Sharing Land Values to Build Better Places

In this month’s HSP knowledge piece, we explore the concept of land value capture. To meet the growing urban, social, and environmental challenges of the 21st century – of which affordable housing is arguably one of the most defining - it is imperative that local authorities find new or additional sources of funding. Land value capture is a policy approach that enables communities to recover (part of) the financial betterment that results from public investment or government action. It has been implemented in different ways around Europe, yet according to the OECD, there is little comparative research and documentation on how it is being used and where. In this piece, Dr. Nicholas Falk delves into the potential for land value capture in the United Kingdom.

Dr. Falk is Executive Director of the URBED Trust.

Cities and regions across Europe are struggling to keep housebuilding efforts in line with growing demand. In many countries, the level of housebuilding is lower today than in previous decades. Britain, which is the focus of this piece, is at a turning point, where none of the concerns that are tearing communities apart can be met without fundamental changes in the way urban growth is planned, funded, and organised. The scale of the housing task is huge; a report of Shelter’s Commission on the Future of Social Housing called for 100,000 social housing units to be built each year, a third of the government’s overall target, and many times the current level of supply.

Young people feel alienated by the seeming impossibility of acquiring a home of their own and call for radical changes now that will help to protect life on our planet. Elderly people are worried by the escalating costs of care and by an uncertain future. Place-making needs to be more inclusive, and this will require a massive increase and shift in investment. In the UK, there is growing agreement that building enough housing and creating a more sustainable (and fairer) society, depends on greatly increasing investment in local infrastructure, especially transport and affordable housing. But no-one can agree on how this should be paid for, or how regional disparities are to be addressed. As over Brexit, the UK seems stuck. So, could land value capture offer a way out?

The case for land reform starts with raising additional finance to help fund local infrastructure by harnessing escalating land values – a tool that has been neglected for too long. Land matters because the price of a house only partly reflects the cost of construction. While the costs of construction are quite similar across the country (allowing for variations in size and quality), it is the price of land that explains the main differences between costs in different areas. Although property rights have largely come to be seen as inalienable, property values are largely created by public investment in infrastructure such as transport or by the protection created by planning controls such as the Green Belts around cities. Land values and the reduction of risk are the products of collective efforts, not individual enterprise. As they largely result from infrastructure and past public investment they should not be appropriated or ‘captured’ as if they were a personal possession. Rather, they need to be shared.

The windfall gains that accrue to landowners as a result of public investment and collective effort - also known as the ‘unearned increment’ – is a phenomenon that has been discussed for centuries. Growing land values create incentives for landowners to hold off on releasing land for development. Unless there is clear, long-term leadership, sites remain stagnant, as the holding costs are low while, as in a gold mine, the values are expected to rise for ever. As long as the developer can ride out recurrent property collapses (the cycle is every decade or so), the long-term investor cannot lose. To create a better-balanced Britain in social, environmental and economic terms, government needs to harness the uplift in land values from development, and channel investment into local infrastructure where it will create most value. This includes more social and affordable housing, as well as renovating worn-out transport and utilities.

My proposals for immediate action are put forward below. They draw on what has worked in the past as well as research into best practice around the world:

Proposal 1: Spatial growth plans should distinguish between areas in terms of their economic potential and related land values. They can promote self-funding development in growth areas where it will add most value, without penalising areas where regeneration is needed. Most areas will be untouched by this change. The Dutch VINEX plan provides a good model for how to increase the housing stock where the environmental impacts will be least.

Proposal 2: A better model for land assembly should tap ‘marriage value’ from putting adjoining land together on larger sites and avoid ‘free riders’ (who hold land back until values have risen). This will open sites to a much wider range of developers and occupiers. Development frameworks should be used to shape land values and reduce uncertainties. Change to the Compensation Code will be needed. The French Zones d’Amenagement Concerté provides a good precedent for our proposed Land Assembly Zones.

Proposal 3: A development land charge, implemented as a levy or tariff on the sales value of new housing in growth areas, could replace the Community Infrastructure Levy and possibly other forms of property taxation on larger sites. This would provide a straightforward means of funding local infrastructure, such as social housing, provided the proceeds are hypothecated to the area where it is raised.

Proposal 4: Land value rating should be tried out in Growth areas to redistribute wealth and narrow spatial differences. Funds need to be raised from all property-owners, not just from developers. Values must be reassessed more frequently. Modern GIS systems and aerial photography make it much easier to distinguish between land and buildings. Small businesses and housing can then be encouraged to use space in failing town centres, and VAT removed from refurbishment.

Proposal 5: Property tax reform needs an authoritative Commission to recommend the best ways of rationalising the various sources of funding such as council tax, inheritance tax, stamp duty, the Community Infrastructure Levy and Section 106. This could provide local authorities with better and fairer sources of funding without increasing national taxes. Split level rating has many appeals, and taxpayers can see where extra funds are going.

Proposal 8*: A Municipal Investment Corporation should be set up to boost local authority capacity in devising and evaluating good projects. This will help package finance from all sources to raise investment levels to European levels. It will replace the role of the European Investment Bank and provide regions with the equivalent of the French Caîsse des Depots, and German KfW, and most relevant of all the Dutch BNG.

*The proposals were selected from a full list of eleven which you can find here.