A consensus is emerging on land value capture: What we need now is political action

£87 billion could be unlocked for infrastructure and housebuilding. That’s the core of an article in yesterday’s Financial Times (FT) calling for major reforms to the land market – reforms we at Shelter have long been calling for.

This number is also of no surprise to us because we know that land value capture offers huge potential for unlocking investment. Indeed, we’ve worked closely with the Centre for Progressive Capitalism, which identified that number, to make sure we get it out for all to see.

And what we need to unlock this money isn’t all that complicated: it’s a few changes to the 1961 Land Compensation Act, which is the piece of legislation that governs compulsory purchase orders (CPO).

It isn’t just the FT that’s picking up on this either. In recent months the Sun has written about the need for CPO, and at the general election both major political parties ran on manifestos calling for CPO reform. In other words – we’ve got a consensus calling for change.

The Conservative manifesto, for example, stated: ‘We will reform Compulsory Purchase Orders to make them easier and less expensive for councils to use and to make it easier to determine the true market value of sites.’

The reason why we need this change is also alluded to here and is pretty simple: land that could have some homes on is really expensive. That’s a fact and, as we’ve outlined many times, it’s a major barrier to us being able to build more affordable housing.

What we need is a system whereby land can come into development at a lower price to enable us to capture the value uplift and then use that for new infrastructure or for affordable housing. CPO reform is the key to achieving this.

That this conversation is now taking place is a huge step forwards – and for us at Shelter it is great to see a topic we’ve long campaigned on gaining traction.

We have the consensus. So, all we need now is for the government to deliver on its promise and look to implement these reforms.

What we should do here though is explain briefly why CPO reform is a key part of capturing land value, lowering land prices and getting more affordable homes built.

In essence it’s just the diagram below:

We’ve been through this in detail on our policy blog before. In its simplest sense though, under the current system, land needed for major transport and housing projects is paid for not on the basis of what it is actually worth right now, but instead on the basis of what it one day might be worth if it ever got residential planning permission: The ‘hope value’.

In practical terms this means if a local council wants to buy an agricultural field to put in a new rail station and some affordable homes it can’t just pay the current value plus an amount of compensation. It also has to pay ‘hope value’ straight to the landowner, making the land so expensive that taxpayers’ money is needed to complete the project.

This is clearly not sensible. All the value that the land might have goes to the landowner – even when that value is actually created by public investment. Landowners win big while communities lose.

This also drives up land prices more widely by contributing to a broken system.

If this were changed though, by amending the 1961 Land Compensation Act, it would be possible to capture the uplift in value and use that to – among other things – build some affordable homes.[1] And landowners would still get a fair price for their land that includes compensation.

If this sounds like a win win then that’s because it is and we should act now to deliver it.

Importantly, we should note, this isn’t about developing a system where we see extensive use of CPO. It’s about lowering land prices more generally and about incentivising landowners to think differently.

Yes, they can still sell land for a fair – albeit lower – price. However, they could also invest it as equity in development schemes to secure a long term return. Our New Civic Housebuilding report sets this out in much more detail.

What next?

By no means are we there yet and we still need to keep the pressure on government to deliver on the promises made in its manifesto.

In addition, we have to all pull together to get this done. In particular, that means cross party working in Parliament to deliver this change: this is an issue on which all parties can agree action is needed and where there is a clear opportunity for them to work together in the public interest.

With a consensus now in place the government needs to commit to taking this reform forwards sooner rather than later.

[1] More on this can be found in our memo on the use of CPO to finance infrastructure and new homes.