Written evidence submitted by Dr Thomas Aubrey [HLV 007]
Background
I have been working on land value capture for more than 30 years following research I undertook as a post graduate on Adam Smith’s theory of commutative justice and land reform. Since 2013 I have been actively involved in the policy debate publishing numerous reports on the topic, speaking at events, submitting evidence to prior inquiries, as well as advising different government departments. I also have more than 25 years of capital markets experience assessing the risk of long-term financing instruments including those related to infrastructure and property.
Section 106 and CIL are the most widely used mechanisms to capture land value increases that arise from the awarding of planning permission. My prior bottom-up estimates indicate that this captures around 27% of the uplift in land values, which rises to 42% of the value when taking into account central government taxation of profits. These figures are close to Tony Crook’s top down analysis including tax that were submitted to the prior select committee inquiry that 49% of the uplift is captured, with the residual flowing to economic agents as unearned income.
Other mechanisms such as council tax and business rates can be used to capture the increase in land values through time, however, both have significant limitations as highlighted here and here.
Section 106 and CIL have been applied to the speculative housebuilding model as way of clawing back some of the “planning gain” and they have been the most successful mechanisms at doing this. However it is unclear how much more can be extracted from the speculative housebuilding model without leading to a fall in housing delivery.
The alternative is to use a plan-led approach where land is acquired by a development corporation at values close to use value. The development corporation puts in the infrastructure and then sells off serviced plots to housebuilders to build out the scheme in accordance with the plan. This was how the UK garden cities and new towns were built. Central to their success was the fact that there were able to use the uplift in land values to help pay for the upfront infrastructure.
In 1974 a landowner, Myers, defeated the Milton Keynes Development Corporation in the Court of Appeal with regards to land compensation payments. Although this didn’t prevent the completion of Milton Keynes, it did result in an end to the plan-led model in the UK due to a lack of financial viability arising from higher compensation payments related to the 1961 Land Compensation Act.
In Section 190 of the Levelling Up and Regeneration Act (2023) a development corporation is now able to request from the Secretary of State a direction to disapply hope value by ignoring prospective planning permission for land compensation payments. This makes the plan-led model financially viable once again, overturning the Myers vs MKDC case for specific cases that are demonstrably in the public interest.
For regions with lower land values there is by definition less value to capture – which in turn also means that the demand for housing is likely to be lower. Regeneration projects might look to a reformed business rates or council tax to capture the future rise in land values. An alternative approach is to combine areas that need regeneration into a much larger project including areas that have high land values.
In England, the practical opportunities are more related to detailed and ambitious projects coming forward at scale. Central to the success of any new town or urban extension project will be to deliver the infrastructure upfront, followed by selling off serviced plots with planning permission to housebuilders. However to do this requires long term revenue streams to be transformed into short term liquidity via the capital market. Hence this model can only be used where there is high demand for housing.
The main economic challenge of these projects is related to the financing arrangements, and in particular to ensure that the investment does not negatively impact the public finances. This was the subject of my recent Bennett Institute report.
If this infrastructure is to be paid out of central government departments, it is unlikely that projects will be delivered on time and on budget due to the governance issues that have been raised by the NAO. Moreover, such a large increase in gilt issuance will not only drive bond yields wider increasing the cost of debt servicing, but will also likely breach the chancellor’s fiscal rules.
The European System of Accounts provides the basis for governments to manage their fiscal policy and addresses these issues in a clear manner. The accounting framework differentiates public corporations from local and central government debt, and requires the relevant statistical agency to ascertain whether the debt of the public corporation is going to be paid back by market sources or through taxation.
Where debt repayment relies on taxation, the debt is considered general government debt. However, where the debt is paid back by market sources it is not considered to be government debt and therefore has no impact on the public finances nor on bond yields. This is why European countries generally have a faster rate of housebuilding than the UK and a much higher percentage of infrastructure stock as a % of GDP.
The UK has the opportunity to follow this model as long as its fiscal rules comply with international best practice and the European System of Accounts, however, the UK has diverged from these rules.
The Labour government inherited from the previous Conservative government a series of debt definitions that are severely constraining investment. These definitions relate to what is and what is not included in the definition of net debt. As net debt forms the basis of the chancellor’s new fiscal measure, PSNFL, these definitions are important.
Although financial public corporations (public sector banks) whose debt is paid off by market sources are rightly excluded from the definition of net debt, which is in line with the European System of Accounts, non-financial corporations whose debt is paid off by market sources are included in the net debt definition. This is neither a consistent treatment of public corporation debt that is paid off by market sources, nor is it in line with the European System of Accounts.
Non-financial public corporation debt that is paid off by market sources is excluded from general government debt in the European System of Accounts because it is: 1) low risk from a public liability perspective; 2) does not increase pressure on government bond yields as is financed separately; 3) is central to raising the rate of growth.
As noted above, European countries have been able to deliver a much higher rate of infrastructure investment and housebuilding than the UK using this tried and tested mechanism. These projects are financed by private capital and paid back by diverse sources of market funding.
The plan-led model has been very effective in capturing the uplift in land values across Continental Europe – which effectively copied the New Town and Garden City model as described by Peter Hall and Nick Falk in Good Cities, Better Lives: How Europe Discovered the Lost Art of Urbanism.
It has hard to see how the government’s target of 1.5 million homes can be met without embarking upon some large scale new town or urban extension projects.
February 2025