[Land Auctions[ would give authorities a huge incentive to proceed with planning permissions. “Nye Bevan said that he overcame the opposition of doctors by ‘stuffing their mouths with gold’,” …“We would be doing the same thing with local authorities.”
Dr Tim Leunig LSE quoted in Financial Times March 13th 2011
Abandoned to Their Fate
Dr Tim Leunig, LSE academic and former treasury economist, has become a very influential figure to the coalition, despite David Cameron calling one of his earlier reports ‘insane’. However this would now appear to be official government policy.
Dr Leunig is an important thinker who raises critical issues about economic geography and to his merit has raised a key economic question, how to capture the unearned income from granting planning permission, to the top of the political agenda. A radical idea that a few years ago we might never have imagined would be accepted by tories.
My intention here is not to go for the man but the ball. I questioned the practicality of one of his key ideas about to be introduced by the government on his blog, and said I would be writing further on the issue. He said he would be very interested in the conclusions. Given the priority I had to give to a redraft of the NPPF, given ongoing discussions between government and various groups I havnt been able to do so until this weekend. Apologies.
Underlying Dr Lunig’s view are ideas about the shifting economic geography of England. He co-authored in 2008 a report ‘Cities Unlimited’ for David Cameron’s favourite dumb-tank and home of non-peer reviewed dubious pamphlets the Policy Exchange.
The report argued
We need to accept above all that we cannot guarantee to regenerate every town and every city in Britain that has fallen behind. Just as we can’t buck the market, so we can’t buck economic geography either.
‘There is, however, a very real prospect of encouraging significant numbers of people to move from those towns to London and the South East. We know that the capital and its region are economic powerhouses that can grow and create new high-skilled, high-wage service sector hubs.’
The report had three recommendations:
- Increase the size of London by allowing the conversion of industrial to residential land in areas of high employment, creating space for half a million more people
- Expand Oxford and Cambridge dramatically to recognise the fact their highly-skilled workforces make them the most attractive centres for growth.
- Government should stop funding regeneration and give the money to local authorities to spend as they see fit in response to local people’s priorities.
The recognised the strength of several northern cities, including Manchester, Newcastle and Leeds, but argued that they do not have the power to revitalise the economies of surrounding town and communities. As a result, children growing up in these communities suffer from a lack of opportunity compared to their counterparts in London and the South East.
The report made John Prescott incandescent (at least in public media), David Cameron dismissed the idea as ‘insane’ and other Policy Exchange condemned the report as by ‘lim dem boy’ (and the Policy Exchange is not supposed to be the research arm of the Tory Party).
The reaction was gutteral and it is doubtful if Cameron had read a word of it. There are real questions about the economic future of poorer towns surround the ‘core cities’ and the ‘urban renaissance’ ideas of loft living were never much applicable to towns such as Oldham where for the price of converting an old mill loft you could buy a whole street. There are also real issues about whether very strict urban containment around university knowledge hubs such as Oxford and Cambridge is the best urban planning and economic development solution (which is not the same thing as saying these places should grow without form or constraint).
The real issue though was whether or not the total free market approach was the best solution even in terms of economic geography. There is nothing in terms of the inherent competitiveness of place to do business that makes Burnley less suitable than St Albans. What matters is that more educated well off people live in and start business in St Albans than Burnley and with that flows money for schools and public services. The economic geography of England is determined by the geography of wealth distribution, unlike in the 19th Century when the opposite causation flowed.
Ideas into Policy
Despite condemning ‘lib-dem boy’ the Policy Exchange swiftly backed his idea of turning industrial estates to residential estates, it was accepted by the government and they have just completed consultation on the idea. It has been widely criticised and we have extensively looked at the idea on here. Firstly it would have no net reduction in loss of greenfield land, in fact a net gain. This is because employment densities are high in urban areas and low in rural ones. Firms would be forced out of cities and so would their employees as they would otherwise have to pay more on commuting out of towns. The amount of industrial and employment space needed in suburban and rural areas would balloon. Start ups in urban areas like Tottenham for example would be unable to find space. The agglomeration economies of firms being located close together would go, the very reason for cities existing in the first place. Cities would empty out of the poor and firms, even the City of London would become an expensive ‘Mayfair 2’ rather than a financial centre as both Savills and the City of London itself has warned. Outside the ghettos of the rich who don’t have to work you would get a donut city effect like Detroit or St Louis with firms and the working poor having fled to urban sprawl. This idea is repeated in the NPPF which proposes ending zoning for employment.
Whilst the NPPF itself embodies the concept of leaving cities to their fate and leaving locational decisions solely to market forces – i.e. growing the fastest growing towns in the South of England.
