The home question

Here we take an in-depth look at what it all means for the industry, asking some of the nation's landowners what they think of the latest attempt to tax them, and looking at the prospects for one site about to enter the planning process. But David Blackman kicks off with the industry's response to the government's proposals, including the controversial planning gain supplement … and that 50,000 figure.

In the late 1970s, Britain was, by widespread agreement, going to the dogs. The winter of discontent was just around the corner and chancellor of the exchequer Denis Healey had just been forced to apply to the International Monetary Fund for a bail out. Fast forward to 2006 and Healey's successor as Labour chancellor, Gordon Brown, has just received a glowing report from the IMF for his handling of the British economy.

But in one respect at least, the comparisons between the two eras are less flattering. While Healey and co presided over the building of just under a third of a million new homes each year, housing completions have struggled to meet half that figure under the current regime. To put the shortfall into context, social landlords alone were building more than 100,000 new homes each year at the end of the 1970s, more than two-thirds of today's overall total.

In last month's pre-Budget report, Brown attempted to put right this blot on New Labour's economic copy book. The chancellor heartened many in the development industry by outlining measures to tackle the UK's recent housing under-supply, responding to the study into the subject the government had commissioned economist Kate Barker to carry out. The pre-Budget report itself was accompanied by the launch of a number of consultation documents and other publications covering such key matters as the revision of PPG3, the introduction of a development land tax or planning gain supplement, and sustainable building standards (see Key Points, below). It all presented plenty for housebuilders to digest along with the Christmas pudding, and the proposals - and the many questions raised by them - are set to dominate the industry agenda throughout 2006.

Foremost among the government's proposals was the target to increase annual housing supply by 50,000 to 200,000 new homes a year by 2010. That begs the 50,000-home question: will last month's announcements add up to a package of incentives that will spur this higher level of housing supply? RICS policy director Michael Chambers is sceptical. "It's not clear how they are going to do it and it's hard to see what the incentives are going to be," he says. Like many others in the industry, his biggest cause for concern is the package's main innovation - the proposed planning gain supplement, a tax levied by the Treasury on the increase in value of land on receipt of planning permission. "We don't have objections to the principle that windfall gains should be taxed," says Chambers. But he adds: "It's hard to see how the PGS is going to be an incentive."

Many believe the PGS will achieve the opposite by giving landowners a bigger interest in delaying the release of sites. Countryside Properties chairman Alan Cherry has been in housebuilding long enough to have seen every previous Labour government's attempts to tax development founder. "I can't understand when you are trying to increase supply that you suddenly come up with a tax that will do exactly the opposite. The people who want to introduce it pay too little regard to the experience of the past," he says.

Bill Brisbane, managing partner of planning consultancy Roger Tym and Partners (RTP), has examined land values throughout the South-east growth areas. He suggests that the windfall gains the government is banking on are likely to prove illusory. The Treasury consultation paper, outlining how the supplement will operate, says that land rises in value from an average of £9287 per ha to £2.46m in England following change of use from agricultural to residential. For industrial or other business uses the increases are smaller, but still considerable, with the Valuation Office Agency estimating that industrial or warehousing land has an average value of £632,000 per ha in England.

But in the real world, Brisbane says the situation is very different. "All the land has either been optioned or bought at hope value [the premium on existing value paid in the expectation of getting planning permission] and that will have to be recognised," he says.

Chris Brown, who is chief executive of insurer Morley's Igloo regeneration fund, points out that the Treasury has said it will ignore any such hope value payments. But those who have already forked out tens of thousands of pounds in hope payments are unlikely to swallow a tax bill without checking with their lawyers first whether they could mount a legal challenge.

Brisbane adds that on many sites the Treasury's decision to continue the provision of affordable housing contributions through the existing section 106 agreements is likely to wipe out the bulk of any residual value left over. "Except for in hot spots like the Fens or bits of Cambridgeshire where there is a high land value, it [affordable housing] can bring residual value down to very little above nil," he warns.

When you want to increase supply, why come up with a tax that will do the opposite?

