How can we make new housing popular?
By Bim Afolami MP
In my constituency, as in so many others, housing is the top issue for young people. Whether it is the problems associated with overcrowding, poor housing quality and insecure tenancies, or the fact that they can see that the opportunity of home ownership that open to their parent’s generation is now closed to them, the housing crisis impacts on the young generation in a deep and profound way.
It was no surprise to me, therefore, that our new polling shows that the top issues for young people are the interlinked issues of the cost of living and the cost of housing. Even those who are adequately housed feel angry that their friends and family, and young people more generally, are being let down by a failed housing market.
The government’s strategy of building significantly more houses is crucial – not least given that frustration over housing is a key driver of the Corbyn agenda. The Prime Minister has promised to oversee a major step change in housing delivery. But this means that we will need to win hearts and minds over to new homes – making sure that they benefit the community. And this would ideally be done before homes are built, so that any new proposal is not just providing sufficient infrastructure but improving an area ahead of new homes.
The creation of value from planning permission by allowing new homes is different from most value creation. That is partly because the value is largely unrelated to effort for the individual concerned, and partly because the sums can be huge. In my constituency of Hitchin and Harpenden, residential land fetches more than £3 million per hectare. The agricultural value is down in the tens of thousands – a huge gap.
The granting of planning permission, therefore, delivers an enormous windfall to landowners and developers. There are currently two mechanisms in place to capture this. The first is the Community Infrastructure Levy (CIL), whereby a set charge per square metre is imposed when a site is given approval. In addition, there are Section 106 payments. Levied at the time permission is granted, these are effectively contractual payments made to the council by the developer. CIL is fixed and Section 106 is flexible, but both are paid by the developer to the council.
I would argue there is an additional point at which value can be extracted from the system. But to work, extra value would have to come from the landowner rather than the developer. This could be extracted at the point where the land is put into a local plan.
The local plan is the document that governs all planning decisions in a community, setting out a land supply for the next five years on which development should take place. When a site is put into the local plan, the land’s value increases very substantially in value, because if land is in a local plan, the council is saying it is very likely to approve the site if it is put forward for approval and it is seen as being suitable for development.
The new National Planning Policy Framework (NPPF), the document which governs all planning decisions, states that the land in the local plan’s five-year land supply must:
“be available now, offer a suitable location for development now, and be achievable with a realistic prospect that housing will be delivered on the site within five years”
So, the current process of capturing land values for infrastructure is flawed, because it assumes that the increase in land value is a one-stage process, and that the only person who should pay is the developer – when in fact the increase in land values is a two-stage process, and the landowner and the developer can both make contributions.
Current system assumes
- Land gets permission
- Land increases in value
- This value is taxed via CIL and Section 106
Reality on the ground
- Land is in local plan
- Land increases in value
- Land gets permission
- Land increases in value yet again
- This value is taxed via CIL and Section 106
The current land value capture mechanism therefore fails in two ways. First, it fails to maximise the levels of payment possible because it pushes the entire burden on to one stage and one player – the developer. Second, it fails to align with the local plan system. In theory, our entire system hinges on local plans, but there is little incentive to bring forward a local plan in the current system. In fact, the system acts as a disincentive for councils to bring forward local plans, because they recognise a definite increase in housing needs and commit to the allocation of specific sites, but do nothing to win over local people living near to these sites.
This all explains why local plans are rarely updated. According to the Planning Inspectorate’s local plans progress data monitor, almost half of local plans were published before the NPPF was issued in 2012. Only around half of local plans have been published in draft format since then (many of which have not been formally adopted – the final stage in having an up-to-date local plan). The Government is in favour of such local plans but has not found a successful way to encourage them to be put in place – beyond threatening communities with a development free-for-all in their absence.
The case for a Permission Value Tax
To rectify these twin problems – the failure to bring on board local people, and the need to maximise the levels of value obtainable in return for granting permission – I propose a simple solution.
When a local plan is adopted, landowners on all sites that are accepted as part of the five-year land supply should be forced to pay a tax to local communities based on the increase in the residential value of the land.
This would create a windfall tax on unearned profits by landowners when agricultural (or other non-residential) land is put forward for development, and accepted by local councils as part of their official plans. This would generate very substantial upfront funding and help to win over local people who live near the site.
I propose that this tax should take the form of a 10-20 per cent levy, depending on the area and the type of land. In much of the South East, and on a greenfield site, 20 per cent would be more appropriate. In the North, or on a brownfield site, 10 per cent would be more suitable. But this could be set at the local plan stage for each area and for each type of site. It is important this does not become too complex – the main flexibility should come from the Section 106 payment that would follow.