As one blogger said this week
What is surprising is that few people have made the connection between Leunig’s fix and the coalition government’s National Planning Policy Framework (NPPF) that promotes a presumptive ‘yes first’ principle on development on restricted land. Developers over-developed on brownfield sites in Northern Cities during the New Labour era, cities like Liverpool are awash with empty homes, office and commercial space. Cities like Cambridge are crammed in so tightly you can almost hear the city squeak, so its understandable that’s where developers would like to target their investments.
It is certainly starting to feel like NPPF is a ‘backdoor’ Leunig fix.
Even more influential though id Dr Leunig’s idea of land auctions. An idea now adopted as coalition policy. The last budget contained a statement that pilots would go ahead. Osbourne and Cable are said to be keen and in the last week Greg Clark is reputed to have said that land auctions will be going ahead.
Britain’s housing system does not work…The only way in which this dismal reality will be reversed is if the planning system is reformed to ensure more houses are built. This could be done from the centre…But it could also be achieved locally, by giving local authorities an incentive to accept development, and the right to say no to proposals they do not want. The best way to do this is to allow local authorities to capture most of the – massive – uplift in values that comes when land is first zoned for development.
The people as a whole create land values, not only by their presence, but also through participation in government, as taxpayers. Schools, firehouses, streets, police, water lines — the whole gamut of public works and services that enhance a neighbourhood are converted into higher land values.
So the problem has been that the public pays for this infrastructure but private landowners benefit. No wonder people oppose development. Finally after decades of playing around with solutions the last government proposed the planning gain supplement which then became the current community infrastructure levy, a means of capturing a part of the uplift to pay for new infrastructure. But only a small part is captured. The current government has also introduced the New Homes Bonus, a boost to council tax revenues for homes built. In the first year of its operation though, despite all hopes being based on it, housing permissions and completions have dramatically fallen rather than risen. Anecdotal evidence suggest that in the north and the midlands, poorer areas, it is encouraging local authorities to ask developers to submit planning applications to boost their revenues, but in the South East, East and South West the hostility to development and political desire to protect existing house prices is so strong that with the abolition of regional targets it is not at a high enough level to make any difference.
He describes a land auction alternative.
In the first stage local authorities would invite offers from landowners, whereby landowners state the price at which they are happy to sell their land. It seems likely that most farmers would be willing to sell their farm for five times its value, just as most homeowners would be delighted to sell their homes for five times fair value. The council would then choose which, if any, of the land offered they would like to see developed, would grant that land planning permission, and auction it to developers.
The successful bidder would pay the landowner the price the landowner had set ex ante, and the additional money would go to the local authority. In essence, the local authority is able to capture almost all of the difference between the agricultural value, and the value with planning permission, which amounts to around £3 million a hectare, or £85,000 per house.
His proposal contains very little detail as to how it would work in practice in terms of the development plan system, but he does say:
Rather than having a periodic development plan, councils would have a periodic two-part auction. In the first stage, they would invite every landowner in their area to offer their land for development at any price of the landowners’ choosing. This is a liberal system, devoid of compulsion. No landowner is compelled to offer or sell their land, and, if land is sold, the price paid will always be the price set by the owner.
This stage would roughly equate to the ‘call for sites’ in current plan making.
The council would then examine all the offers of land, and carry out a ‘local plan’ style exercise to decide where and how to develop. Nationally protected areas, such as sites of special scientific interest, would remain in place. But national governments would no longer issue binding development targets for local governments.
Notice how similar this is to the NPPF approach. Indeed one can see that the land auction system would be the missing piece in the jigsaw of the NPPF – that protesters mouths would be ‘stuffed with gold’.
Once the council decides which land is to be developed, it can begin the second part of the auction process. The council would auction the call options for land it is willing to see developed. Winning such an auction would give a developer the right to buy the land from the original landowner, at the landowner’s chosen price, and then to develop it in line with the council’s plan….Councils would set a reserve price: if the winning bid was lower than the reserve, the land would remain undeveloped.
By giving them an incentive to allow development, in the form of the uplift
in value of the land on which planning permission is granted, the system will change NIMBYs into IMBYs
Why the Land Auctions Model wont work – But the debate is worth having
Lets take a moderately real world example here of a town expansion. It needs to expand by 100 units a year (for sake of simplicity 20% buffer issues are disregarded). So 500 after 5 years, 1,000 after 10 and so on.
The sites considered as part of the Strategic Land Availability Assessment are as on the map above. The LPA has considered and ranked them by combined site suitability and acceptability to a strategy. Green are best sites and red worst. It has also ranked these as shown below.
So rationally the normal phasing might be first 5 years A+D, then B, then finally C and part or all of L.
F would not be chosen but might realistically expect to be chosen in the next plan period.