Alan Cherry, Countryside Properties

As for commercial development, Brisbane says that outside of hot spots like central London and Manchester, this is unlikely to yield much revenue either. "There are places where the costs of building offices are more than the value of the rental stream. A lot of commercial developments are barely viable."

Even the basis on which the tax is being levied is likely to prove highly contentious, he argues. "Residual valuations are very complicated. Unless there's very clear guidance, there's going to be enormous scope for variation." And policing the tax is going to be difficult, points out RICS regeneration policy panel chair, Nigel Smith. "When we had development land tax, we had masses of people in the valuation office, but we don't have that any more." To help get around this problem, the Treasury consultation paper proposes that sites should not be valued individually, but by using average values in the area. But such a formula could prove too blunt an instrument, says Smith, given the enormous variations in value that issues such as contamination can generate. E E "If you've got a greenfield site, it will be pretty easy to work out," says Smith. But for many brownfield sites, particularly those that are in use, calculations will be far less straightforward. The government's suggestion that the rate could be set at a lower level on brownfield sites is not likely to address the problem, believes Smith. "It will be yet another bureaucratic hurdle. People will be scared because they won't know what they are going to pay," he says.

Of course, whether landowners challenge their bills depends largely on the rate at which the government chooses to set the supplement. Set the rate too high and it will deter development, as happened during the 1970s when the development land tax ended up costing more to administer than it raised. But too low a rate will yield miniscule returns.

Housing minister Yvette Cooper has gone out of her way to reassure the development industry that the penal rates seen in the 1970s, when the tax reached 90%, are out of the question. The Treasury has refused so far to disclose a figure, although ODPM sources have indicated that it could be set at 20-25% of the increase in the value of the land. Chris Brown calculates that such a rate could yield about £6bn a year, which sounds impressive until it is set against the UK's infrastructure backlog. The South-east alone will swallow half of this sum, according to a conservative estimate produced by the region's county councils last year. To avoid deterring development, the rate should be no higher than 5 or 6%, Brown believes.

In a sign of the concern that the supplement has aroused, many in the industry have belatedly discovered the virtues of the oft derided Section 106 system. "I've yet to be convinced that there's a better way of securing contributions to the community and social requirements," says Cherry.

It’s hard to see how the planning gain supplement is going to be an incentive

Michael Chambers, RICS

And the incentive for landowners to hold on for a change of government has increased following David Cameron's election as Conservative leader and the Tory Party's lead in the opinion polls for just the second time since the mid-1990s. "If it [the PGS] had been announced in 1998 when people thought the Tory party was out of government for a very long time, then it might have worked," mused London mayor Ken Livingstone recently.

Other proposals

So, if the key plank of the government's ousing supply package is likely to be so counter-productive, will the other elements help? Alongside the PGS consultation paper, the government has also updated its PPG3 planning guidance for new housing development. Planning Policy Statement 3 quietly discards some of Barker's more radical recommendations, notably the proposal that councils should release extra land if housing market affordability worsens dramatically. But it retains proposals floated in a consultation paper published in the summer that authorities should put together a sub-regional housing market analysis with their neighbours. Planning consultant Robin Tetlow of Tetlow King says this proposal is a recipe for fresh delays. "We're now talking four or five years before every local authority in the country will have one."

The new guidance also resurrects proposals, which were shot down in flames earlier this year, giving authorities powers to stipulate the size and type of homes in developments. Nick Townsend, legal director of Wilson Bowden, says: "There is still a niggling concern about the attempt to fix the mix. Markets change and we need, especially on a big site, the flexibility to respond. We can only build what we can sell."

Tetlow believes that this attempt to micro-manage the market will prove counter-productive. "If housebuilders don't deliver, what is there to make them do so, bearing in mind that they are private bodies?"

Overall, Edge believes that the proposals outlined in PPS3 will do little to spur delivery. "I don't see it as a major change to how we do things at the moment. Really it's a matter of re-arranging the deckchairs on the Titanic. And we all know how that particular trip ended."

There is still a niggling concern about the attempt to fix the mix

Nick Townsend, Wilson Bowden