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The land and housing crisis in the UK and how to fix it

Updated: Jun 13, 2023


By Paul Entwistle


In this article, based on a talk recently given to Dorset Humanists, Paul provides an overview of the current housing situation in the UK, highlighting key issues, examining historical factors, and providing some solutions. He draws on the work of economics journalist and broadcaster Liam Halligan in his recent book Home Truths.



Introduction

The UK faces a housing shortage of around three million units, which has resulted in a raw deal for renters as well as for young people trying to get on the first rung of the housing ladder. Property in the UK is overpriced, and 'planning gain' is considered iniquitous (planning gain is the increase in value that a developer or landowner receives when planning permission is granted for a new housing development). While Britain is claimed to be 'full', the challenges faced by different regions vary, and the planning system is broken. In addition, there are conflicting opinions on the optimal size of the green belt–this refers to an area of land designated for protection from development, usually surrounding or adjoining urban areas. Its primary purpose is to preserve open space, protect natural and historic features, and prevent urban sprawl by maintaining a buffer zone between cities and their surrounding countryside.

The power and immense wealth of landowners are also an important theme, as illustrated by the Duke of Westminster quotation below. Historically, most land was taken with no recognizable merit or justice in today's terms, raising questions about the continued retention of this power.

The Duke of Westminster, on being asked if he had any advice to encourage the younger generation in emulating his success, replied: ‘Make sure they have an ancestor who was a very close friend of William the Conqueror.’

It is notable that neither of the main political parties has a housing objective in their current five-point plans. The government's lack of attention to this problem adds to the frustration felt by those affected. Shockingly, about 115 Members of Parliament are buy-to-let landlords, some owning two or more houses, yet they seem blind to the problem.


Land prices

Land is a critical factor of production and the largest portion of the UK's national wealth. It remains a vital component of economic and social activities, affecting the cost of everyday establishments such as pubs, gyms, and car parks. High land prices seep into every aspect of our lives, impacting the affordability of property and other essential goods and services. A prime example of the disproportionate influence of land prices on the property market is the recent purchase of a plot in Sandbanks, Poole for £13.5 million. The land includes a modest bungalow that has a very low life expectancy. It could not cost more than a few hundred thousand pounds to replace it, meaning that the land value of the property is over 95 per cent of the total. On average, in England, the proportion of land value in property prices is around 70 per cent of the total, varying significantly across the country. It's crucial to recognize, therefore, that much of the discussion about property prices is about land prices rather than the buildings themselves. Inflated land prices affect the affordability and accessibility of essential goods and services, impacting the economy and society at large.


The insanity of house prices in the UK

According to Professor Danny Dorling, our housing system follows an 'extractive' model that is out of sync with many European countries. In his book Shattered Nation: Inequality and the Geography of a Failing State (2023) Dorling explains how this system channels money from the less fortunate to the already affluent, from excessive rents and overpriced homes to hefty mortgage payments. He notes that if house prices had increased only in line with inflation over the past 70 years, the average home in 2022 would have cost around £63,300 - equivalent to about twice the median full-time UK salary of £31,000. If the average house cost only £63,000, the UK economy would be entirely different, because ordinary people would have more money to spend on other goods and services, which would increase demand in the economy. This highlights how the money extraction model identified by Dorling could be a factor in our slow economic growth.


Planning gain

Planning Gain, also known as Betterment or Land Value Capture (LVC), refers to the significant increase in land value when planning permission is granted for development. The value of land with planning permission can be as much as 100 to 200 times higher than its agricultural use value. This increase in value generates substantial profits for landowners and developers. While councils may recover modest taxes and joint costs for infrastructure such as roads, the bulk of the profits go to private interests. In 2016/2017, Planning Gain generated a total of £18 billion, with only £5 billion being collected in taxes and cost recovery for councils.


