Tim Worstall

Housing Land Banks

So the OFT is going to investigate the housing industry again. One possible misconception is this:

This combines with the fact that tax is
not paid on the gains realised in the value of development land until
the land is developed, a policy that often makes it more viable for
developers to hold that land as security rather than develop it.

Well, do they? Do housebuilders hold huge land banks upon which they don’t build?

Mr White also warned the OFT against attacking land banks. "Most
housebuilders have a little over two years’ land with full planning
consent. It is not unreasonable to expect that sort of lead time. To
suggest otherwise would be a recipe for housebuilders going out of
business."

The question is, how long does it take to get planning permission? About two years you say? Well then, that’s the amount of land with permission that a builder will need to keep in stock, isn’t it? If you’rerunning a copper cable factory and you can only get copper drawing wire delivered once a month then you’regoing to keep a month’s worth of material in stock, aren’t you? Possibly a little more in fact. If you’re a village shop and you go to the Cash N’ Carry once a week then you get a week’s supplies each time, don’t you?

If gaining planning permission takes x years then you’re going to keep x years of land in stock, aren’t you?

In

5 responses

  1. Jock Avatar
    Jock

    They are also going to be looking at “how land that is suitable for development is brought through the planning process”. And I note that the Telegraph article talks of a “two year land bank with full permissions”. I suspect the “land bank” issue is more about cornering the market in potential development sites well ahead of time as much allowed development sites.
    Equally, there’s a valid concern for the OFT if builders are really saying that they’ve got all the land they can cope with actually developing – why is there not more capacity coming into the system if there is demand? I think the builders are blind if they don’t see there are valid concerns that should concern the OFT. After all, the OFT’s remit is to protect the consumer, who is definitely feeling the pinch at the lack of housing availability, not to defend the supplier.
    Within less than a quarter mile of me in the near centre of Oxford I can see about four hectares of derelict land that has zoning for new uses but which has lain completely idle for at least five years and eight in most cases. I also know that inside those five years the potential sale value of the new homes on completion has risen from around £170,000 to now £250,000+ for a one bedroomed flat.
    It may turn out to be a planner’s problem rather than the building industry’s, but the competition regulators should look at the land monopoly and how it is potentially manipulated.

    Reply
  2. bluematter.blogspot.com Avatar
    bluematter.blogspot.com

    Well Tim, your analysis is wrong. If it takes two years to get planning permission and a housebuilder wants to retain a constant flow of work, is it really the case he needs to hold two years worth of land with planning permission in stock?
    ‘Landbanks’ refer to land that already has planning permission, not land that is in the housebuilders’ possession and is in the process of acquiring planning permission. A developer may hold landbanks (as opposed to land that doesn’t yet have planning permission) for two reasons: as a precaution in case gaining planning permission takes longer than expected, and for speculative/tax planning reasons.
    Also, keep in mind you don’t have to complete work on a site to apply for planning permission on another site (another implicit assumption needed for your analysis to hold).
    So, if completing a site takes (say) two years, and gaining planning permission takes two years, you simply apply for planning permission on the new site the moment you start work on the site that already has planning permission. At no moment in time does a developer need to hold ‘landbanks’ to ensure a constant flow of work.
    Your thoughts?
    Tim adds: OK, now say that it takes 4 years to get planning permission, plus or minus 50% for any specific plot. What size of land bank will a builder now want to hold?
    (BTW, I have no idea how long any of these periods are, would in fact like to know).

    Reply
  3. bluematter.blogspot.com Avatar
    bluematter.blogspot.com

    And to adjust you cash’n’carry example to better suit the situation with housebuilders, in fact it is not the case you go to it and stock up once a week. In contrast, you order at any point in time and they take 1 week to deliver. You can foresee that and order early – the only reason you would also keep stocks at your own home is if they sometimes take longer (precautionary motive), or for speculative reasons.

    Reply
  4. bluematter.blogspot.com Avatar
    bluematter.blogspot.com

    Tim, it doesn’t really matter how long it takes to secure planning permission – as long as that period is always the same. If you introduce a ‘plus or minus 50%’ then it’s a different story, and the precautionary motive I mentioned earlier comes into play. To the degree there is some uncertainty, housebuilders will find it optimal to have some landbanks (although how large these will be depend on how much the time needed to get planning permission varies, not on how long that time is on average).
    Assume getting planning permission takes 10 years while completing a house takes 1 year. Now picture a housebuilder that is not interested in speculation/tax planning/market manipulation and simply wants to maintain a constant flow of work. When this housebuilder enters the market, he will apply for planning permission on a site, then next year he will apply for PP on another site, next year the same and so on and so forth.
    The first PP will arrive 10 years after the original application, and subsequent permissions will then arrive in each case just on time for the housebuilder to keep himself busy – at no point are there any landbanks forming. (remember, landbanks refer to land that already has PP, not land in the process of acquiring PP).
    Does that make sense?
    Tim adds: As you lay it out, yes. But given the changes in law (not to mention other things) are we certainthat there is no variability and thus no need or desire for a land bank?
    Or, perhaps: how about this. the City sees the exiestnce of lanbanks at quoted builders as being a guarantee that the company has a medium term future. Thus, a land bank increases the value of the company, whether it is logical that it does so or not?
    BTW, my argument is that I don’t think such landbanls exist purely for tax planning purposes, nor in order to hoard sites and thus push the price up (the normal complaints). I’m convinced there’s a more rational explanation than that.

    Reply
  5. bluematter.blogspot.com Avatar
    bluematter.blogspot.com

    Tim – we are in agreement here.
    Given the uncertainty around the time it takes to secure PP, the way the City values companies etc etc, homebuilders will be holding landbanks for entirely legitimate reasons and with no intention to disrupt competition. On the other hand, whether they are holding landbanks that are ‘too large’ is an issue I am agnostic on and the OFT will have to assess. Your main point is right: the existence of landbanks is not evidence of monopolistic practices in itself, but we may well be in a situation where landbanks are actually too large simply to be catering for legitimate purposes. My take on this is that I simply don’t know.
    To reiterate my (admittedly geeky) point on your analysis in the original post: it’s not the length of time it takes to secure planning permission that matters in determining the optimal size of landbanks, but rather how much this time varies from case to case. (In your original post you said: ‘The question is, how long does it take to get planning permission? About two years you say? Well then, that’s the amount of land with permission that a builder will need to keep in stock, isn’t it?’)
    Thanks for this discussion, it has been really interesting.

    Reply

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