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“It is a truth universally acknowledged that, in areas of high demand, the high ratio of house prices to incomes creates a serious problem of affordability,” said Sir Oliver Letwin in his interim report on the issue of land banking, released today.
It’s also a truth, while not acknowledged universally, that land apportioned full permission for development becomes more valuable than without.
Another economic pseudo-truth is that when demand increases for any given product, the price of said product should be dependent on the level of supply.
And while Sir Oliver may have held these truths to be self-evident in his analysis, his team have not taken the quantum leap and found that developers holding onto this land will want to control the supply of homes in order to maximise their profits and keep their shareholders happy.
Indeed, Sir Oliver said in his report that the “allegation” of major house builders engaging in land banking was “implausible”.
“It is of course true that, although the land market can be highly volatile, land (unlike most assets) does not depreciate, and has generally tended to increase in value across the cycle, and has a ‘real option’ value,” Sir Oliver wrote.
This much appears to be true. LGC’s snap analysis of the Ministry of Housing, Communities & Local Government’s previously published statistics found an approximate 20% increase in land value across England between 2014 and 2017. Sir Oliver’s argument that followed, however, appears more controversial.
In first finding that speculatively holding land could “maximise” a developer’s “profitability”, Sir Oliver said that he could not “find any evidence that the major house builders are financial investors of this kind”.
“Their business models depend on generating profits out of sales of housing, rather than out of the increasing value of land holdings; and it is the profitability of the sale of housing that they are trying to protect by building only at the ‘market absorption rate’ for their products,” Sir Oliver said.
Sir Oliver is not the first government reviewer to find in this way. The Lyons Review (2014), Callcutt Review (2007), and the Barker Review (2004) all concluded similar findings.
So if the government cannot find the evidence, then why does the pernicious rumour persist?
The answer could lie in Sir Oliver’s material for inspection. The majority of Sir Oliver’s interviewees are gainfully employed in the construction, lobbying and developer industries, while fourteen of his fifteen site visits were to “very large” building sites in the south-east of England. The one site outside of this area was to a garden town in the Conservative stronghold of Cheshire West & Chester.
Sir Oliver said in his closing his report that he had “heard anecdotes” of the practice of land banking and is “inclined to believe” that it is a “serious issue for the planning system”.
“But it is not one that is consistent with the business model of the major house builders,” Sir Oliver said.
By Robert Cusack, reporter