Historical factors

Land ownership in England has a long and complex history. This history goes back to William the Conqueror who, in 1085, ordered the creation of the Domesday Book - a comprehensive survey of much of England and parts of Wales, listing all the landowners, their holdings, and their values. This set the template for land ownership for centuries to come. Over time, landowners came to dominate Parliament and became entwined with the Conservative Party. One particularly significant development was the enclosure of the commons from 1500 to 1900, during which landowners, with or without the support of the law, progressively took over the bulk of the common land in England. Many major landowners today can trace their heritage back to important historical events, such as conquest, land theft, slavery, and colonial and industrial proceeds. In 1873, the first formal review of land holdings since the Domesday Book was undertaken revealed that about 4,000 of the landed elite owned half the country.


20th century factors

The inter-war period was characterized by several factors that contributed to its success in terms of housebuilding and infrastructure development. These factors included cheap money with low interest rates, the availability of more mortgage finance from building societies, cheap and available land enabling low densities of housing, extended commuter services that enabled the development of suburbia and metroland, and the absence of many planning laws that would have hindered progress. The presence of many small and medium-sized enterprises in the construction sector also encouraged healthy competition and innovation, while funding for new infrastructure came from the Land Value Capture (LVC) system. Additionally, the government's policies played a crucial role in promoting development, such as Lloyd George's 'Land Fit for Heroes' initiative in 1919, which provided homes for veterans and helped to stabilize the political situation. His government also passed the Housing and Planning Act in 1919, which signalled its intention to take responsibility for providing affordable housing to all citizens.

By 1939, nearly 10 per cent of the population was living in social housing. The Second World War caused significant damage to the housing stock, with half a million homes destroyed. However, the post-wargovernment managed to undertake a major rebuilding effort despite shortages and the country's financial situation.

The Land Compensation Act 1961 is arguably one of the worst blows to British living standards since the Second World War.

In 1946, the New Towns Act was passed, which enabled the purchase of large acreages and the setting up of development corporations. In 1947, planning permission in its current form was introduced, with land purchased at existing use price, and all betterment accruing to the state. This allowed local authorities to fund local infrastructure such as schools, roads, and shops.

Landowners opposed this system, and laws were progressively changed, culminating in the Land Compensation Act 1961. This Act provided for compulsory land purchases to be made at open market value or 'hope value', which allowed for aspirational planning gain. This led to rampant speculation and soaring land prices, forcing housing to become high density. Social housing was moved upwards into tower blocks, and completion rates plummeted. There are numerous examples of landowners with modest agricultural holdings becoming multi-millionaires. This kind of excess reward for doing nothing except holding on to land is one of the factors driving inequality. The Land Compensation Act is arguably one of the worst blows to British living standards since the Second World War.

The success of the inter-war period in terms of house building and infrastructure development was due to a combination of government policies, innovation, and the absence of restrictive planning laws. But the post-war Land Compensation Act signalled a shift in priorities, and subsequent policies have failed to deliver the same level of progress.


Post-war period

Moving past the Second World War, housing was a priority across all political parties. In 1951, the Conservative Party manifesto stated that housing is the first of the social services and one of the keys to increased productivity. Current governments pay lip-service to a similar aspiration, but fail to plan for it in practice.

In 1980, the Conservative government led by Margaret Thatcher introduced Right to Buy policies, under which social houses were sold off to tenants at well below cost, leading to a peak in home ownership at about 71 per cent in 2003, though this proportion has since fallen due to austerity and financial constraints. Today, at least 40 per cent of Right to Buy council homes are owned by private landlords, who charge over twice the social rents, leading to worse conditions and higher costs for tenants.


The passion for housing that existed in the past is lacking in current governments, who fail to plan and prioritize effectively. The consequences of the Land Compensation Act and Right to Buy scheme have been catastrophic for tenants and have contributed to inequality in society.

In recent years, there have been several trends in the housing market that have affected both buyers and renters. The first relates to the house price to earnings ratio, which was 4.4 in 1980 but has since increased to between 8 and 9, rising to 12 in London. With mortgage limits typically set at 4x earnings, this increase in house prices has made it increasingly difficult for young people to buy their own homes, particularly since younger people rarely earn median incomes.

