[Original title: Bureaucratic alchemy in a field near you - Wealth multiplied x 250 times]
Try this exercise for land for new housing in your area and see what treasure lies in green fields. Wealth is magicked into existence by the Local Authority's word: 'Permitted' after someone submits a planning application for new housing. Your local Planning Development Committee is regularly able to make private individuals rich through bureaucratic alchemy. In many towns and villages, cases similar to the one below are arising and fabulous wealth creation performed for one section of society only. This case is based on a proposed development on the edge of a market town in Hampshire.
THE COMMUNITY DEAL
On a 10 hectare site (about 25 acres) it is proposed to build at a density of 32 dwellings per hectare. Under planning regulations using a Section 106 Agreement (Town and Country Planning Act) which brings benefits to local people, the proportion of 'affordable' dwellings for rent and shared equity is suggested at 40%. This will mean that the land for 40% of the 320 homes (128) will be given free by the landowner/developer to a housing association (Residential Social Landlord) and the developer will arrange to build the 128 houses and flats on it and then sell them to the RSL for an amount set by a national formula. This means a straightforward good deal for builder and community - a guaranteed sale at a reasonable price. These 'affordable homes' are let at rents set lower than market rents and will include some shared-equity homes.
Because the affordable element of the development is a zero-cost exercise (builder's costs and profits are covered by the RSL's payment for the finished homes) and given the relatively low value 'gift' of agricultural land at £25,000 per ha, these are ignored below. But an extra 5% as a developer's cost for managing the affordable scheme has been included. This will hopefully be covered within the RSL deal, but if not take a look at the final figures below and see if the developer ought to be able to afford such costs anyway.
The land is currently for agricultural use and its value is about £25,000 per hectare. This means that at 32 per hectare, if you bought enough for one house, 1/32 ha of land (includes a bit for roads), it is currently valued at £781. On that part of the site reserved for market price homes, 192 of them can be built and this part of the development is the one which generates the wealth.
COSTS
On the Homebuilding and Renovating webpage are figures for the cost of building houses which are based on RICS data. They date from mid-2013, so adding 5% (ref: BIS Construction +2.5% pa cost figures) to project the figures forward to 2015 (the very earliest building could start due to planning processes) and, just to be on the safe side, adding another 20%, we arrive at £1890 /m2 cost per house with an area of 120m2. Adding 5% for infrastructure and utilities costs (roads, drains, etc) is £11,340 per house (£1985 m2).
Summary of building costs:
House £226,800 + infrastructure £11,340 = £238,140.
Add finance costs:
Assuming a house takes 4 months to build, with bank interest and fees at say 9% on £238,140 borrowed to finance the building operation, this is around £7,200. So total costs are £245,340.
SALES
Next, to find expected selling prices look on Zoopla . Choose your postcode etc, click on 'Sold prices' and on the drop down menu click on 'UK area stats'. Scroll down the page to the chart and click on 'Home values' to bring up the historical record. The webpage header for the town gave around £484,800 for the current average Zoopla value for all houses in the area. But a developer cannot rely safely on this figure for sales in more than a year's time, so I used the lowest price since 2010, which was £450,000.
PROFIT
So with a sale price of £450,000, less costs of £245,340 the profit is £204,660 per house which is hidden within the estate agents' price as a raised land price. This is something over £39 million profit from the 192 market price houses to be built over about 10 years - say £4m per year . The original agricultural land value of £781 will be multiplied more than 250 times to £204,660, so the 'gift' of the original land for the affordable homes is seen in proportion.
Another way to look at this gain is that the planning-inspired land value of £204,660 is about 45 % of the total 'average property price'. This is a high figure compared with earlier decades when the land value might be between 20% - 35% of the total. Are we seeing a price bubble? With data such as high house prices cf average income figures, maybe. See The Telegraph 8 Feb 2014 (Richard Dyson). But maybe houses are becoming permanently more expensive - Chancellor George Osborne is anticipating another 10 years of house price rises see The Telegraph 7 Feb 2014 (Matthew Holehouse), so prices might just keep climbing, especially as he is not intending to throttle back one of his monetary rockets that is powering it.
Our society is again becoming more divided by housing status. To counter this, freeholders should pay a levy proportional to the value of their land. Land value tax should be a major alternative to other taxation, payable every year and not only when a developer digs up green fields. Developers obviously gain when they use their land but they do contribute benefits such as free land for affordable housing and they may pay some tax on their profits. Meanwhile ordinary residential freeholders are favoured with tax-free land value gains and young people who thought they might buy their own home sometime are being left behind, adding to the the growing group of renters.
