Published: 21 Jul 2015 by Toby Lloyd

Regular readers of this blog will be familiar with me banging on about the central role of the land market in our dysfunctional housing supply system. Simply put, we’ll never build the number of homes we need in England, and certainly won’t make them affordable to ordinary families, unless we can get the right bits of land into the right hands, at the right price.

Sadly, we seem to be completely unable to do this. The land market remains terrifyingly murky, making it hard to know who owns or controls developable sites. The only significant study into this issue showed that almost half of the development sites in London were held by companies with no track record of building – which suggests that there’s a fair amount of speculation going on. It’s not hard to see why: the amount of money that can be made from buying land, ‘promoting’ it through the planning system and then selling it again is eye-watering – and dwarves the returns that developers make from actually building homes. This unregulated, largely invisible process of land trading keeps the cost of development high, makes house building a risky proposition, and forces developers to maximise the price of the homes they sell by trickling out supply.

In the end, we all end up paying the price of the housing affordability crisis – from the appalling social impacts of homelessness to the mounting housing benefit bill and the economic waste caused when whole generations cannot afford to house themselves in the places where the jobs are.

To be clear, landowners, traders and developers are behaving rationally and legally in a market that works for them, but not for society as a whole. Reversing this vicious circle will therefore require bold government action, to change incentives and behaviours in the market – as we’ve detailed with KPMG. Using land smarter is the essential first step to creating a new model of development, one that invests land at low upfront cost in order to maximise the quality and affordability of new homes, rather than extracting maximum short term profit.

We know that this model is doable – because it’s what the great estates used to build the smartest parts of West London; what the Victorian philanthropists used to build Bournville and Saltair; what the pioneers of the Garden City movement used to build Letchworth; and what the post-war government used to build the new towns. More recently, the government used this very model to build the Olympic development in Stratford – and countries across Europe have been using it to build high quality neighbourhoods with great success.

All of which means I was excited to hear the Treasury announce that the forthcoming CSR will use the government’s large land holdings to get more homes built – could this be the catalyst that our dysfunctional system has been crying out for?

Tragically, it doesn’t look like it. The indications are that the ‘disposal’ of public land assets is intended to reduce the deficit – oh, and contribute to solving the housing shortage too. This might sound like a ‘win-win’, as Newsnight put it, but there is a fundamental contradiction between these two goals.

If this land is to be sold at maximum market value as soon as possible – which is what deficit reduction demands – the government will simply be replicating the behaviour of speculative land traders in the private market. By squeezing as much value out of the site as possible before a single brick has been laid, there will be precious little value left to pay for infrastructure or affordable homes. Whoever buys these sits will be in exactly the same position as developers are today: having laid out a fortune to acquire the site, they will need to haggle down any contribution to the local community, and maximise the sale price of the homes. If a developer does not plan to do this, then another one will outbid them in the auction for the site. Almost by definition, the one that proposes the worst scheme will be the one that gets the land and builds its out. And that’s the best possible outcome – because at least some homes get built: slowly, expensively, poorly served with the infrastructure needed to make places work, and no doubt resented by local people and unaffordable to all but the best off, but built at least. At worst, these sites will just join the international speculation circuit, which sees land traded from hedge fund to off-shore company to oligarch to sovereign wealth fund – with value creamed off at each stage.

Other recent government announcements will make the result even worse. Talk of ‘removing red tape’ like affordable housing commitments and environmental regulations will just push the price of these sites even higher – which may be great for the deficit, but will be disastrous for quality development.

Of course, I could be wrong, as we haven’t seen the details of the government’s proposals yet. There’s still a chance that George Osborne will require public bodies not to sell their assets for a fast buck, but to invest them in partnerships or development corporations tasked with delivering high quality, affordable developments that people will actually be able to welcome. This approach to public assets needn’t be a give-away: holding onto ownership and investing in quality can yield brilliant returns over the long term: this is what made the Duke of Westminster so rich. The new towns corporations made so much off their initial investment that they paid back all their debts decades early.

The choice of what to do with public land assets is simple. Our preferred option is that they be invested over the long term – delivering quality development and a decent return to the Chancellor. Alternatively they could be given or sold cheaply to housing associations or others to build affordable homes. Or they could be sold for top dollar to improve the public finances. But simply flogging them on the open market absolutely cannot solve the housing crisis AND the short run deficit at the same time. If the government is to meet its manifesto pledges the CSR has to make building genuinely affordable homes the priority for public land.