The private rented sector has also flourished under the Tories, with tax incentives and high returns resulting in an increase in rental units from 2.1 million in 1991 to a peak of 4.7 million recently. Another development is the Help-to-Buy scheme, which was designed to help first-time buyers without a deposit. However, the scheme has merely distorted the market and raised builders' profits, also resulting in substandard homes being built. The cost of land-hoarding has long been a major issue, with six major operators controlling the land market and no legal restrictions in place.


The soaring cost of land has been a significant factor, with an increase of 8 per cent cumulative per annum between 1991 and 2016. This has resulted in a thin land market which has forced prices up, making land an excellent long-term investment. Land taxation has also been a factor, with no income tax, capital gains tax, or inheritance tax payable on woodland and the opportunity to reduce income tax by incorporating. Tax havens, trusts, and companies have also been used to avoid tax, and overseas owners are often able to avoid capital gains tax.


The impact on young people

The failure to house young adults has been identified as a social disaster, with housing costs rising steadily as a percentage of income from 10 per cent in the 1940s to 30-40 per cent today. Housing provision has also not kept pace with demand, with fewer than 200,000 homes built per year since the 1980s, despite a House of Lords recommendation of 300,000 homes needed per year.

Social housing was effectively destroyed by the Thatcher government and by subsequent Tory policies, with promises to reinvest never being acted upon due to high land costs and lack of resources.


Henry George

In passing, let's give a nod to the 19th century American economist and journalist Henry George who was the first to comment on land ownership. He believed that the economic value of land should be shared by all. His bestselling book Progress and Poverty (1879) explains how an increase in wealth is often accompanied by an increase in want. His ideas are still relevant today.


Losers

Those who stand to lose from current policies include:

  • Homeless individuals: there are currently 271,000 homeless people in the UK, including 123,000 children, up 74 per cent in ten years. Roughly 250,000 people are in temporary accommodation, with about 2,400 sleeping rough and the rest in hostels. The issue of 'beds-in-sheds' is also on the rise.

  • Those on social housing waiting lists: there are over one million households on the waiting list, with wait times of up to 10 years. Last year, 29,000 social housing units were demolished while only 7,000 were built.

  • Tenants: renters currently have little security, as they can be evicted without reason, and short-term rental periods mean they must frequently move in pursuit of affordable rents. Repairs and maintenance are not always undertaken, and a trend of increasing rent-to-income ratios is emerging.

  • The 'Generation Rent' cohort: young people are struggling to save enough for a deposit and are often forced to live with their parents for longer periods.

  • The general population: high asset prices are causing economic stagnation.


Winners

On the other hand, those who stand to gain from current policies include:

  • Oligarchs and overseas despots: they have benefited from a secure, rising market with lack of transparent ownership. London is known as the 'money-laundering capital of the world'.

  • Banks: with three out of five loans backed by collateral, the mortgage market is flourishing.

  • Builders and developers: they benefit from rising land prices, limited competition due to an oligopoly, control over land banks, high margins, and poor regulation (which failed to prevent the Ground Rent scandal and the Grenfell disaster).

  • The government: high asset prices maintain support for the ruling party, and contributions from builders and developers reach up to £11 million a year. MPs who are landowners and buy-to-let landlords also benefit, and some have engaged in 'house flipping' to save on capital gains tax.

  • Property owners and landlords: those who own property benefit from tax-free property gains on their primary residence, leading to a massive shift of wealth over time from 'have-nots' to 'haves' and contributing to income inequality.

  • Landowners: they make super-profits from planning gain.


