Use German Land Value Capture System to Make Housing Affordable

Here Here FT

The UK spends almost 10 times as much as Germany on housing benefit but could slash the bill by adopting a law used in that country, which freezes land values at the moment they are earmarked for residential construction, according to a think-tank.

Some 1.4 per cent of UK GDP is spent on subsidising housing costs, compared with 0.81 per cent in France and 0.14 per cent in Germany, according to the centre-left think-tank Policy Network, which is chaired by the former Labour business secretary Lord Mandelson.

The group is urging George Osborne, the chancellor, to consider reshaping the UK housing market through land reforms, bringing the country closer to Germany’s model.

“It is clear that Britain’s broken housing market needs to be fundamentally reformed if construction rates are to jump and the redistribution of taxes for housing benefit due to excessively high rents is to fall,” said Thomas Aubrey, the report’s author.

The proportion of UK GDP spent on housing benefit has increased steadily from just over 1 per cent in 2005, the figures show.

British construction rates have also been lower than those in five comparable European countries — France, the Netherlands, Germany, Denmark and Sweden — based on official data from each country.

Between 1975 and 2014, the UK completed 3.5 new homes per 1,000 people each year, compared with six in France and 4.6 in Germany. In recent years, between 2010 and 2014, the UK was again the slowest builder, constructing 2.2 new dwellings per 1,000 people each year, the report finds.

With the costs of home ownership increasingly out of reach — the average home in London costs 10 times the average salary — growing numbers of people remain tenants, pushing up rents. That in turn has more than doubled the government’s annual housing benefit bill since 1996 to £24.2bn.

Ministers are attempting to address the housing crisis through a series of measures, including overruling councils that are reluctant to build homes and introducing a legal duty for councils to build “starter homes” to sell below market prices. These are included in a housing bill published this month. Separately, Mr Osborne has capped total state benefits available to households.

Mr Aubrey argues: “A lot of this is just tinkering at the margin. I’ve been looking at this market failure for the past few years and there’s nothing in there that looks like it’s going to solve the underlying problem.”

He blames the practice of “land banking”, in which landowners may hold land without developing it, watching its value rise once planning consent is granted.

Some countries, such as Denmark, have tackled this through versions of a land value tax, based on location values, aimed at bringing idle land into use. But in Germany, planning law freezes the value of land once it has been earmarked for residential construction. This is Mr Aubrey’s preferred option.

George Osborne has shown he is willing to put his neck on the line for policies he thinks will help to make the economy more productive

Policy Network suggests regional authorities should be able to acquire land at “close to use value” in dedicated housing zones, through an amendment to the 1961 Land Compensation Act, which deals with compulsory land purchases.

James Pargeter, head of residential projects at Deloitte Real Estate, said housebuilders and developers were restricted by the need to borrow money to finance developments. “It’s not usually a problem of developers not wanting to get on with it. They are working under conditions set during the downturn by their banks and funders,” he said. Housing availability could benefit from more emphasis among planners on the “build-to-rent” sector, he added.

Mr Aubrey, however, believes the Conservative government may be open to more radical land reforms.

Mr Osborne cut tax relief for buy-to-let landlords in this summer’s budget — a move for which Policy Network had lobbied. “[George Osborne] has shown he is willing to put his neck on the line for policies he thinks will help to make the economy more productive,” Mr Aubrey said.

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