"IT'S THE LAND ECONOMY STUPID"
“IT'S THE LAND ECONOMY STUPID"
Time for sustainable land markets in the public interest
Planning and Development Surveyor, Stephen Hill, examines current thinking about land and housing prices and challenges politicians and professionals to find Churchillian courage to promote sustainable development that will deal with both the root causes of a broken economy and an unjust society, and the preconditions for a new generation of sustainable ‘garden city’ settlements and neighbourhoods.
This paper has been written partly as a tribute to the work of the radical urban geographer, Peter Ambrose, who died in early August. Peter had been Director of the Centre of Urban and Regional Studies at Sussex University, and latterly, an inspirational teacher and researcher as Visiting Professor of Housing Studies ‘over the road’ at the Social Science and Policy Research Centre at Brighton University.
Peter had no fear in tackling vested interests, and relentlessly identified the causes and likely effects of the conditions that led to the housing market crash and financial crisis in 2007-8. These are, recorded in embarrassing detail…embarrassing for us all in retrospect…in his Memorandum to the Prime Minister on Unaffordable Housing in 2005: information and advice that was ignored by its recipient, the Commons Select Committee on Affordable Housing and Treasury officials alike. The latter observed percipiently that the problems identified in the Memorandum were not a problem “as long as the market is working”.
Like the early 20th century economist, Thorstein Veblen, whose work is also described in this paper, Peter leaves no ‘school’ of thought behind him; but a significant legacy nonetheless. He was most celebrated for his 1987 book ‘Whatever happened to planning?’ Like the book’s title, he has left us with a host of unanswered questions about housing and land policy: do we even have one? These questions are very similar to those that Veblen put over a century earlier, and to which they both would have called the answers ‘common sense’. They are the very questions that we all spend most of our time deliberately avoiding, in the mistaken belief that one day, doing more of the same will start to work. We need more minds like Peter Ambrose, not one less.
Conventional wisdoms under scrutiny
As the US Presidential Election comes to its climax, we can all expect to hear both politicians and political commentators falling back on that old saw, ‘It’s the economy, stupid!’ Its author, Bill Clinton, may have created a great sound bite but he was not an economist. The problem for him, and the USA, as for us in the UK and many other economies around the world, is that it is not “the economy”, and has not really ever been. “It’s the land economy”.
We might generously forgo the ‘stupid’, perhaps, as for most of the past hundred and twenty years or so, conventional wisdom has ignored the value and price of land and natural resources in the formulation of economic and fiscal policy. Land became invisible in economic theory, and thus public policy. This is the legacy of neo-classical economic theory becoming the dominant economic world view in the early 20th century. For the three centuries before that, classical economists and rational thinkers clearly understood that land was central to understanding how political economies actually worked: not least because nearly all wealth and tax revenues were then derived from it.
Over a hundred years into the neo-classical hegemony, some politicians and economists are beginning to realise that something is not quite right. The EU Environment Commissioner, Janez Potočnik explicitly questions the neo-classical assumption that natural resources are ‘free’, and that the consequences of economic decisions on resource supply and use can be ignored. Making this case to the EU Environment Council in December 2011, Potočnik argued for resource use to become a mainstream issue in economics: "We really do need to have the internalisation of these costs” , both for Europe to remain economically competitive and to sustain a decent quality of life for everyone. He predicted the need for ‘drastic changes’ to the structure of both local and global economies.
Some leading neo-classical economists also understand the need for this paradigm to change. Martin Wolf, Chief Economist at the Financial Times, explains what he now sees as the faults of neo-classical economic theory:
“Something strange happened to economics about a century ago. In moving from classical to neo-classical economics, economists expunged land or natural resources. Neo-classical value theory, based on marginalism and subjective valuation, still makes a great deal of sense. Expunging natural resources from the way economists think about the world does not.
In classical economics, land, labour and capital were the three factors of production. With neo-classical economics, the standard production function had just two factors of production: capital and labour. Land - by which we mean the totality of natural resources - was then incorporated into capital.
The idea that land and capital is the same thing is evidently ludicrous. Humanity does not make these things (natural resources); it exploits them. Some of these resources are also appropriable and so a source of unearned personal wealth…Henry George argued that resource rents are not a reward for the efforts of the owners, but the fruit of the efforts of others. It would be both just and efficient to socialise rents, he argued, and then use the proceeds to finance the infrastructure that makes resources valuable.
But the powerful owners of natural resources wished to protect their unearned gains. In practice, therefore, the tax burden fell on labour and capital. Economics, one might argue, was pushed into supporting this way of organising economic life.