Overall, this situation represents a 'tyranny of the majority', in which the interests of those with assets are prioritized over the less well-off, who have little political leverage. The situation is complex and requires a multifaceted approach to find solutions. It's imperative that we challenge the vested interests that benefit from the current policies, and increase the role of the government in addressing the issue. Rather than focusing solely on demand, we must particularly address the supply side of the problem. It is important to note that Britain is far from full, and there are solutions available, but implementing them will be challenging. While some members of the Tory party may be sympathetic to the cause, the current government is unlikely to bring about fundamental change due to the entrenchment of vested interests within the party.

Britain is far from full, and solutions are available, but implementing them will be challenging. We need Help to Build not Help to Buy. We should also introduce penalties for land-hoarding.

Some solutions

Many people claim that Britain is full, but consider these facts: 90 per cent of land is not developed. 12.6 per cent of land in England is designated as Green Belt, which has more than doubled in size since the 1970s. But many areas within the Green Belt are neither green nor beautiful, and it covers many times the total residential housing footprint. There is ample space to build three million homes without harming the green lungs of our cities. 6 per cent of land is state-owned, much of which is located in highly developable locations. But Whitehall torpor prevents its usage, even though it could accommodate 50,000 units per year and form the basis of a government land bank.

Planning permission need not be a barrier to development. For example, in 2010, 156,000 units were approved, and they took only 1.7 years to complete. The National Planning Policy Framework of 2015 and subsequent policies have accelerated planning permission, with 370,000 units approved in 2017. However, the construction sector faces cash flow problems, especially for small and medium-sized enterprises (SMEs), and the Government has recently backtracked on this more liberal planning regime.

The problem is not demand, but supply. Right to Buy and Help to Buy schemes have had unintended consequences, such as fuelling price rises and lowering quality. Instead, we need Help to Build, which should support SMEs, increase competition, and introduce new financing and guarantees. We should also control land hoarding, and treat planning permission as a time-limited contract. Penalties for hoarding could include interest or council tax. Moreover, we should favour local rather than overseas purchases of land.

We can learn from other countries, such as Singapore and South Korea, which have managed land and housing more effectively than we have. Singapore's government is the main landowner (around 90 per cent) and controls foreign ownership. It allocates land via long-term leases and collects rents. The South Korean state and Korean Bank own 50 per cent of land and manage it actively in the general interest. These policies have tempered the rise in house prices. Other European countries use land value capture to fund infrastructure.

Local Development Corporations could play a major role in building new homes. We should scrap the 1961 Land Compensation Act, which inflated land prices. Land purchases should be backed by compulsory purchase order powers at existing use value. We should invite tenders from various stakeholders and encourage SMEs. Land should be sold to Housing Associations and Local Authorities at fair prices for social housing. Planning uplifts could be gathered on a 50/50 basis to fund infrastructure and better planning. We should also consider a new programme of building new towns.


Conclusion

Capitalism can work for the common good when it is allowed to, creating and distributing wealth in a fair and equitable manner. However, we have seen that a property market based on unearned income and oligopoly profit leads to dysfunctional outcomes. The proposed solutions take us back to the inter-war and post-war periods, when government purchasing power and political will were used to achieve great things. While some may argue that such plans are too socialistic, the current housing crisis with one million households on waiting lists and an overall shortfall of three million units calls for a post-war-scale solution. There are many such proposals in the public domain, but refining and harnessing them will require an exercise in democratic process and realignment in Britain which, sadly, we rarely see.


Note

This article is mostly about the situation in England but sometimes draws on data for the whole of the UK.


Further reading

  • Home Truths: How Britain's Housing Crisis Affects Everyone by Liam Halligan

  • The Book of Trespass: Crossing the Lines that Divide Us by Nick Hayes

  • Who Owns England?: How We Lost Our Green and Pleasant Land, and How to Take It Back by Guy Shrubsole

  • Rethinking the Economics of Land and Housing: A New Agenda for Sustainable Housing by Josh Ryan-Collins, Toby Lloyd, and Laurie Macfarlane (New Economics Foundation)

  • Building More Homes (2016/7) House of Lords Select Committee on Economic Affairs

  • Progress and Poverty (1879) by Henry George


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