A fork in the road: the Letwin review

In the pantheon of sexy retail offers, the promise of an internal government review does not, you might argue, necessarily set the pulse racing. So when a review of land banking was announced in the Autumn Budget, it wasn’t rewarded with huge media attention. Some world-weary cynics (not me, you understand) even wondered if it was just a way to kick the issue into the long grass.

But there’s every reason to pay attention to the review (which will be led by Sir Oliver Letwin) – and even be hopeful about it.

Its conclusions will tell us a lot about where the debate on house building is within government. The review will indicate how serious the government is about solving the shortage of homes that hurts so many people, and is rapidly transforming politics and society in England. To re-cap, the chancellor asked Sir Oliver to look at the gap between planning permissions and completions – otherwise known as ‘build out rates’ or land banking.

He said: ‘…in London alone, there are 270,000 residential planning permissions unbuilt. We need to understand why. So I am establishing an urgent review to look at the gap between planning permissions and housing starts… and if it finds that vitally needed land is being withheld from the market for commercial, rather than technical, reasons. We will intervene to change the incentives to ensure such land is brought forward for development.’

So why pay attention? Firstly, because Letwin himself is a really bright and reasonable person, and is approaching the task in an even-handed, intellectually curious way.

Secondly because (on our reading at least) rather than having a pre-determined destination, the review itself is a function of difference of opinion within government. A few years ago there was widespread deference to the major developers: they would build more homes if only dastardly council planning policy let them. There are still pockets of sympathy with this view, but government and civil service is staffed with smart people. Many have noticed that successive rounds of planning liberalisation have not led to the step change needed or hoped for, and wondered if there is something deeper afoot.

One could argue that at this point that the major developers have had a lot of what they want from government, and delivered not that much for it. Letwin’s task is to sort this dispute out; it’s a referendum on the major developers’ business model, and whether there is a problem with it or not.

As we have long argued, there definitely is a problem. Developers build slowly because they need to build at a rate which keeps house prices high. They do so not because they are evil, but because of high land values. They have to pay so much to buy the land to build on, that anything but rising house prices threatens the 15-20% profit margins they have promised shareholders. So they sit on sites and wait for prices to rise. They can do this because there is no threat or penalty that makes it not worth their while. They can’t be undercut by a competitor in the way a conventional business can.

In this sense, build out rates are just one part of a wider picture that is at the root of why housing is so expensive in England. The land market is why we build so few homes, including affordable homes, and it’s where we need to focus our efforts to sort things out.

Once you connect these dots, you start to get to the kind of solutions that will make a real difference: stronger powers of compulsory purchase, land assembly, greater powers for local authorities. Under a reformed housebuilding system, developers would still make a healthy profit – but they would be less reliant on damagingly high house prices to do so. This would not only deal with the symptom of build out rates, but the underlying drivers. These include high house prices, high land prices, and the stranglehold that a handful of players have on the house building market.

This is the argument we will be making to the review. We’ve looked at things in depth in recent years, with the likes of KPMG and Legal & General (L&G). We’ll be producing some new research to back our case up, too. And we won’t be on our own. Organisations as politically diverse as Civitas, the Adam Smith Institute, the Institute for Public Policy Research (PPR), and the Campaign to Protect Rural England (CPRE) have all said similar things.

Though many in the development industry agree with this analysis privately, it’s likely that publicly the leading industry bodies will take a different view. A range of things will cop the blame: tardy council officers, a brick shortage, the weather, the fortunes of the England football team, whatever: anything but the fundamentals of the industry and land market.

These will be seductive targets for Sir Oliver – less controversial, lower-hanging fruit.

But it is a smaller analysis that will lead to a smaller set of solutions: a tweak to planning contracts here, a bit more resource for local authorities there. This might be fine if it would solve the problem, but, as far as we can see, it’s unlikely to.

Nevertheless, those are the two main paths open to the review, with quite different implications. In its own way, which one is chosen will tell us a lot about the scale of ambition we can expect from government in the next five years. The review’s interim report is due at the Spring Statement in March, and is likely to conclude for the Autumn Statement in November.