Now imagine you were the owner of site A or D at the land auction. You might rationally bid very low knowing that the site or sites would likely to be chosen anyway, and even if it were not you could wait 5 years and bid again. Even at a discounted rate of, say, 5% per annum you discounted cash flow land valuation, in terms of premium over and above agricultural land value would not be hugely dented. You might rationally assume that the other owner A or D would think the same. There would not even have to be collusion, simply the rational expectation that the other party would act in their own best interests and assume you do the same.
Lets assume you were owners of B or C. Here you would assume you would normally get permission in 5 years. If you bid very low you wouldn’t harm that. You just bid again on plan review in 5 years time. It is rational to make a low but not very low bid.
Now imagine you are the owner of one of the other sites that might not ever get chosen without land auctions.
Lets say you were the owner of site M. Under normal circumstances you might have to wait 136 years! If you took the current value now if it were zoned and discounted it you would reach a point where this curve would intersect the current agricultural land value plus a minimum rate of profit. That would be the marginal value of the scheme. Each extra pound you bid brings the site forward by a certain units of time. What a land auction is doing is using monetary payments to substitute for the poor sustainability of the site. You are buying off sustainability.
Now of course there is a dimensional problem. The rank ordering and money are non-commensurable. A bidder would have to assume what weight the decision maker would give to money as opposed to sustainability, and indeed what their implied discount rate is. As they might be facing short term financial pressures. Given the uncertainties it is rational the less sustainable the site bid very high.
This issue of differing time preferences get even more difficult when we take away the town. Lets assume the town would be created by the act of planning. Leunig has claimed for example that the new town of Borden in Hampshire is a bad location under the land auction model because house prices near it are high whilst house prices are higher around other existing towns which would be chosen instead. But of course it is a town which creates value and it is impossible to gain value until it becomes a town. Borden and other new towns are of course chosen because of low existing land values, which have the potential following investment, transport links etc. to become very high. If in the classic Ebenezor Howard model you can buy low, retain the land values for the community it can push down rents dramatically, providing of course you can buy low and borrow to develop at a reasonable interest rate.
In Borden’s case if the LPA was under severe short term financial pressure it might accept a very high bid off a landowner of an existing high value site around an existing town. Even though in the medium term the new settlement solution might offer better value. Also you would not be be able to retain the freehold and borrow off it in Leunigs model, you would have to sell it on. With a site that might not come to full fruition for many years and requiring large up front infrastructure bids will be low for the new settlement solution, again even though it might offer the best longer term solution.
So we can see that the two stage auction model sends perverse signals and doesn’t allow the LPA to fully capture the uplift in land values from sites where the planning and infrastructure actions create the value.
Leunig’s model existing in an aspatialand atemporal world where all auctions are made at once and their is only one auction. Planning is not like 3G auctions, it is not all or nothing, different sites can be ranked by more than price, more than one own interest rate, there are multiple stages and there is implied collusion. To get technical for a moment it is not a Cournot game and as such the neoclassical presuppositions that Leunig uses are inapplicable.
The better the site the more incentive their is to bid low. With low bids there will be less funding for affordable housing and infrastructure – this might get squeezed out. An LPA might then go for less sustainable sites and the low bidders would bid again in 5 years. Hence it provides perverse outcomes of both potentially squeezing out affordable housing from the best sites and forcing phasing into reverse with the least sustainable sites being chosen first.
Indeed the only way potentially to salvage the system is with a reverse auction model whereby landowners bid to maximise affordable housing, a system now being introduced in Chinese cities. This also helped reverse the moral hazard of local authorities being overdependent on land sales for municipal income (26% of budgets) and causing them to overallocate land, causing a property bubble which has now popped, and over borrow to service it, causing a $1.7 trillion debt overhang that threatens to take down the entire Chinese economy.
So a badly structured model, which this is, can create perverse municipal incentives with severe macroeconomic risks.
Overall the land auction model is a decided second best to land value taxation. This provides income over a longer period, rather than a short term hit. It does not create perverse incentives to allocate unsustainable sites and it provides an incentive to keep landbanks to a minimum. This is why it was brave to bring up the idea because it has raised the profile of land taxation issues and ways and means of capturing rentier income.
What the public though will be concerned about is the introduction of an ability to buy off unsustainability. If a site is ranked poorly bid high and you’ll get planning permission. This will be perceived by the public as utterly corrupt and only confirm suspicions that the coalition reforms are all about planning permission for sale.
Note: It is unlawful to take into account such bid offers in allocating land. The localism bill would make some financial considerations material but only to granting permission not allocating land. Land auctions therefore require primary legislation which in the form proposed I cant see any government being able to pass.
I should note as well that the land auction model does not work at all for windfall sites, and urban brownfield sites where there is no alternative site.