Letwin identifies the problem but misses the solution

Letwin identifies the problem but misses the solution

One thing that probably won’t feature in today’s post-Budget headlines is the result of the Independent Review of Build Out undertaken by Sir Oliver Letwin.

While the report might not provide headlines, it does deserve recognition because it taps into a singularly vital part of our housing crisis: the cost of land. This means Letwin joins a growing group who recognise that only by bringing land into development at lower values can we unlock better, faster, more affordable development.

This group is already cross-party, and cross-sector. In just the last few months, we have seen:

  • organisations including Shelter, Onward, CPRE and IPPR sign an open letter calling for land reform
  • the Housing, Communities and Local Government Select Committee recommending reform of the 1961 Land Compensation Act in its report on Land Value Capture, with the aim of lowering land prices
  • Conservative MPs including Neil O’Brien and Nick Boles repeatedly highlighting the need for land reform – particularly reform of the Land Compensation Act.

That all joins a long history of calls for land reform, and one that now feels an unsurprising sense of renewed urgency – with 128,000 children waking up last Christmas without a home.

Ultimately, everyone who looks seriously at why the UK does not build enough homes – and why what we do build is affordable to so few – reaches the same conclusion: the high price of land makes it impossible to meet housing need. Letwin’s review is no exception to this.

This is why change that looks at land is vital. And there is only one change that we – and others – think will deliver: reforming the 1961 Land Compensation Act. Unfortunately, and despite identifying the problem, Letwin and his team haven’t recommended this.

What the review does suggest

The key takeaway from the report should be this: land-awarded planning permission is currently worth 275 times the agricultural value.[1] Letwin wants to see this reduced to around ten times that.

This would enable a huge shift in how we deliver housing. Instead of developments that are marked out by homogeneity, poor infrastructure, and a lack of social or affordable housing, we could have:

  • more community infrastructure – like GPs, parks, and schools
  • more opportunities for SME builders
  • faster development, delivered by an increase in the variety on individual sites
  • significantly more social housing.

There is a problem, though. Letwin suggests that this can be delivered by changing the planning system to introduce new diversity rules on large sites. That would lower the land value to a point where the more diverse and improved development is deliverable. These new rules would only apply to sites above 1,500 homes – because his review was only tasked with looking at those – and these would be set out by local authorities in their local plans.

On the surface, this all seems fine then, right? Land values are high, so we cap their value on large sites and those large sites start delivering in a different, better way. However, Letwin seems to have decided that all of this is possible without addressing the issue of the Land Compensation Act.

As such, we feel that this report offers a wonderful analysis of the problem, but not a solution.

The 1961 Land Compensation Act

This piece of legislation nominally sets out the compensation rules for when land is subject to compulsory purchase orders (CPOs). However, the impact of the act is far broader – and has a distorting effect on the price of land in general.

What the act does is uphold a landowner’s right to withhold their land from development until they are offered the price they think is right. But landowners have overwhelmingly decided that the price they require to sell is a high one – so high that the only homes which can then be built are unaffordable to most people.

The choice between CPO reform or tolerating the housing crisis is unavoidable because landowners will not voluntarily part with their land at a price that will enable us to build homes that ordinary people can afford to live in.

We can change landowners’ incentives so that participating in a good, affordable scheme is the best option, compared to the alternative of CPO at lower compensation values. Or we can continue to uphold the current understanding of land compensation, allowing landowners to define for themselves what represents a ‘reasonable’ return on their land, so that landowners and big developers will continue to decide what homes get built, at what price and at what speed.

Changing the 1961 Act though changes this. Landowners won’t be incentivised to withhold their land from the market until they get the highest possible price. Instead, they will be incentivised to agree to a price that reflects the scheme that is going to be delivered – ideally high-quality, well-designed and with high levels of social housing.

Therefore, changing the 1961 Act would be the key to unlocking what we, Letwin, and so many others are trying to achieve.

Next steps ...

The government must hear the noise on the issue of high land prices. The need for land reform is overdue, it’s popular, and it should happen sooner rather than later. Next year’s Queen’s Speech would provide the ideal opportunity for the government to announce that it will take the necessary steps to reform this outdated law and unlock our land market.

But it can’t be a case of taking up the reforms proposed today. They won’t get the job done, and that noise simply won’t go away.

 

[1] Centre for Progressive Policy: ‘Gathering the windfall’, 2018

 

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