The land market is key to solving the housing crisis

An excellent piece by Toby Lloyd titled “Understanding and adapting the land market is the key to solving our housing crisis” appeared recently on the LSE website. Its a “must read” for anyone interested in getting to the bottom of the issue of housing affordability. Lloyd’s analysis is in essence a Georgist one. Toby LloydHe states that understanding the economic fundamentals of how the land market works is essential if we are to come up with effective solutions. Take this passage for example, which concerns The Viability Trap. Every District Councillor or local body planner dealing with residential development needs to understand this:

“When you [a developer] are trying to work out how much to offer the landowner, if you make a sensible estimate of where house prices will be in three years you’re likely to be outbid by someone who makes a more bullish estimate. If you assume you’ll have to follow local planning policy and provide, say, 30% affordable housing, your offer will be trumped by a rival who reckons he can screw the planners down to 20%.

The result of the land auction process is that the worst scheme, the one that offers the least to the community, the poorest quality homes, and charges the most for them, is generally the one that will happen, because this is the one that offers the most cash up front to the landowner. As a result, development is always already at the margins of viability.”

Lloyd stresses that any attempts to make housing more affordable by pumping public money into the sector will simply result in further rising land values thereby making housing more expensive while lining the landowners’ pocket. We can see this effect of George Osborne’s Help to Buy scheme right now.

Land prices are a one-way ratchet: they rise when the economy is booming but they don’t fall (at least not very much) during economic slumps as land owners face no costs of holding land out of productive use. They are content to play a waiting game, holding derelict land for decades if necessary, until the economy rises once more.

The only way to tackle this is to impose costs on the withholding of land from use. In effect this means implementing a policy of “use it or loose it.” Failure to grasp this nettle will condemn us to a housing affordability crisis without end.

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