Yet it would seem to me that this way of thinking by economists is no longer sensible, if it ever was. Land must again be treated as separate from labour and capital…Thus, for both economic and political reasons, we should put natural resources into the heart of economics, thereby remedying a neoclassical mistake.”
Wolf was suggesting that the problem with neoclassical theory was not just its detachment from plain common sense about how the world really works, but that the adoption and indeed the maintenance of the theory was and is driven by powerful vested interests; an idea that might now seem more obvious in the continuing fallout of the financial crisis. Wolf’s Blog, written in high summer in 2010, provoked over 180 pages of comments, despite most FT readers probably being on holiday: an indication that the issue of land is very much on our minds and deserves a wider public debate.
E4 = M4/4 = Not boring enough
Perhaps taking a cue from Martin Wolf, the former Housing Minister, Grant Shapps, started just such a debate, later that autumn . Asking “What would an intelligent housing market look like?” he proposed it should be”boring…really quite predictable.” He asserted that “we’ve all forgotten what our housing market is actually for…to provide a home. Buying a home shouldn’t be like playing the lottery” and that “Britain would be a better place if house prices did not rise in nominal terms during this parliament.”
Politicians normally avoid commenting on how property markets should behave, or on what values should be. Conventional wisdom is that there is usually nothing they can do about either; but these were and are exceptional economic times. Shapps was also voicing the now commonly expressed concern in the UK housing industry about land price; that land costs too much, and that the expectations of landowners are damaging our attempts to build enough homes for the still growing population needed for an economically successful and socially and environmentally sustainable country. Such a debate has the potential to go beyond assertions that politicians can end ‘boom and bust’, with more intelligent insights into the purposes and uses of land, what kind of rewards it can generate through investment, and thus what values should be.
It is important to understand why this debate remains so central to the future of the economy, even though it seems that, as house building rates may be picking up, ‘things may be getting back to normal’. Every market has its cycles, and the first stages of recovery may seem comforting, even though underlying problems remain untreated. So it is worth looking at the first effects of the credit and asset bubbles that followed the deregulation of financial markets in the early 80s.
A comparative study by Peter Ambrose and others examined two similar high value areas with strong employment and economic demand, the E4 Motorway corridor between Uppsala and Stockholm, and the M4 corridor in Berkshire, over the period 1980 to 1988. The E4 Corridor performed consistently better:
• 20% more efficient land utilisation,
• 65% of housing affordable to people on average local incomes against the UK’s 15%, (collapsing to less than 6% as the study ended in the crash of 1988, making many sites ‘unviable’),
• Upto 6 different kinds of provider and form of tenure, including cooperatives and self-build housing, against just 2 in the UK – market sale and social rent, and
• Nearly 50% of what we would call ‘affordable housing’ occupied by people in managerial and professional jobs, compared with 2% in the UK.
The most telling difference, however, was that Swedish land values rose about 5% against 436% in England, representing about 10% and 60% Gross Development Value [GDV] respectively. E4 land ended up as one quarter the price of M4 land.
The period 2000-08 covered the second wave of credit driven asset price inflation and speculation, with many similar characteristics; this time fuelled by the changed investment environment and growing weight of global capital seeking short term speculative gains on assets and commodities in uniquely short supply; especially development land and housing which will always be at their scarcest at the peak of a business cycle. As a ‘safe’ haven, housing and indeed all land in the UK was a ready target for global capital, enhanced by ‘naturally occurring’ limits on supply. Population and economic growth pressures were restricted by over complex planning and regulation, under-investment in infrastructure, as well as increasing anti-development sentiment; notably the socially acceptable and benign sounding NIMBY’ism, but more accurately the selfishness of the already housed at the expense of the unhoused.
At the 2007/8 peak, development-ready housing sites were commonly selling at 30-40% GDV. Exceptionally sites sold at 60% of GDV, in the expectation that there would be a significant and essentially speculative rise in sales values over the development period, sufficient to cover as much as half the normal build cost; a measure of the collective madness in which the market had ceased to behave rationally.
The problem with land price
The significance of land in house prices and to macro-economic policy has been highlighted in recent research studies for the RICS, which disaggregate and analyse the effects of the land element of house prices from the bricks and mortar, based on two large scale studies over two decades. In Western Australia , in the high demand housing market around the booming city of Perth, over the period 1988-2011, average aggregate land leverage ratios for the whole city, ie the proportion of land value to house price, was 36% for new build properties, with the land value component rising more quickly year on year than the buildings. However, for second hand homes, the land leverage ratio is significantly higher at 63%, with similarly high annual increases relative to buildings.
In Japan , land price is already formally regarded as a separate asset from buildings, with the property price clearly distinguishing between the land and building costs. In a culture in which homeowners expect to replace the building element quite regularly, the building is quite correctly seen as a depreciating asset. This makes land price movements particularly sensitive for housing markets, affordability and the wider economy. In a telling graph, the Japanese residential market seems, to the UK eye, to have sustained itself in a remarkable state of equilibrium from 1983 to 2009, bumping along at an Index value of around 150-160, with what seems like the merest blip to 180 in 1991-2; in fact, the bursting of the bubble that decimated the Japanese economy for the rest of the decade, and the start of the recession from which it is still struggling to escape. England and Wales residential markets are tracked for the same period, starting at the same Index point of 150; rising to 550 in 1988 (the M4 moment), and 1680 in 2007, before falling back to1150 in 2009: certainly not a market in any kind of equilibrium.
In both cases, the quantum and trajectory of land price emerge as being central to the volatility of house prices, affordability for all, and the workings of the wider economy. In 2005, in a mischievous unpublished paper, “The Great House Price Fantasy”, Peter Ambrose explained how John Prescott’s £60k house was really possible, without fudging the issue of the land cost. Take average house prices in 1975 - £10k. Apply RPI to 2005; result - a national average of £60k, with regional variations from £39k in the north to £93k in Greater London. Not very scientific perhaps, but more seriously he looked at how, between 1980 and 2003, house purchase debt increased from 23% to 75% of GDP. On his analysis, if lending had risen in line with general consumer prices, over £600bn would have been available for other purposes than servicing housing mortgage debt. Work ongoing at his death suggested that this figure had risen by 2010 to the equivalent of the national public debt of £1trn.
Value, Values, Poverty and the Infrastructure Conundrum
However you look at these various pieces of research, it is not hard to see why the neo-classical economists can sense that something is not right. The combination of inflated and speculative land markets, and consequential rises in housing related debt, both for housing producers and occupiers, are consuming huge resources from both personal and national incomes that could have been invested in a great deal of improved quality of life, new low carbon infrastructures, and other investment in UK plc that would have benefitted us all much more significantly than our housing ‘wealth’. The deadweight of unnecessary extra debt payments for buying assets that is largely untaxed and almost totally unproductive in terms of their contribution to the wider economy, is no doubt a contributor to the need for the current reorganisation of public finances that primarily affects non-homeowners and the least well-off in society.
Despite the extraordinary wealth to be found in allocated land, the housing industry was and is unable to afford the real costs of sustainable development. At times of crisis, for them if not the country at large, they appeal to government to reduce the burden of regulation and standards of sustainable development to get development moving again; as if that was the real problem. Much more deserving of attention is the classical idea that ‘development follows infrastructure’, which was effectively abandoned in the last financial crisis in 1976, at the behest of the International Monetary Fund, but willingly supported by the Treasury.
Since then, we have struggled to make work an inefficient and costly process of new development being contingent on its ability to fund its own new infrastructure and the growing infrastructure deficit as the pre-1976 legacy of investment is expired. The latest attempt, the Community Infrastructure Levy (CIL), and S.106 are, as house builders correctly claim, taxes on what we want more of, imposed at the moment of maximum risk and uncertainty in the development process, and based on dangerously short term and unreliable assessments of land value.
Such ill-conceived mechanisms for capturing ‘value uplift’ through planning yield pitiful and unpredictable resources to pay for public goods. Despite CIL’s attempt to rationalise these public goods costs, no one yet seems to be thinking about the practicalities of delivering the required infrastructure in a way that supports and speeds up the development. Basic issues of cashflowing the CIL revenues into coherent construction programmes, or creating new investment opportunities for long term funders, seem to be less important than the bureaucratic niceties of the Charging Schedules and the wide variations in charging rates. The absence of a coherent strategic planning framework for infrastructure investment, at national, regional and sub-regional level, remains the elephant in the room, without which spatial planning cannot deliver the certainty needed to create investor confidence in long-term sustainable investment.
Instead, we find ourselves locked in the futile Catch 22 argument about ‘No infrastructure…no growth’: sometimes deployed as an accurate description of a local situation, but also as a defence against unwanted development that would be politically unpopular. No one seems to be able or willing to pay the costs of new and sustainable infrastructure. House builders are prisoners of a production system in which they must pay what landowners expect, often advised by property advisers whose approach might be crudely characterised as ‘promise as little as possible, get planning permission and sell client’s land’: advisers whose fee is a percentage of the highest possible sales price.
The system of valuation and land assembly effectively seeks to externalise social, environmental and economic costs, and detach them as far as possible from any understanding and theory of asset value. That would accord with a neo-classical economist’s view of how markets should work: now under question at least in relation to land. Should the debate between the two schools of economic thought be important to professionals concerned with the land, and to their values as professionals? Almost certainly, yes .
The RICS is a public interest body, with a global remit. Probably the most important of the professional activities listed in its 1881 Royal Charter, is “…securing the optimal use of land and its associated resources to meet social and economic needs”. Note the obligatory ‘and’, which might also be a surprise to many today. It would not have been at all surprising to the 19th century authors of the Charter, who were forthright in claiming that the purpose of the institution was “to promote the usefulness [authors’ emphasis] of the profession for the public advantage in the United Kingdom and in any other part of the world”. They would have been thinking about professional tasks and responsibilities in the context of John Stuart Mill’s ‘Utilitarianism’ and ‘On Liberty’ : both mandatory reading in late Victorian times. Mill described utilitarianism as the maximisation of utility as a moral criterion for the organisation of society that should aim to maximise the total utility of individuals, to achieve "the greatest happiness for the greatest number of people. He regarded “utility as the ultimate appeal on all ethical questions".
The foundations of the land profession were, therefore, firmly grounded in the rationalist classical economic thinking of the day. There is a direct lineage from the 19th century ‘public advantage’ in the original RICS Charter, and more recent formulations, such as ‘the public interest’, ‘sustainable development’, ‘community wellbeing’, or even ‘happiness’, currently enjoying a 21st century political revival under the Coalition Government. By linking ‘social and economic need’ together, the Charter writers understood what now seems to have been forgotten, as demonstrated by the work of Ambrose and others, that social and economic needs are also interdependent. The failure to recognise that social and, now, environmental needs should be internalised to value means that the professionals may be ignoring that interdependence; a potential failing not just of professional standards in valuation and professional practice generally, but in professional thought leadership in the national public social and economic interest.
“When will we ever learn…”
Winston Churchill would have been familiar with these ideas when writing and speaking, as a Liberal MP, in the run up to the 1906 election campaign and the 1909 People’s Budget. He argued that the strength of the economy and the welfare of all citizens depended on stable and fair land markets, and that inequitable wealth creation though inflation and speculation in land prices undermined basic freedoms: “The best way to make private property secure and respected is to bring the processes by which it is gained into harmony with the general interests of the public.”. The Liberal government’s answer was to tax the ‘scarcity rent’, or unearned income from inflationary and speculative land value increase, proposed by the 19th century thinker, Henry George, ie. an annual tax on the value of the assumed optimal use of land: ‘optimal use’ as also in the RICS Charter.
However, George’s analysis was defective. He was as much an abstract and universalist theorist as the neo-classical school he was critiquing. He did not see that the uniqueness of land and natural resources in the context of the political economy of each country and its institutions, particularly financial institutions, might have very different effects in different places.
By contrast, the Norwegian economist Thorstein Veblen, working in the USA in the late 19th and early 20th centuries, made the link between real estate and what he called ‘financial predation”. By using the development of the growing country town as his example, he described real estate as “the great American game…an enterprise in ‘futures’ ” in which the economic rent, or excess profit, to be derived from speculative land sales becomes accepted as the normative price for land, and was thus capitalised unquestioningly into mortgage debt b y the banks, whose willingness to supply easily available credit then fed the inflationary pressures on the very commodity it was secured against; and so ultimately undermining its financial sustainability as a medium for transactions. Sound familiar?
George would not extend his proposed reforms to the banking sector, considering that the correct pricing of agricultural land through taxation would be sufficient. Both he and Veblen were successfully marginalised by the neo-classical schools gaining ascendancy in the American universities, supported by landowners, bankers and others who have relied on these schools ever since for their sources of advice and intellectual respectability. George and Veblen were rendered ineffective as much by being ignored as refuted, so as to simply remove the spotlight off the whole subject of rent seeking.
Veblen, however, always retained a popular readership for his ideas, and is enjoying new prominence internationally. Professor Michael Hudson, an academic economist and Wall St adviser himself, has been at the forefront of reviving interest in Veblen. He emphasises Veblen’s importance for his analysis, derived from the German historical schools and the American institutionalists, that retained rent theory and its corollary idea of unearned income as an unnecessary overhead on productive national wealth creation. Veblen also understood what the neo-classicists did not that debt was important as a form of capital which “determines who gets what, and how income is distributed or siphoned off”. He maintained a focus on the effects on financial institutions of being able to exploit rent seeking opportunities, which even Marx’s critique of capitalism had not foreseen. “More than any other institutionalist, Veblen emphasized the dynamics of banks financing real estate speculation and Wall Street manoeuvring to organise monopolies and trusts.”
Since Veblen’s and George’s time, however, vested land owning interests and their advisers have mostly successfully resisted the idea of annual land value taxation or rent recovery, despite its successful application to rescue failing markets and tackle social and economic dysfunction in particular places across the globe. The promoters of the Garden Cities understood that they also had to create a settlement-wide land and development model which replicated these principles, if they were to achieve their objectives. The Garden Cities remain a ground breaking, innovative and uniquely popular ‘growth’ model, and are one of the few examples of successfully applying principles aimed at moderating the impact of land speculation in the public interest that have also been sufficiently resilient to adapt and stand the test of time.
Yet, the widespread application of the ideas to control exploitative and speculative rent seeking remains elusive, regarded by some as "so simple, so fundamental and so easy to carry into effect that I have no doubt that it will be about the last land reform the world will ever get.” . Yet, Veblen had predicted exactly what we have witnessed in a significant number of national economies, over the last thirty years, where the corrosive interactions of land markets and finacial institutions were constructed just as he had described them.
Low Carbon rather than Real Estate ‘futures’?
However, Veblen’s and George’s principles are now understood more broadly as central to the debate about the value of not just land but all those resources of nature, that were traditionally viewed by neo-classical economists as ‘not scarce’ but which now clearly are. As Potočnik and Wolf have acknowledged, nationally located land and natural resources have to be understood as essential parts of the production processes that underpin the performance of a nation’s GDP, as well as playing a part in determining global wealth distribution. They also lie at the heart of any realistic attempt to meet the 80% reduction in CO2 emissions needed by 2050, but are still considered off-limits for political action and intervention.
In a speech to the World Bank in 2002, Herman Daly , Professor of Economics at the University of Maryland proposed taxing “the resources and services of nature and to use these funds for fighting poverty and for financing public goods… In fact, failing to tax away the scarcity rents to nature and letting them accrue as unearned income to favored individuals has long been a primary source of resentment and social conflict.” He was imagining a situation that feels uncomfortably like now; a time of greatly increased resentment at the social, economic and environmental disparities, and spatial injustices that have grown up over a generation, and which have been exposed by the current economic crisis, and are now embedded in global austerity policies.
As a response to the crisis, Mr. Shapps was therefore absolutely right to start this debate. Neil O’Brien, director of the centre right Policy Exchange has followed, despite the alleged spluttering over the Policy Exchange claret and outrage in the Mail on Sunday. Is this a real Tory minister? He also rightly acknowledged that “market conditions don’t exactly match this picture at the moment. The economic legacy has made things very difficult... and will do for sometime”. Let us hope that he understood the true cause of this legacy, and which legacy needs to be addressed. The former Prime Minister, Harold Macmillan, put his finger on it, in a private letter to Margaret Thatcher in 1980: “Any attempt to force money onto unbound borrowers will lead to disaster.”
The Lady was not for turning. The absence of any of her customary marginal notes suggests her utter contempt for such prudence. However, the true legacy of financial deregulation is that we are now a nation awash in debt, too much of it property related, as Veblen would have foreseen. Public debt of £1trn at 67% of GDP is a concern, of course, but at historically modest levels, it is dwarfed by private debt of £6.4trn at 477% GDP, nearly half of which is housing and commercial property debt; (and not to mention £5.5trn of derivatives allegedly matched by asset values.)
John Hawksworth, Chief Economist at PwC stated: “Sooner or later, this will have to be addressed, (but) deleveraging goes well beyond the immediate challenge of getting the public finances under control. “ . Martin Wolf, at the Financial Times, described the effect of global capital inflows from Far and Middle Eastern GDP surplus economies into the GDP deficit countries of Western Europe and their property markets as “the biggest misallocation of resources imaginable” ; a misallocation that is now more pronounced as these funds continue to flood into housing markets in London and the South East, supplemented by capital flight from failing euro-economies. London property, much of it unoccupied, is effectively the ‘new gold’.
So despite Mr. Shapps’ entreaties, we continue to pretend that average house prices, costing between 5 and 9 times average incomes, now in continuous real decline, are affordable and sustainable: that only rising house (and land) prices, ie. ‘getting back to normal’, can be a ‘good thing’. Yet in 2007, Martin Weale, then Director of the National Institute of Economic and Social Research, and now on the Bank of England’s Monetary Policy Committee, estimated that annual house price increases were equivalent to a government current account deficit of 4.4% of GDP, or £50bn a year . It is unlikely that even Veblen could have imagined any government permitting, and to some extent encouraging by its policies or lack of policies, such a significant drag on economic performance, and a huge opportunity cost on national economic wellbeing.
Global financial realities
How much more decarbonising of the economy and sustainable infrastructures could have been afforded with that £50bn a year? The answer to that question is not one that can be considered just in terms of national policy. The last thirty years of financial deregulation has also coincided with a global pattern of underinvestment in infrastructure; a deficit that is now being rectified at speed in the newly emerging economies. But older economies need major infrastructure investment too, especially if they are to remain competitive. Remember Potočnik’s concern that Europe now looks very weak against China, with its ability to buy up and colonise the world’s natural resources.
The World Economic Forum and McKinsey’s Global Institute have estimated global infrastructure needs at between $3-4trn annually. With many governments constrained in what they can spend, the search for private long term investors is on, matched by those investors also looking for secure inflation proofed investment opportunities. Life assurance and pension funds are certainly in the market, but their preconditions for investment will be hard to meet; the premium for illiquidity for anything up to 50 years, and the demonstrable lack of a robust and clear strategic spatial planning investment framework for a generation past will be high.
McKinsey’s ‘rule of 2.5’ suggests that to raise GDP by 1%, spending on infrastructure and other capital needs to increase by 2.5%. If the UK is to return to a situation where it remains globally competitive with annual growth in the order of 2.5 to 3%, then it needs to be investing upto £85bn year on year on the county’s everyday infrastructure needs. That order of magnitude in investment will not be achieved by exhortation to pension funds and life assurance companies, or random acts of planning deregulation taken from a short term political perspective. As the Chairman of the Long Term Investors’ Club says on the Home Page of their website: “The economic and financial crisis has clearly shown the limits of what is essentially a "short-term" market approach. Difficulties encountered in durably reviving the economy stem partly from the lack of structural mechanisms to sustain a long-term recovery.”
The case for radical reform
Long term investors will not be impressed by such recent political statements of intent as:
“We can either spend money on council tax benefit or take a little cut on that and a little cut elsewhere, then put it all together in order to spend money on developing our infrastructure."
So, the rent seekers win again. Only a considered series of major policy and fiscal reforms will be sufficient to create an entirely new kind of climate for long term investment. There are five overarching and interlocking areas for this reform:
Local government finance: reforms to unlock the investment potential of public property assets, public capital and revenue investment, combined with more strategic use of spatial planning, sustainable economic development and wellbeing powers. Local authorities remain disempowered in their current relationship with central government, with insufficient freedoms to create the conditions in which private and other public investors will invest long term in ‘their place’ with certainty and confidence.
Recent reviews of local government finance and the failure to address the need for revaluation of the local tax base in England, under this government and the last, continue to undermine the financial autonomy of local government, and put them at a huge disadvantage with their mainland European counterparts and competitors for attracting new employers.
Spatial planning and climate change: reforms (of culture not legislation) that ensure that spatial planning becomes what it was originally intended to be; an enabling framework for public and private investment that has the capacity to create that investor confidence: an unfashionable idea, but without good planning, private money will not come.
Contrary to received opinion, the last thing that long term investors want is a deregulated and unstrategic planning system. Adventitious relaxations of the Green Belt, an outdated policy that certainly does need reform, or misplaced ideas about ‘freeing up’ the planning system, simply opens up planning to the unstructured and damaging rent seeking activities of land speculators. This will not impress or attract investors whose investment needs to be assured through predictable, consistent and inflation proofed returns over 50 years. They will only invest in situations which are sustainable, in every sense of that word, requiring strategic spatial focus, and sustained political leadership and commitment to particular places, and which also address climate change and fossil fuel shortage imperatives over many administrations to come.
Infrastructure investment and delivery: reforms that create new national and local infrastructure investment banks, of the kind commonly seen in mainland Europe. The Green Investment Bank is too small and limited in scope. Infrastructure UK is an important initial move towards the effective integration of private investment with focussed public investment in areas that are committed to the levels and type of sustainable growth that is right for their locality. The appointment of an Infrastructure Tsar is also a promising recognition of the challenge, but he will not be able to ignore the fundamentals of what long term investors need.
With a reinvigorated Public Works Loan Board and the publicly owned banks, we need a system that can cashflow CIL, (as English Partnerships did for the Milton Keynes ‘roof tax’), to ensure that development can follow infrastructure.
Public ‘spending’ also needs to secure a proper return on its investment. Ironically, the period 1950-76 was the only period in the 20th century in which the UK was not the lowest spender on infrastructure amongst the developed nations in Europe and North America . This was, of course, the period of post-war reconstruction upto the IMF Crisis. New Towns were the centre piece of this investment: one of the UK Treasury’s most profitable investments ever, generating returns to the public purse in land receipts right up to the present day. It took and benefitted from a 50 year view. The current inefficient mechanisms and short term view of infrastructure needs are not fit for purpose in global land and investment markets.
Property related taxes: reforms that abandon the current emphasis on taxing production and earned incomes, and move progressively away from inefficient and perverse transaction taxes in favour of a fairer and more efficient system focussed on consumption, and the use of property and land. Only the state can ensure a fair and progressive allocation of scarce resources which have a uniquely important role to play in the life and finances of a modern political economy. Land price unconstrained by public interest considerations is one of the main reasons why it is so hard to move to a fairer and low carbon economy. Land price still externalises all the environmental costs that other aspects of public policy are trying to tackle through regulation, at the most policy inefficient moment in the investment and development cycle.
Negative incentives should include central and local taxes to discourage non-development, delaying or carrying out less than optimal development on allocated or consented land beyond the delivery targets of a plan period, and that have the effect of frustrating the objectives and soundness of the spatial plan through its (un)timely delivery. Facilitated by the other reforms proposed, housing producers must be put into a position where they have to compete genuinely on cost, quality, variety, speed of delivery and quality of aftercare, free from the current pressures and attractions of speculating further in land futures.
Such taxes should not just be focussed on owners of development land. Most homeowners are now rent seekers. Over a generation, many will have gained more in untaxed unearned house price increases than they pay in income tax, leaving disadvantaged private and social renters and the unhoused to carry the whole burden of their own welfare.
Land policy reform: reforms in land assembly are needed to bring forward the quantity of land actually required. The Housing Forum’s Land for Housing Report in 2009 examined the ability of housing producers to generate their own land supply. Over the post-war period, a good average might be in the order of 140,000 plots (as opposed to total starts and completions) per annum. Any ambition for 240,000 or more homes a year therefore begs the question: ‘Who generates the rest?’ There are few realistic alternatives to central or local government action in land assembly.
Positive incentives should encourage landowners to participate in consortia with public enabling bodes committed to bringing forward development in accordance with a plan. Landowners would obtain a guaranteed minimum price for their land after development, and an agreed proportion of created value, subject to their participation in a Voluntary Partnership Agreement (VPA) for land development. Additional tax credits should be offered to landowners who defer any land receipt and profit-taking till the development is completed. VPAs would thus provide a more attractive, quicker and cheaper alternative to CPOs as the principal means of public agencies acquiring a sufficient interest in land to make development happen.
There is also a case for rethinking leasehold enfranchisement rights. The leasehold and freehold options in English land law traditionally provided very efficient means for allocating capital, risk and reward, and helped to ensure that development land remained a long term investment, rather than a short term speculative trade. By permitting enfranchisement since 1967, the process of commodifying land and the houses that go upon it has been reinforced. Similarly, Right to Buy has stimulated the post-deregulation rent seeking culture. There are options for selective restrictions of enfranchisement rights, alongside public action in land assembly, to maximise the potential for value created to go into infrastructure.
Equally, the community land trust phenomenon shows that some new homeowners are also willing to opt out of their enfranchisement rights voluntarily. Residents in the St Minver CLT in north Cornwall are living the principles of George and Veblen, choosing to forgo any increase in the land value of their homes, giving up the rent seeking potential of speculating in land, through home ownership, so powerfully illustrated in the Australian research. They have made the choice that politicians dare not offer. It is more important to them to live in that place where they can work and to be near their family connections. Mr. Shapps would approve: that’s what a ‘boring housing market’ really looks like.
Conclusion: The example of Churchill
All five of these reforms are essential for UK plc to compete more effectively for international capital, and to rebuild more sustainable property and land markets that provide the foundation for a genuinely fairer and low carbon society. To put them into effect will clearly require extreme political courage in relation to land policy and rent seeking: something no one has seriously attempted to do since the People’s Budget of 1909 and Churchill’s election campaigning. Remember, he was elected on that platform. He would now despair at the structural inequalities and poverty that we have created by not addressing these issues.
The debate that Mr. Shapps, in his new role as Conservative Party Chairman, should now lead, with politicians of all parties and the public, is about the very nature of investment in land and property, and the balance to be struck between debt and equity, between long and short-term returns, between stewardship and speculation, between genuine risk and reward, between public and private interests, and between local and the national interests. Letting land and housing markets revert to the way they were will, this time, only reinforce the structural economic problems we already have. Cloaking them in the folksy garb of the early 20th century garden cities will not protect them against the activities of Veblen’s ‘financial predators’. We also need a new professional understanding of value that reflects the necessary balance between all these things, and both social and economic need.
If politicians and the professions can do that, we might truly look forward to a land economy of more intelligent and sustainable markets operating for the benefit of all of us, creating new and regenerated places to live and work that will embody the aspirations of a fairer, more generous and equitable society than is currently imaginable, and an economic legacy of the kind that visionaries like Veblen and Ambrose so vigorously advocated.
Stephen Hill is director of public interest practitioners, C2O futureplanners, and a member of the RICS Planning Policy Panel. The views expressed are his own.
 Ambrose P et al (2005) Memorandum to the Prime Minister on Unaffordable Housing Zacchaeus 2000 Trust, http://www.z2k.org/downloads/memorandum-to-the-prime-minister-on-unaffordable-housing
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 Wolf, M., (2010), Why were resources expunged from neo-classical economics? [Online] Martin Wolf’s Exchange, Financial Times. Available at: http://blogs.ft.com/martin-wolf-exchange/2010/07/12/why-were-resources-expunged-from-neo-classical-economics/#axzz1kWatZS1n
 Speeches at the Housing Market Intelligence Conference, London October 2010 and Centre Forum at the Liberal Democrat Party Conference, September 2010, Birmingham http://www.guardian.co.uk/society/2011/jan/01/minister-end-housing-price-rollercoaster?INTCMP=SRCH and http://www.guardian.co.uk/business/blog/2011/jan/03/michael-white-house-prices
 ESRC funded research carried out by the Centre for Urban and Regional Studies, Universities of Sussex
and Örebro. Written up in Ambrose, P. (1994) Urban Process and Power, Routledge
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Perth, andUniversityofGlasgowfor the RICS
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 The issues raised in this paragraph will be explored further in Hill. S, Lorenz. D, Dent. P, and Lützkendorf. T (2013 forthcoming) Professionalism and ethics in a changing economy Building Research & Information Special Issue
 Royal Charter RICS, 2008 revision
 Mill, J. S., (2002), The basic writings of John Stuart Mill: on liberty, the subjection, of women & utilitarianism, Modern Library Edition, Random House,New York
 Churchill W.S (1909) ‘The People’s Land’
 Veblen. T (1923) Absentee Ownership and Business Enterprise in Recent Times, cited in Hudson. M (J2012) Veblen’s Institutionalist Elaboration of Rent Theory, Paper at the Veblen, Capitalism and Possibilities for a Rational Economic Order Conference, inIstanbul June 2012
 Hudson. M (J2012) op.cit.
 Clarence Darrow (1859-1938) was an attorney in theUnited States, who made his reputation, in part, by his defence of a schoolteacher who dared to teach the scientific basis for evolution to students in a Southern school.
 Inside Housing 22 October 2010 ‘Must do better’ Comment by Tim Leunig Reader, Department of Economic History, LSE http://www.insidehousing.co.uk/analysis/opinion/must-do-better/6512180.article and http://www.dailymail.co.uk/debate/article-1320302/I-resent-tory-housing-minister-Grant-Shapps-saying-house-isnt-investment.html?ITO=1490
 From Cabinet papers released in January 2011 under the 30 year rule.
 John Hawksworth, Chief Economist in http://www.pwc.co.uk/eng/publications/ukeo_complete.html ‘Economic Outlook’ PwC (November 2010)
 Speech at Policy Exchange Seminar on Global Imbalances at RICS January 12th 2011
 Knight Frank Research (2012) The Wealth Report Knight Frank and citi Private Bank, Think Publishing
 Weale. M (2007) Commentary: House Price Worries, National Institute Economic Review April 2007
 Wyman. O (2011) The future of Long Term Investing World Economic Forum
 Dobbs. R et al (2010) Farwell to cheap capital? The implications of long term shifts in global and investment and savings McKinsey Global Institute
 A club of sovereign wealth funds and public investment banks committed to long term sustainable investment. See www.ltic.com
 Hansard 16 July 2012: Column GC13. Earl Attlee
 Dobbs. R et al (2010) op.cit.
 Munday. B, Falk. N, Hill. S et al (2009) Land for Homes: Creating Value through Community Leadership and Co-Investment, Housing Forum
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