Section 106 would still remain and could be adjusted as necessary to ensure sites were still viable. The current levels of developer contribution paid to obtain permission are worth £6 billion in 2016/7. Given that 183,000 new-build homes were built in 2016/7, of which around 50,000 were affordable housing, this means that each of the 130,000 private sector properties is paying around £50,000 in total developer contributions. I would argue that perhaps the first £10,000 of this would be best taken at the local plan stage rather than permission stage.
This is not, however, simply a cash-grab by the state. This money must go towards the priorities of local communities, rather than being passed up the food chain to district or county councils, let alone the Treasury. The Department of Housing, Communities and Local Government should therefore evaluate a wide range of scenarios for how this might work in practice (e.g. neighbourhood plans, new powers for parish or town councils, or even direct votes). The key is that this should be about what genuinely is popular with existing local communities, rather than just going into district or county council coffers.
To help make this more palatable for the larger house builders and landowners, who are likely to protest at these changes, I would argue this charge should replace CIL, which would then leave only a negotiated Section 106. CIL is already paid at the point where permission is granted, at least in theory, so this helps to ensure that the housebuilder and landowner do not have to make two payments before work starts on a site.
This would then have two positive benefits.
- Make the politics of more homes and putting a local plan in place more positive. There is currently no incentive for an area to accept new homes. There is also little incentive for a council to put forward a local plan. In fact, as noted, it is actively difficult to do so, because you are telling local communities that they are going to house more homes, and their infrastructure and environment will be worsened. By creating a pool of money upfront when a local plan is put in place, and giving this directly to local communities, it will substantially shift the politics of housebuilding and make new housing popular.
- Increase the total amount extracted from land. Because the current system puts the entire burden on a single negotiation, and single payer in the form of the developer, it is almost certainly failing to extract the maximum value for communities and councils from the rise in land values. How far these changes go is hard to predict – but it is clear that this would increase overall funds raised. And given the sheer scale of the value created when planning permission is granted, it is hard to see this Permission Value Tax deterring people from putting forward land from development: they will still make a substantial gain. Existing local communities will get more money than they do now, for their local priorities, as a result of new homes being built nearby.
A worked example: The Permission Value Tax in practice
Let us say a hectare of land in the South East is worth just £25,000 as farmland, but £1,500,000 with residential planning permission in the local plan.
The hectare is put forward as a greenfield site to be allocated in the local plan – and when it is allocated, there is a charge of 20 per cent levied on the final land value, based on a likely 30 homes a hectare (given that the area is low-density). This would give a levy of roughly £300,000 levy for the local community.
In total, in the next five years in the local plan there are 600 homes a year, totalling 3,000 homes over the next five years in greenfield locations. With a total of 30 homes a hectare, this means that 100 hectares are required to get a five-year local plan in place, each hectare raising £300,000 for the local community.
A five-hectare site of 150 homes would give a levy of £1,500,000. This is a comparatively large sum for a local community and could pay for a new community centre, repaved roads for the area, new landscaping or go into a trust to provide support for much-needed local services (e.g. a pub or local shop). Because it would be at least partially on top of Section 106 payments, and because it would be delivered before the first home is built, it would show local communities how new homes will actually improve where they live.
Just getting the local plan in place would raise a total of £30 million for local communities across the entire area – all going to communities living around the sites being developed under it.
Rather than the current system, where the Government simply pushes areas to put forward local plans allocating new homes, this would be a major new incentive for local people to accept new homes and the council to put a local plan in place.
No new laws or regulations are needed
One of the most attractive aspects of this proposal is that it could be brought in immediately, with no need for primary legislation. The “Lucas Clause” in s154 of the Housing and Planning Act 2016 allows the Secretary of State to “make a planning freedoms scheme, having effect for a specified period, in relation to a specified planning area”, if the following conditions are met:
- That the relevant planning authority has requested the Secretary of State to make a planning freedoms scheme for their area; and
- That the Secretary of State is satisfied that “there is a need for a significant increase in the amount of housing in the planning area concerned”; and
- That, after due consideration, the planning freedoms scheme will contribute to such an increase.
It seems likely that these changes would contribute to a significant increase in the amount of housing in areas that need it – and councils should be encouraged to apply for this freedom as part of putting their local plan in place.
It is hard to see why there would not be cross-party support for this clause being used in this way. Why would Labour seek to defend unearned windfalls for landowners? And young people will see this proposal as a powerful way to make sure that new homes can be built with new infrastructure – as part of the push by this government to reach 300,000 homes by the mid-2020s.