Getting the most out of land

In an excellent new research note for Savills, the housing market expert Neal Hudson explains why anyone who cares about building affordable homes needs to care about the stuff under our feet:

“Land is the fundamental ingredient in the construction of new homes. Many of the issues limiting the rate of new home building can be traced back to the pricing and availability of land for residential development.”

In short: land is really expensive and that’s making it hard to build enough homes, especially genuinely affordable homes. Unless we make more land available for new homes and communities – in the places where people want to live (such as South East England) – we are not going to see improved affordability, falling homelessness or even more homeowners. We need to be bold and release more land for new homes.

But there’s more to it than that.

A study written up in today’s Financial Times, proclaims that “housebuilding does not drive down prices”. Hang on, I thought we’d agreed that more land = more homes = lower prices?

This cuts to the heart of the problem. The way we currently build new homes in England is based on a business model that cannot produce ever more affordable market homes, even when more land is made available. Why not?

Developers buy land in a competitive market many years before homes are built. To outbid rivals for the site they must pay the highest price possible, which means they must assume the highest possible sales prices for the homes and the lowest possible construction costs. This market dynamic therefore systematically drives down the size and quality of new homes and forces a sales strategy based on achieving the highest possible sales prices in the future.

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In practice, this means developers will only build and release new homes onto the market at a rate that does not threaten their maximum sales price. The industry rule of thumb is to sell one home per week, per sales outlet to avoid having to discount the price. Using this model, the FT’s story that local building doesn’t drive down local house prices is hardly a surprise – the whole point of the business model is to maintain prices!

It’s important to note here that this isn’t anti-competitive, corrupt or even wrong for any particular developer: it’s simply the best strategy for businesses operating in England’s broken housing market. If any particular developer did anything else, they’d be undercut and go out of business.

Things can be different though.

In other Northern European countries homes are built at a much faster rate, are more affordable and larger. This is made possible by ‘active land planning’. Active land planning simply means policies – usually from cities or local authorities – to bring land into the market at reasonable prices and in a way that allows multiple developers to build faster and better. For example, the Netherlands does this by zoning a plot of land on a city boundary, clearly specifying what can be built there and often splitting the sale of the land to multiple builders. By specifying in advance what can be built, the land price is effectively frozen and known by all potential builders.

Crucially, bringing land into the market in this way shifts the site of competition in the development industry away from bidding up the price of land, towards building the best quality homes that reflect what consumers want (whether that’s gardens, parking spaces or high ceilings). There isn’t less of a market in these countries: there’s simple a market for homes, not land. In Germany and Holland there is a thriving, diverse and competitive house building industry which delivers some of the best quality new homes in the world.

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A reform agenda for building more homes therefore needs two central and complementary pillars:

  • Policies that make more land available for homes in the right places
  • Policies that break open the broken development model and allow faster, better building

We’ll be publishing more about how this could be done for England’s mid-sized cities – places like York and Oxford – next week.