Labour compulsory purchase orders: Could forced sales of undeveloped land work and is 'land banking' really happening?

The proposals come amid widespread claims that speculators and developers are 'land banking' for profit and blocking the delivery of badly-needed new homes

The evidence on land banking is patchy and inconclusive (Reuters)

The Labour Party said this week that it is considering plans to enforce “compulsory purchase orders” on undeveloped land in a bid to cut the public cost of building new council homes.

The Conservative housing secretary, Sajid Javid, has suggested something that sounded similar in a newspaper interview, saying such measures could speed up private housing construction projects.

The proposals come amid widespread claims that speculators are “land banking” for profit and blocking the delivery of badly-needed new homes.

But what are compulsory purchase orders? Would these measures work in increasing housing supply? And is “land banking” really happening?

What are compulsory purchase orders?

They are a provision within the law for certain state bodies, such as local authorities, to obtain private land without the consent of the owner.

It’s traditionally been used when the broader public good is deemed to be served by the land being acquired to allow a new infrastructure project to go ahead, such as a motorway or public amenity.

The authority has to demonstrate in court that there is a “compelling case in the public interest” and the landowners are able to challenge this.

If the compulsory purchase order is successful the landowner has to be compensated by the state.

What’s it all got to do with housing?

Compulsory purchase can be used to enable new housing developments too.

And this can be expensive.

Agricultural or brownfield land with residential planning development approval - or the prospect of such approval - is worth many times the value of land without it, reflecting the simple fact that houses have a high market price.

Labour’s plan is apparently to create an “English Sovereign Land Trust” with powers to compulsorily purchase land for housing at prices which exclude any prospective planning approval “uplift” value from the compensation.

This would make compulsory purchase cheaper and thus reduce the cost to the public purse of building new homes on the land.

Labour says it can accomplish this by altering the 1961 Land Compensation Act.

Mr Javid’s idea is less ambitious. He says Homes England, the Government’s housing agency, should simply use its existing compulsory purchasing powers more readily to speed up new developments.

However, Mr Javid did also raise the idea of “new charges” on land to ensure “the state takes a portion of that uplift to support local infrastructure and development”.

This could effectively achieve the same goal as Labour but through a new tax rather than a change in the law.

Mr Javid also says “there is definitely some hoarding of land by developers” and there is speculation the Government is planning to introduce a new “use it or lose it” regime for planning permissions.

And is there hoarding going on?

This is one of the great unresolved debates of UK housing, ever since Ed Miliband campaigned on the issue in 2013.

If such speculation is taking place, taxes on undeveloped land and other sanctions could incentivise builders to increase their construction rates.

The threat of compulsory purchase orders could also act as a spur to sales and development.

Figures do show that in tight markets such as London there is a sizeable backlog of sites with residential planning permission that have still not been built on.

The homeless charity Shelter estimates that across England planning permission were granted for 1,725,382 housing units between 2006 and 2014 but only 816,450 had been completed after three years.

The conclusion often drawn from such figures is that developers and speculators are sitting on the land as a fast-appreciating asset in order to book a healthy accounting profit.

But the construction industry dismisses such calculations as grossly misleading, saying that it is prudent for firms to have long development pipelines, and insists developers are building out their sites as rapidly as they can.

They also say the idea that they would make bigger profits from land price appreciation than building and selling more homes doesn’t stand up to scrutiny.

As for a tax on undeveloped land or threats of its confiscation at knock-down prices, they warn they would not hesitate to take legal action to prevent such expropriation.

The evidence on land banking is patchy and inconclusive, although a report for the Mayor of London in 2014 did find that a quarter of the land in London with planning permission is owned by speculators rather than developers.

It’s also clear that housebuilders are wary of putting a glut of new housing on the market at any one time (which could exert downward pressure on sales prices) and thus try to feed out new units at a gradual pace (although whether this is actually land banking, as most people understand it, is a moot point).

The Government last year tasked the Conservative grandee, Oliver Letwin, with investigating the whole fraught question.

The combative rhetoric this week from Mr Javid suggests the Letwin review will not make comfortable reading for the industry and that a showdown is approaching.