Auctioning Planning Permission?

Think tank Centre for Cities are this week, in a private seminar, turning their attention to the so called Land Auction proposal (which the Government is looking at in its Growth review) originally proposed by LibDem Tim Leunig from think tank Centre Forum in his paper….

This mis-named proposal is nothing to do with auctioning land but instead is about auctioning planning permissions in the hypothetical circumstance where a local authority is considering expanding a town outwards and is trying to decide which green fields to allocate for housing.

The idea is that the local authority would invite all land owners to bid for planning permission. They would then select sufficient bids to deliver the amount of housing they thought necessary and would select those bids that made them the most money (taking into account the cost of any infrastructure they needed to provide and presumably the likelihood of them being elected next time round having spent that profit). The basic assumption is that this is a more economically efficient way (market based) of determining where development goes.

There is a lovely irony around this proposal in that it represents the nationalisation of development rights as was originally the intention of the 1947 planning acts but which, in a classically British fudge, we have reversed by reducing the level of taxation and by a process of plan making which delivers development rights to some land owners periodically (through local plans) with a charge/tax that bears little relationship to the value of the rights.

There is a huge amount of ignorance surrounding these ideas so it is probably worth starting by exploding a few of the more common myths.

1                    Land doesn’t automatically go up in value when it gets planning permission.

2                    Building more houses in Essex doesn’t reduce house prices in Westminster (it doesn’t even reduce house prices in most parts of Essex).

3                    The planning system does not set out to prevent growth (in fact the reverse, one of its functions is to plan the infrastructure necessary to achieve growth most effectively)

Each of these is worth a few words of explanation.

The Value Increase on Planning Permission Myth

Land does go up in value when it is re-allocated in a local plan or gets planning permission for a higher value use than it was previously allocated for and where the infrastructure costs are either state funded or less than the increase in serviced land value.. The always used example is a piece of land zoned for agriculture on the edge of a growing town easily accessed from the main road and with services which unexpectedly gets planning permission for housing.

In fact this is a special and quite unusual case. 80% of homes in 2009 were built on previously developed land which usually means it already has buildings on it and development is usually for more buildings often for the same use (roughly a third of the time) and usually in an existing urban area. In these cases there are flocks of land buyers, working for the house builders in particular, who are watching like hawks for the moment when the value of the existing buildings on the land is overtaken by the value of land for a larger development. As a result, there is no significant increase in value when planning permission is granted.

This is the reason why s106 obligations, as they have developed over recent years into a significant financial burden on land owners, and similarly Community Infrastructure Levy (CIL) are such a bad idea. By reducing the land value for development they delay the moment when the development value of the land exceeds its existing use value and so reduce the supply of land for development. A Government pursuing growth would revise s106 exactly as the Government is doing (back to its original state as a contract between developer and planning authority where the planning authority contracts to deliver those things only it can do and which are absolutely practically required in order for the development to take place).

What it wouldn’t do is proceed with CIL. Or if it did, it would require that CIL could only be used to pay for infrastructure which had already been built. If the Government really wants growth it is going to have to fund the infrastructure required to deliver it. InfrastructureUKis busy looking at this at the moment.

The Building More Houses Reduces House Prices Myth

That house prices are not particularly affected by increasing supply was amply illustrated by Kate Barker’s first report for Gordon Brown (we would need to build around 400,000 houses a year, against around 100,000 at the moment) to achieve house price growth in line with inflation). This piece of policy based evidence making, commissioned to prove the case for more house building, showed that vast numbers of new houses would be required to make tiny reductions in the rate of growth of house prices.

Even this work was limited. It didn’t really investigate the geographic impacts at neighbourhood level for example. Neo classical economics is based on a number of simplifying assumptions, most of which do not apply to the land market where each piece of land is unique, of limited substitutionability one with another, a capital asset and so on. It turns out that it is possible to swamp the land market in a single neighbourhood but really quite difficult to do it in every neighbourhood. One of the best examples I have seen recently was in Melbourne, Australia where the oft amended growth boundaries were having no apparent impact on CBD prices and indeed even on the suburban fringe it was proving difficult to moderate price increases through supply increases.

The Planners are Enemies of Enterprise Myth

And finally the planning system. The bit of the system most politicians and the public see most often is the development control side and it is true that this is the bit of the system that has been growing and where the documentation, costs and time required to achieve a planning permission have been increasing. It is also true that the politics in the system has often tended to be NIMBY driven and so the appearance of the planning system as enemies of enterprise is when seen through the lens of house builders and land owners and the people they lobby in Government.

In the house building business model, firms often buy land without planning permission and then try and maximise what they can build on it, ignoring many of the costs their proposals will impose on others. The major function of the development control system these days is to internalise those costs so that the house builder pays to mitigate the costs it would otherwise impose on the local community and the planet.

