We need to lower the cost of land to true market prices

After many decades of political obscurity, reforming the way that land is bought, sold and owned is back on the agenda. It’s about time too: the dysfunctional land market is at the heart of our broken housing market – and underpins the total failure to build enough high quality homes that people can actually afford. One thing we’re hoping for in next week’s budget is a sign that Downing Street is ready to overcome bureaucratic opposition to real reform.

Unrealistic expectations

The single most important thing we can do to build more affordable homes is lower the high cost of land.

As it stands, high land prices make it nearly impossible to build the affordable, high-quality homes and infrastructure communities want and need. This is because the price of land for development is currently based on a speculative value taken from what could be built on it. The landowner, understandably, wants as much as they can get for their land, so they tend to speculate that expensive, luxury developments could be built on their land – and consequently expect to get a price for their own land at the highest level possible.

In reality, the open market price won’t match that expectation, because the market will factor in the likelihood that some affordable housing and infrastructure will be required. But if the land is purchased compulsorily, the landowner will get the full ‘hope value’ – because in that case it’s not the market that sets the price, but the courts.

This is why the current value of land is inflated – because its value is dictated by the wildest dreams of the landowner and enforced through legal processes. The true market value of land would instead reflect the realities of what the planning system allows, which includes proper contributions to what communities want from development.

The think tank Civitas published an excellent report on Friday, clearly showing how legal changes in the 1950s and 60s have distorted the market, preventing true market prices from coming through. You can see this effect clearly in the data:

The change we need

We need to reset the price of land to its true market value.

That means reforming the compulsory purchase laws. The main reason why landowners are able to ask for so much for their land is because current compulsory purchase laws encourage them to.

To be clear, we’re not talking about compulsory purchase happening more often –  it should always be a last resort – but that these rules, which ultimately determine the market price of land, should be changed to stop giving landowners unreasonable expectations as to what their land is worth.

And we are not talking about dispossessing landowners unfairly by refusing to give them the market value of their land. We’re talking about removing a legal distortion that artificially inflates land values in order to allow the true market value to emerge.

True market value

Lowering the market price of land is as close to a silver bullet policy as we will ever find – which is why both Labour and Conservative parties included it in their manifestos earlier this year. Given that over 80% of the electorate voted for these two manifestoes, it’s surprising that DCLG officials rejected Civitas’s recommendations, arguing that “compensating owners at less than market value would be inherently unfair and could drive up opposition to new developments.” This suggests that they have misunderstood the proposal – and the manifesto pledges. There is nothing unfair about allowing the true market value of land to reflect local priorities. And it is precisely the failure to give local communities enough back from development that drives opposition.

Amid all the speculation as to what will be in next week’s Budget, this misunderstanding by DCLG could be fatal. Voices from across the political spectrum are united on this: the latest came from former DCLG minister Nick Boles MP, whose new book calls for exactly this reform. It now seems that the only people opposing sensible reform are the very department tasked with delivering more and better housing.