Labour’s radical land plans go too far for homebuyers

House prices fell 3.4pc during the year to May and are now 4pc lower than their peak last August, according to Nationwide. That’s the steepest drop since the 2008 global financial crisis.

Some surveys claim prices are still rising – but they are generally compiled by estate agents, based on sellers’ asking prices that are often not achieved. Nationwide uses up-to-date mortgage approval data – deals actually done. And on that basis, prices have fallen for eight of the last nine months. With UK inflation still at 8.7pc in April, the highest in the G7, mortgage costs have lately spiked. The Bank of England may now raise interest rates from 4.5pc to 5.5pc over the coming months – pushing up rates on home loans too, limiting what buyers can afford to borrow.

The average rate on a new two-year fixed-rate mortgage was 5.38pc during May, compared to 3.03pc a year ago. The number of residential property deals, 58pc down during the first three months of 2023, is set to slow further, causing prices to drop more.

Falling house prices are often seen as bad news, given the impact on broader economic sentiment.

Yet signs that the housing market is on the turn will be welcomed by millions trying to buy their first home. And that’s why a little-noticed announcement from the Labour Party last week could turn out to be highly controversial and counter-productive.

While the price of the average UK home rose 53pc over the last decade, wages were up just 19pc over the same period, making homeownership far less affordable. That’s why just 38pc of today’s 25 to 34-year-olds are owneroccupiers, down from 67pc a generation ago – with millions being denied the security of homeownership at this crucial family forming age.

While the reasons behind house price growth and unaffordability are multi-faceted, the underlying cause is our chronic shortage of homes. The UK needs about 250,000 new homes each year to meet population growth and trend immigration – some 2.5m per decade. House building hasn’t reached such levels since the late 1970s. Over the past 20 years, it’s been under half the required rate.

The resulting surge in prices explains why owner-occupancy has fallen from 73pc to barely 60pc of households – below the European Union average. And lower down the income scale, an endemic shortage of social housing is driving a rise in overcrowding and homelessness.

Since 2013, the Tories have bankrolled the ridiculous help-to-buy loan scheme, stoking demand in the face of inadequate supply, driving prices up further. That’s handed even bigger profits to the handful of already over-mighty developers dominating the scheme, as they channelled desperate homebuyers into often substandard new-builds – while pushing housing costs higher for the majority who can’t access the scheme.

What’s needed is radical supply-side reform – ensuring more homes get built. Because as local councils have granted more and more planning permissions over recent years, big developers have staged a go-slow, making higher profits by producing fewer homes to keep prices rising.

This column has previously argued that if homes are granted planning permission, and not built and ready for sale within two years, developers should pay full council tax on unfinished properties – incentivising them not to sit on unfinished plots, waiting for prices to rise even more.

I’ve also highlighted that the state owns 6pc of all freehold acreage across the UK, almost 1m hectares, rising to 15pc in urban areas, including countless sites prime for development.

Just 5pc of that land would be enough, at the UK average density of 45 homes per hectare, for more than 2m homes – far more if urban areas were used, where densities are higher. Government land sales should be restricted to small, local builders – who build-out quickly to aid cashflow – while including strict conditions relating to affordable and social housing provision. But reforms to land sales need to go further – which brings us to the policy floated by Labour last week, an idea not without merit, but which ultimately goes too far.

When residential permissions are granted on agricultural land, values can rocket a hundred-fold or more – with this vast “planning gain” going almost entirely to landowners, developers and intermediate “land agents”. That gain should instead be shared with local authorities – which would dampen price speculation, resulting in cheaper plots and, therefore, more affordable homes.

Such “land value capture” would also generate funds to build schools and other infrastructure, making new homes more popular, transforming the fraught local politics of planning.

Existing “Section 106” deals are meant to “claw back” some planning gain – but instead just reinforce the status quo. Powerful developers often negotiate away their obligations to build communal assets and affordable housing – threatening councils, under pressure from Whitehall to deliver housing, with further delays. Small builders lack such power, so are forced to fulfil their community obligations, making small developments unviable.

Only bold action can break this deadlock. In my 2019 book Home Truths, I proposed a transparent system splitting planning gain 50-50 between landowners and local authorities. Similar mechanisms are used in many advanced countries – including Germany, the US, Singapore and South Korea – raising huge sums which are then channelled into infrastructure and other public services. Britain is an outlier.

Making this happen means repealing the 1961 Land Compensation Act – which guarantees landowners “hope value” when selling acreage, including any future planning gain and related profits if land is developed.

This ensures house prices remain sky-high – and low-cost homes, including council housing, rarely get built. Labour wants to repeal the 1961 legislation but says local councils should then impose compulsory purchase orders on landowners, with agricultural land sold with no “hope value” whatsoever as the state grabs all the planning gain. This is extreme, unduly confiscatory and would spark countless lawsuits. It would be fairer and much more effective to split the gain evenly – and for such a scheme to be introduced by the Tories.

Why? Because history shows that when such reforms are introduced by Labour, landowners simply sit on their acreage, waiting for such measures to be reversed by the next Conservative government.

‘What’s needed is major supply-side reform, ensuring that more homes get built’