We can certainly improve the system and this is a valid debate, we can also debate the balance between market failure and government failure as played out in planning policies and we can look at the use of the planning system to drive public infrastructure investment. But to dismiss the system and its operatives as anti growth is simplistic and ignorant.

So where does this leave the so called Land Auction proposal?

We can say for certain that the Government proposal to do this for public land only as a pilot is completely barking mad. Auctioning planning permissions may work in certain circumstances but we can be pretty certain that there are no circumstances where it makes sense for public sector land owners, and only public sector land owners, to bid for planning permissions!

Who ever made this ignorant cock up is presumably currently covering their tracks by getting as much public land on the market as possible (despite the lousy market timing) and will no doubt be making sure some of it is sold through auctions!

Piloting planning permission auctions may make sense but it seems almost certain that you would do that in a place based way. You might also only be able to do it where there was no local plan (or after producing a new one with land auctions in mind) because otherwise you might be removing development rights that had already been granted and might become liable for compensation to land owners which would rather undermine the process.

Before we can even design a land auction pilot we would first require some clarity around principles and objectives. Do we think society or individuals own development rights or do we want to continue with something like the current fudge? Do we want growth quickly now, long term competitiveness, environmental sustainability (Greenest Government Ever anybody?), to be re-elected and/or a long list of other things like Tech City, more housing and so on.

We would then need to see if we could design a pilot that looked like it would work having thought through all the potential economic, financial and legal elephant traps.

Hopefully the Centre for Cities can help take us at least part of the way down this winding road.

3 Responses

  1. Chris

    As you say the proposed auction process is a nonsense. It cannot work with (a) the present planning system and (b) a mature land market. And it is simply bizarre to suggest that it can work when applied only to the publicly owned part of the potential land supply.

    But I fear that you are also in danger of further myth making.

    First you imply that CIL/s106 obligations reduce the value of land. Properly used they should only reflect the impacts/externalities of development. Historically they have broadly done so, albeit imperfectly failing to cover all costs and without giving any adequate credit for the future net revenues from that development. However, CIL/s106 costs are not really a reduction in value — they simply ensure a proper value for land.

    Second, you dismiss the levels of value that can be transferred by an allocation or the grant of consent. While 79% is the most recent available figure for development on brownfield land (and even there there can be a value difference depending on the existing use) this is an historic high and is likely to fall, at least back to the 10 year average of 73% and possibly back to the 52% that applied before the brownfield target came in (figures from the CLG Impact Assessment of the draft NPPF. However, even at a 20% level there is a signficnt value that is worth thinnking about.

    Third, there is a bit of a myth about what the 1947 legislation was meant to achieve. The Barlow and Uthwatt reports, and Silkin in the Commons, make it fairly clear what was intended. The real irony is that we presently have a planning system built on a mechanism that was not really meant to deliver a planning outcome — part of the reason the legislation was historically value free. It was largely a vehicle for transferring values, and we should not be surprised that a system designed for such a purpose sometimes gets used in that way.

    .

  2. This is a comment from David Brock of Mills Reeve.

    Chris – this is an interesting post. And I do agree with you that we need to have clarity about principles and objectives. In that spirit we should be clear that the 1947 legislation did nationalise development rights, effectively without compensation. The tax on development was also abolished in 1951, but that does not lessen the fact that the State now owns development rights (albeit against the background of a presumption in favour of development which dates from 1923).

    I agree with Stephen about the true purpose of s.106 and CIL. The trouble is that Councils and Government treat them as taxes.

    Land auctions as envisaged amount to a new tax, on top of the uncompensated nationalisation. I blogged on your post on Plan-it Law on Monday (and did try to make a comment here but must have failed to hit the right buttons – sorry). Here’s a link http://www.plan-it-law.com/2011/07/land-auctions.html .

    Finally, Stephen says the aim of the 1947 legislation was to transfer values. That may have been a side aim of some Labour party MPs. But the Uthwatt Report and Lewis Silkin’s speech makes clear it is about ensuring that the system of compensation for restriction of development does not hold up post-war reconstruction. In other words, the legislation was pro-development.

  3. Guys – please – spare us the over-complex economic philosophising and byzantine auction systems. IF S106s and CiL, and affordable housing taxes didn’t exist and the property industry simply paid corporation tax like other businesses, and central government let local government keep enough money so it could do what it is supposed to do, AND private housing wasn’t exempt from capital gains tax, AND RSLs didn’t run around with more money than sense, then we might stand a chance of having a normal housing market. Absolutely no danger of that though while all flavours of both national and local politics are so rooted in gerrymandering social-rented/affordable provision and/or home ownership, or both at the same time.

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