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The role of profit in ambition for housebuilding

January 14, 2016 4:45 PM
By Joe Otten | Tue 15th December 2015 in Liberal Democrat Voice

Houses being builtWe have planning permission for around 8000 units granted and unstarted in Sheffield, and numerous brownfield sites which are considered unviable for development. The authority is in danger of not meeting its housing land supply, and a green belt review is looming. This is a northern perspective, and I daresay the issues are different in the south.

Now a common feature of the planning system as it operates in practice seems to be the negotiation between planners and developers to add conditions and extract gains from developments to serve public interest goals, such as:

  • aesthetic standards
  • provision of affordable housing
  • homes of a different size to what the developer wishes to build
  • higher or lower densities
  • building to particular eco and other standards

A planning policy is supposed to be clear what is allowed and what isn't, and often developers will stand by their own interpretations and appeal if necessary, but others will negiotiate and make concessions.

This came up at a recent scrutiny committee looking into the problems facing house building in the city. Planners explained how, for example, they had persuaded one developer to build two storey houses rather than bungalows at one edge of a development so that the aspect from the district centre was more in keeping. A councillor complained that this had delayed the development for a year.

Some developments which are delayed by a year will never happen. Developers might get board-level authority for the capital spend valid for 6 months, and if a council cannot complete the sale of land and grant planning permission in that timescale, the opportunity may be lost.

My point today is nothing to do with how strict or lax planning law and planning policy are. This is about a process whereby planners are doing their jobs correctly by extracting every bit of gain they can from every development.

I would always prefer a public gain over a windfall profit to some developer, though some demands are of much less value than others in relation to their cost. But the aggregate effect of always extracting the maximum gain is that there is less profit to be made, and less appetite among developers of getting on with the job of building houses. There is a viability test with a generous sounding profit margin which gives developers some assurance. But this "minimum" profit margin in policy may be more like a maximum as all profit above that margin is extracted in gain or restricted by conditions, and the downside of commercial risk is still present.

When I questioned the process, it was flatly denied that allowing developers to make more profit would encourage them to get on with the job of developing. The most basic understanding of economics, or of how to run a business would confirm that it does. But even for asking the question I have been condemned in full council, never mind that I didn't get as far as asking the next, more interesting question: how much housing are we losing for these policy gains and is it worth it?

You will never get the trade-off right if you deny that it exists at all, preferring to whine at developers for not building, and whine at the government that land-supply rules have forced a green belt review.

In any other business shortage leads to high prices, and it has in housing. In any other business high prices lead to high profits, but we employ people to squeeze the profits out. In any other business, high profits attract investment, boost production and thereby deal with the shortage. Not in housing.

If we are serious about building 300,000 homes a year, maybe it is time to become more relaxed about profit.

* Joe Otten is a councillor in Sheffield and Tuesday editor of Liberal Democrat Voice, described by The Liberator as a 'fanatically loyal Clegg acolyte'


William Davison - Alter

Re "If we are serious about building 300,000 homes a year, maybe it is time to become more relaxed about profit."

That should read "If we are serious about building 300,000 homes a year, maybe it is time for a Land Value Tax"

In Pennsylvania, they found cities that had Land Value Tax, had 16% more construction for every 1% LVT shifted from traditional property taxes, so a 3% LVT as parts of Denmark have, could create 48% increase in construction.

This idea that throwing good money after bad at developers (eg. help to buy) or somehow tweaking the planning system is going to change the incentive to speculate on land and land bank, sometimes for decades, is fantasy. Most businesses have to get the maximum income out their assets as they depreciate each year or they go bust. But land does not rust or become obsolete like capital assets. Land grows in value over time without the landowner doing anything with it, especially if they can persuade some gullible politician to give them money or build infrastructure for free. LVT would force landowners to use it or sell it to someone that will use it. Many small developers like the idea because the big developers with their land banks and ability to outbid them means they are locked out of the market. If a manufactures leaves capital assets idle they go bust. Land Value Tax makes the developer's business model the same as every other business, i.e. there is no unearned increment from owning land.

As Winston Churchill - Speaking in 1909 for the People's budget said:

"Roads are made, streets are made, railway services are improved, …water is brought from reservoirs a hundred miles off in the mountains - and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced."