In the Budget, Philip Hammond took aim at land-banking, or the alleged practice of sitting on land, and deliberately not using it, to prop up house prices and increase profits.
Hammond said the government will be commissioning a review of the gap between the number of planning permissions granted and the number of new homes being built.
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If developers are holding back land for “commercial, rather than technical” reasons, the government will intervene, Hammond said, using compulsory purchase powers if necessary.
Housebuilder shares did not react well to the news of possible government intervention in the market. Clearly, some traders thought Hammond would follow through on the threat.
But, are housebuilders really guilty of land-banking?
To back up his investigation, the chancellor said there was a “significant gap” between the number of planning permissions and the number of homes built.
In London, for example, there are 270,000 planning permissions for projects which remain unbuilt, he said, quoting figures from the most recent London plan.
According to analysis by Shelter, the current land bank of the ten largest listed developers could provide 404,040 homes. At the current rate developers build at, this land would take six years to develop.
The data, which refers to the financial reporting as of December 2016, shows Persimmon has the largest land bank, with enough land for 92,519 homes. Taylor Wimpey has the second largest land bank, at 77,805 homes.
Pete Jefferys, analyst at Shelter, says “that’s a lot of unbuilt homes” and argues that while developers need resources to build, they do not buy any other material so far in advance.
Developers add to this land bank with option agreements with landowners.
These exclusivity agreements give developers the option to buy the land within a certain amount of time, or if they manage to secure planning permission.
Shelter estimates that these strategic land banks account for 481,910 plots (or homes); and Jefferys says this is a conservative estimate. He argues that while having a land bank is reasonable to a certain extent, it is not clear why firms hold onto the land for so long.
So, it is beyond doubt that developers own land they haven’t built on yet.
But are they deliberately holding onto it to push up house prices?
Anthony Codling, a property market analyst at Jefferies Bank, says land-banking is a “myth”.
He argues there are many other limiting factors behind the surplus land. Obtaining planning permission is difficult, there is a limited workforce, and there may be inadequate infrastructure at large sites. Utilities companies, for example, can also be accountable for a delay.
Alan Brown, chief executive of housebuilder CALA group says tying up capital in land with no houses on it “simply isn’t in our financial interests”.
Instead, the delay is caused by cash-strapped local authority planning departments, he said.
Housebuilders need evidence of cash-flow to drive investment; this is also a reason why they need to acquire land in advance.
In a report on land-banking, the Home Builders Federation said: “A house building company will be judged by investors on the land that is available to it. If one considers land to be a housebuilder’s most important raw material, a company seeking investment with little or no viable land in its ownership would be unlikely to attract the investment required to finance construction and generally operate as a well-functioning business.”
The data on planning permissions, quoted by the chancellor, can also be misleading.
There is a difference between an outline planning permission, and an implementable planning permission, which is the permission required to allow building to commence.
In the London plan quoted by Hammond, much of the total pipeline is outline permissions, so these do not represent land a developer is illegitimately holding on to. The number of full permissions is actually 129,855, far lower than Hammond suggested.
Dan Lewis, senior infrastructure adviser at the Institute of Directors, says that if there’s a landbanker in Britain, it’s the government.
“The thing is, it is not a free market,” he said.
“Government ultimately controls the supply of land.”
The cost of land makes up three-quarters of a home’s price, so if the government increases the availability of land, costs will come down, Lewis said.
Hammond will give an update on the review, which will be conducted by Sir Oliver Letwin, in the Spring Statement.
But, for traders wondering about the stability of housing stocks, it’s perhaps best to look to the past: there have been several independent reviews and investigations of land-banking, stretching back more than 10 years, and none have found evidence of the practice.