Sunday 21 July 2013 10:38 pm

How hidden taxes and levies are pushing up UK house prices

BRITAIN’S housing market is broken: inane planning rules mean that not enough new homes are being built. Growing demand (in part bolstered artificially by the coalition’s silly funding for lending and help to buy policies) combined with a supply that is growing only feebly is pushing up prices in and around London and risks turning home-ownership into an expensive luxury. That, at least, was my thesis on Friday, and it triggered a good deal of reaction from readers, for which I’m very grateful.

I want to elaborate on two points. It’s not just planning that is reducing the supply of homes and increasing their cost but also hidden taxes in cash and kind that are imposed on new building projects. These drastically reduce gains that developers can make – and in some cases are now even levied on private individuals building extensions. This is making some projects unviable, pushing up the price of others and reducing the supply of homes.

The Community Infrastructure Levy (CIL) is merely the latest; there have long been levies for local government to grab chunks of the planning gain and schemes to get developers to pay for social housing, schools and new roads as part of getting the green light for private housing projects. This may sound like a good idea, but in fact it’s a bizarre and opaque system with large but hidden costs. Instead of openly and democratically raising money through the regular tax system, and then spending it in an accountable manner, the government is operating a parallel, partly off-balance sheet and entirely stealthy tax and spend system for the construction industry, using it to subsidise what would otherwise be regular government spending.

But there is no free lunch – if you slap a tax on home construction, somebody will have to pay it. Fewer new homes will be built, and those that are will be sold at higher prices. New homes would be substantially cheaper and more plentiful in the absence of these levies. It would make more sense to abolish the current planning gain tax system altogether, flood the market with new buildable land (thus eliminating super-profits from planning) and raise any funds needed to pay for any new social housing through the normal tax system.

This leads us to another big argument: it is often said that developers are sitting on lots of land with planning permission, but not doing anything with it, and that this shows that making it easier to build isn’t the solution. The first problem with this argument is that it is exaggerated. Imagine a 1,000 home scheme, and that the developer has started on the first 100 flats. They understandably won’t start on the next tranche until most of the first is finished and sold, partly because of the need to raise funding. Yet the statistics will suggest that the developer is sitting on 900 permissions, which is grossly misleading. Some developments may also be financially unviable at current prices and costs, especially outside of London – but would often be worth building were taxes and levies not so high.

But it is also true that sometimes developers do sit on land banks. Yet such behaviour only happens because of the madness of our planning system, and would disappear were land more easily available.

Some companies land bank because they need a pipeline and are worried about where they will find their next usable plot. But the main cause of land banks is that under our current, idiotic system, land prices keep going up because of artificial scarcity – so some developers have an incentive to hold on to their ever-appreciating assets, knowing that they will always be worth more in a few years’ time. If the market were liberalised, and lots of land made available, including to self-builders, prices would stop going up and landbanking would cease instantly. We need to fix our broken housing market, and fast.