Development for the many

A profit-led development model is at the root of Britain's dysfunctional housing market. It’s time for a new approach that puts the public interest first.

Laurie Macfarlane
6 June 2019, 9.00am
Persimmon Homes sign near Larbert after the housebuilder reported pre-tax profits surpassed £1 billion.
Andrew Milligan/PA Wire/PA Images

Almost everyone agrees that Britain is experiencing a housing crisis. But ask a group of politicians about the nature of the crisis, and its underlying causes, and you will hear many different answers. Some will blame convenient scapegoats such as immigration and ‘red tape’, while others will say that ‘we’re just not building enough homes’. One thing is certain: few will mention the real culprit – our broken land economy.

Our new report published this week, ‘Land for the Many’, aims to put this neglected issue where it belongs: at the heart of political debate and discussion. The report sets out a bold agenda for changing the way that land is used, owned and governed. Our recommendations are wide ranging, and include proposals for increasing transparency of land ownership, overhauling property taxation, de-financialising the housing market, increasing community ownership, democratising the planning system, and much more.

But one of the most overlooked aspects of Britain’s housing crisis is the development process itself. Although poorly understood, Britain’s profit-led development model lies at the heart of Britain’s dysfunctional housing market.

Private windfalls, public squalor

Ever since the state began to withdraw from housing supply in the late 1970s, development in Britain has been overwhelmingly reliant on private developers. The duty of these companies is to their shareholders, and they shape the built environment in whichever way will maximise shareholder value. In many cases, this bears little resemblance to the type of buildings, tenures and amenities that communities actually require. Britain’s major developers operate a ‘speculative model’ of development, which is a cyclical process of raising finance, buying land, securing planning permission, constructing the homes and finally selling them. Several important features of the British housing system are the product of a reliance on this model.

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Because development can be risky, developers prioritise strategies that reduce their exposure to market risks, such as buying up land allocated by the planning system, building strategic land banks, and seeking to dominate local new-build markets to reduce competition. A residual valuation methodology is typically employed to arrive at an offer price for land, which involves estimating the final sales value that the developer expects to get from the new homes, and then subtracting all of the costs expected to be incurred in building them, to leave a residual amount. The price offered by the developer for the land must come from this residual value. In a country like Britain where housing has been heavily financialised, expectations of future house price inflation feed back into higher development costs, as the developer with the most bullish expectations of house prices will typically offer the highest bid and secure the site.

The main beneficiaries of this system are landowners, who make vast windfalls from escalating land prices. But developers that are able to successfully navigate the land market are also able to make handsome rewards – often at the expense of wider society.

This is because once land has been secured, developers face a strong incentive to cut costs when designing and building new homes, which often results in poor quality housing. They also face incentives to serve the top end of local markets, which rarely meets the needs of local communities. Developers are also incentivised to ‘drip feed’ new homes onto the market, as releasing too many homes at once may reduce house prices in the area, which in turn would erode the developer’s profits.

Overall, this business model means that the success or failure of developers is largely determined by their ability to navigate the volatile land market, rather than by the quality of the buildings they construct or their ability to meet the demand for new housing.

Misguided government policy – most notably the Help to Buy scheme – has further distorted this broken system. Although Help to Buy subsidies were intended to help first time buyers, research has shown that the primary beneficiaries of the scheme have been developers, who in response to the new subsidies simply raised the price of new developments by almost exactly the amount. Last year, Help to Buy subsidies helped Persimmon record a record-breaking £1 billion profit, which resulted in chief executive Jeff Fairburn pocketing a bonus of £110 million.

A new model

It is clear that this model is failing to deliver Britain’s housing need. Evidence from around the world, including from Britain's own history, indicates that designated public bodies can play an effective role overseeing the ownership and development of land in the public interest.

In the report we propose that new public and democratically-accountable Development Corporations should be established with the power to purchase and develop land in the public interest. These Development Corporations would act as the prime mover in the land market, working closely with local authorities, planning departments, landowners and other key stakeholders to acquire and prepare sites for new housing developments, new towns and regeneration projects. Once land has been assembled, the Development Corporations would contract out construction to housebuilders, prioritising local small and medium-sized firms, who would compete with each other on the basis of quality and design of house building. The land could be retained in public ownership and used for social housing, or leased or sold for private housing or community schemes.

By removing private developers from the speculative land market, our proposals would reduce volatility in the land market, lower the cost of land for development and ensure that land is strategically managed to serve the public interest.

Combined with reform of land compensation law to enable public authorities to acquire land at near use value, and new powers and resources for local authorities to engage in pro-active placemaking and community participation in planning, our proposals represent a bold departure from the profit-led development model of recent decades. At the same time, our proposals rekindle the spirit of Britain’s more radical past, most notably the post-war New Towns programme. For each New Town, a public development corporation was established which purchased land compulsorily at agricultural prices, drew up a comprehensive masterplan for the town, and then built the necessary infrastructure using money borrowed from the Treasury. They granted planning permission on the sites they owned and sold them to house builders, using the uplift in the value of the land to repay the loans.

This combination of low-cost land acquisition, strategic plan-making and the power to determine planning applications proved to be a powerful means of delivering affordable housing. There is no reason why it could not do so again.

Private sufficiency, public luxury

Throughout our report the proposals are guided by the principle of ‘private sufficiency, public luxury’. As George Monbiot has highlighted, there is not enough physical or environmental space for everyone to enjoy a life of private luxury, but there is enough space, if land is used rationally, for everyone to enjoy shared public luxury: excellent parks and playgrounds, public sports centres and swimming pools, galleries and public transport networks.

With regards to development, this means ensuring that the provision of high quality, affordable housing is not pursued in isolation, but in concert with a holistic plan for re-designing our communities around modern and low-carbon public transport links, high-quality amenities and plentiful public space.

Big challenges require big solutions. After decades of serving the few, it’s time that development in Britain started to meet the needs of the many. Only then can we fix Britain’s broken housing system, and start to build a fairer and more sustainable economy.

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