swings the market.

An iceberg — 10% above the waterline, 90% below — that’s comparable to the housing market. In normal times 10% of houses on the market are new build, 90% of the supply to the market comes from existing stock. 

[think of the Iceberg as all the plots of land on which homes are built, represented by their value/price as an ice crystal. So the whole iceberg is the total value of all the plots both for new-builds and existing dwellings]

Liam’s special (inadequate) theory of fixing the housing crisis (which doesn’t account for all significant factors)

His theory: House price bubbles are almost entirely caused by land prices, with land acquisition costs inflated by hope value of Planning Permission. This is because the 1961 Act required hope value compensation to be paid to owners, NOT the existing (agricultural) value.

He also uses the theory that New build is the Supply to the market. Prices of new-build are driven up by the land value uplift when planning permission is granted. 

His solution seems to hinge on capturing this uplift at the time of PP. This will provide revenue for public benefit, but it should also give the builders an incentive to produce more and better new dwellings. But Liam is only looking at the plot values which are highly visible above the waterline

(My) The General theory of fixing the housing crisis  — what’s needed to really fix actual market crisis. 

I agree with Liam’s point about PP causing land price uplift, and that bubbles are almost entirely caused by land prices. But it isn’t just greedy landowners (or land-banking builders) who cash in on the limited supply of land. 

Banks and financiers saw a lending opportunity based on the limited supply of plots both for new-build and sales of existing plots (with dwellings already built on them). 

When plot (land) values are flexible upwards, and financial liberalisation leads to mortgage lending, the only limit is borrowers ability to manage repayments. The incentive for borrowers that capital gain from increasing plot values will cover all their outlays — eventually.

Add up all the plot values of the existing dwellings--that is the amount ‘Below the waterline’ on my iceberg. It far exceeds the plot-values of all the new builds (24 million to about 150,000). Only one or two million of these existing houses are put on the market each year. But that is still 80% of the Supply to the housing market.

These existing Home-owners who sell are able to extract all of the uplift in plot value (as well as the discounted value of the building). Nearly all existing houses are eventually put on the market as the main part of the Supply, so all houses/plots are potentially in play in the market. (Owner-occupiers get generous tax exemptions on their capital gains). 

My Conclusion: In the plot value iceberg, it is no good trying to reduce plot prices ‘above the waterline’ — for new build.  Plot price uplift there, in newbuilds creates similar plot price increase in the whole iceberg. 

Tinkering with newbuild plot values ‘above the line’ won’t fix the housing market. In order to bring all plot (land) prices down, perhaps even reduce them to zero requires action above and below, especially below, the waterline.

Taxing all plot (land) values on an annual basis will reduce house-prices and tend to equalise them in all areas. A small annual, repeating charge spread over all 24,000,000 properties will be much less burdensome than a one-off very large charge on one-twentieth of that number — the annual number of new-builds.   LVT is an exemplar of the former tax, Betterment Levy or s106 charges and example of the latter.

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