For more on developer's secrets read The Free Lunch - Fairness with Freedom. The facts above prove yet again one of the book's main messages: that the benefit arising from land use is a 'Free Lunch' which derives from democratic decision making and that by obvious principles of fairness these should fund public expenditure.
posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom
Try this exercise for land for new housing in your area and see what treasure lies in green fields. Wealth is magicked into existence by the Local Authority's word: 'Permitted' after someone submits a planning application for new housing. Your local Planning Development Committee is regularly able to make private individuals rich through bureaucratic alchemy. In many towns and villages, cases similar to the one below are arising and fabulous wealth creation performed for one section of society only. This case is based on a proposed development on the edge of a market town in Hampshire.
THE COMMUNITY DEAL
On a 10 hectare site (about 25 acres) it is proposed to build at a density of 32 dwellings per hectare. Under planning regulations using a Section 106 Agreement (Town and Country Planning Act) which brings benefits to local people, the proportion of 'affordable' dwellings for rent and shared equity is suggested at 40%. This will mean that the land for 40% of the 320 homes (128) will be given free by the landowner/developer to a housing association (Residential Social Landlord) and the developer will arrange to build the 128 houses and flats on it and then sell them to the RSL for an amount set by a national formula. This means a straightforward good deal for builder and community - a guaranteed sale at a reasonable price. These 'affordable homes' are let at rents set lower than market rents and will include some shared-equity homes.
Because the affordable element of the development is a zero-cost exercise (builder's costs and profits are covered by the RSL's payment for the finished homes) and given the relatively low value 'gift' of agricultural land at £25,000 per ha, these are ignored below. But an extra 5% as a developer's cost for managing the affordable scheme has been included. This will hopefully be covered within the RSL deal, but if not take a look at the final figures below and see if the developer ought to be able to afford such costs anyway.
The land is currently for agricultural use and its value is about £25,000 per hectare. This means that at 32 per hectare, if you bought enough for one house, 1/32 ha of land (includes a bit for roads), it is currently valued at £781. On that part of the site reserved for market price homes, 192 of them can be built and this part of the development is the one which generates the wealth.
COSTS
On the Homebuilding and Renovating webpage are figures for the cost of building houses which are based on RICS data. They date from mid-2013, so adding 5% (ref: BIS Construction +2.5% pa cost figures) to project the figures forward to 2015 (the very earliest building could start due to planning processes) and, just to be on the safe side, adding another 20%, we arrive at £1890 /m2 cost per house with an area of 120m2. Adding 5% for infrastructure and utilities costs (roads, drains, etc) is £11,340 per house (£1985 m2).
Summary of building costs:
House £226,800 + infrastructure £11,340 = £238,140.
Add finance costs:
Assuming a house takes 4 months to build, with bank interest and fees at say 9% on £238,140 borrowed to finance the building operation, this is around £7,200. So total costs are £245,340.
SALES
Next, to find expected selling prices look on Zoopla . Choose your postcode etc, click on 'Sold prices' and on the drop down menu click on 'UK area stats'. Scroll down the page to the chart and click on 'Home values' to bring up the historical record. The webpage header for the town gave around £484,800 for the current average Zoopla value for all houses in the area. But a developer cannot rely safely on this figure for sales in more than a year's time, so I used the lowest price since 2010, which was £450,000.
PROFIT
So with a sale price of £450,000, less costs of £245,340 the profit is £204,660 per house which is hidden within the estate agents' price as a raised land price. This is something over £39 million profit from the 192 market price houses to be built over about 10 years - say £4m per year . The original agricultural land value of £781 will be multiplied more than 250 times to £204,660, so the 'gift' of the original land for the affordable homes is seen in proportion.
Another way to look at this gain is that the planning-inspired land value of £204,660 is about 45 % of the total 'average property price'. This is a high figure compared with earlier decades when the land value might be between 20% - 35% of the total. Are we seeing a price bubble? With data such as high house prices cf average income figures, maybe. See The Telegraph 8 Feb 2014 (Richard Dyson). But maybe houses are becoming permanently more expensive - Chancellor George Osborne is anticipating another 10 years of house price rises see The Telegraph 7 Feb 2014 (Matthew Holehouse), so prices might just keep climbing, especially as he is not intending to throttle back one of his monetary rockets that is powering it.
Our society is again becoming more divided by housing status. To counter this, freeholders should pay a levy proportional to the value of their land. Land value tax should be a major alternative to other taxation, payable every year and not only when a developer digs up green fields. Developers obviously gain when they use their land but they do contribute benefits such as free land for affordable housing and they may pay some tax on their profits. Meanwhile ordinary residential freeholders are favoured with tax-free land value gains and young people who thought they might buy their own home sometime are being left behind, adding to the the growing group of renters.
For more on developer's secrets read The Free Lunch - Fairness with Freedom. The facts above prove yet again one of the book's main messages: that the benefit arising from land use is a 'Free Lunch' which derives from democratic decision making and that by obvious principles of fairness these should fund public expenditure.
posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom
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