May can yet keep her housebuilding pledge

The Chancellor will not accept higher borrowing, but there remains a simple way out of this impasse

Theresa May promised to dedicate her premiership to fixing the “broken housing market”, but nearly 18 months in we are still yet to see the decisive shift in policy required to achieve such a thing.

Sajid Javid, the Communities Secretary, says we need between 275,000 and 300,000 new homes each year, but only around 200,000 were built in 2016. So if she really wants to make fixing housing her political legacy, the PM needs to do something radical – and fast.

As so often, the problem is money. The Government has locked itself into a fiscal straitjacket that is preventing it from opening the spigots. Perhaps the Budget will prove me wrong, but the manner in which Philip Hammond slapped down Mr Javid last month when it was briefed that the latter wanted an extra £50billion to support housebuilding suggests that any proposal that would require dramatic increases in spending is unlikely to get very far.

There is a way out of this impasse, however. It would enable housebuilding to be scaled up dramatically, and at much less up-front cost to the taxpayer than is currently envisaged.

In simple terms, councils would be allowed to purchase land that doesn’t currently have planning permission at something close to its value as, say, farmland before then granting themselves planning permission for housing. The financial benefits would be immense, given that agricultural land is valued in the tens of thousands per hectare whereas each hectare of land with permission for residential construction can be worth millions.

If the Government wishes to build new council houses, as it now says, this would dramatically reduce the costs of land acquisition for that purpose. But it needn’t be used for that alone. Councils could also sell on land to developers for private housing at residential values, collecting the rise in value to invest in infrastructure. This would be a way of establishing new towns and garden villages.

This approach – land-value capture – is widely used in Europe and it would essentially give Mr Hammond a new funding stream. Work by the Centre for Progressive Capitalism shows that more than £9billion a year is currently made in profit by landowners when planning permission for new homes is granted.

It is also an approach we have employed in the past. Those who look back for inspiration to the Macmillan housebuilding years of the Fifties, when output was double what it is now, should remember that local authorities had the power to buy land at existing use value between 1947 and 1959. About 1.8million council homes were built during these years, more than a third of all of those built since the Second World War. Over a similar time period, post-war new towns were mostly built on land acquired by development corporations at close to its existing, agricultural use value.

A wide range of voices are starting to advocate a more imaginative approach to land acquisition, ranging from the housing charity Shelter to the free-market Adam Smith Institute. But it is not as simple as it sounds, because there has been a change in the law since the Fifties that prevents the purchase of land for housing at anything less than its residential value.

Under the 1961 Land Compensation Act, landowners are entitled, in the event of compulsory purchase by the state, to the value of their land with residential planning permission – even if it does not yet have that permission. This has become a charter for hoarding. It also lies at the root of our dysfunctional housing system. It means that land, especially in the highest-demand areas, is drip-fed slowly at rates that maximise the returns to landowners but only by keeping housing costs high.

Reforming the rules so that the “market value” of land does not, in law, reflect speculative, future values would be transformational. Councils could build many more homes if they wished. But it would also enable developers to get hold of land more cheaply and so provide more of the homes we need, in the places we need them most.

If Mrs May wants to fix the housing market, she needs to start by fixing the land market.

Daniel Bentley is editorial director of Civitas and author of ‘The Land Question’