Churchill knew how to solve the housing crisis

The key lies in "land value capture"

August 30, 2016
Winston Churchill in 1941 ©BiblioArchives / LibraryArchives
Winston Churchill in 1941 ©BiblioArchives / LibraryArchives

During his tenure as President of the Board of Trade, Winston Churchill wrote a book called The People’s Rights. In it he confronted the issue of landowners benefitting financially from the productive work of others. As the demand for housing and business properties increased, the rewards of rising land values flowed to the landowners at the expense of taxpayers. Crucially he noted this also resulted in a loss of competitiveness to the nation. Not that much has changed since Churchill wrote this back in 1909, except that this latter problem has become ever more acute.

Since 2000, house prices have outstripped earnings growth across all regions in England, with London being most affected. In the run up to the London mayoral election, Sadiq Khan highlighted the housing crisis as being London's single biggest barrier to prosperity and growth. A shortage of housing that is affordable is causing significant issues for millions of households across England, and damaging competitiveness. Indeed, firms in many areas are struggling to recruit the people they need to grow and prosper as a result of the housing crisis.

The new London Mayor has argued that the capital needs more than 50,000 homes to be built a year. But the building rate across London is approximately half that number. Moreover, the building rate may well begin to slow further if land values fall as a result of the Brexit vote, leading to fewer financially viable projects. Building rates across England still remain well below the government’s target of 200,000 per year.

To dramatically increase the rate of housebuilding will, however, require massive amounts of infrastructure investment to improve transport capacity as well as schools, hospitals and public spaces. But where will the money come from to finance this infrastructure?

Countries across Europe and Asia have long heeded the advice of Churchill and made sure that the uplift in land values from infrastructure investment is captured by the public authority, rather than flowing to the landowner. This system of "land value capture" is critical, as it is used to finance the infrastructure investment, which in turn permits large scale house building.

The system of land value capture works by allowing authorities to assemble land at its use value, which in urban areas is mostly at industrial value rather than agricultural. Crucially, this land is a fraction of the cost of land with planning permission for residential construction. Public authorities then generally borrow from the bond market to finance the infrastructure, with the bond holders paid back as a result of the uplift in land values once the project is completed.

Much higher levels of infrastructure investment are needed if the rate of housebuilding is to increase. But without a means of financing this infrastructure investment across the country, housebuilding rates will continue to flounder.

The challenge for the London Mayor and for the rest of England’s regions is that to bring Churchill’s vision to fruition, the 1961 Land Compensation Act needs to be reformed. As it currently stands, the legislation effectively ensures that the rewards from public investment flow to landowners instead of public authorities. The exact issue that Churchill highlighted a century ago.

The good news is that the Treasury issued a consultation on the 1961 Act in March. Analysis by the Centre for Progressive Capitalism shows that reforming the Act would have numerous positive economic benefits for every English region. The jump from industrial land values to residential values from the 57,000 units freed up by Crossrail across London over the entire length of the project would have generated around £19bn alone, enough to have financed the entire project. However, the majority of this £19bn flowed to landowners instead.

But it is not just London that would benefit. Reforming the Act could generate more than £13bn of incremental financing over the next 25 years for the West Midlands, nearly £14bn for the North West and £24bn for the East of England. Although London would gain considerably more, it would become largely self-sufficient in financing its infrastructure investment including Crossrail II, thereby freeing up greater levels of central government cash for the rest of England’s regions.

By working closely with the government on the Neighbourhood Planning and Infrastructure bill, the London Mayor and other civic leaders across England have the potential to fundamentally change the way our infrastructure is financed, facilitating a massive increase in housebuilding. A system where the community benefits from its productive activity. 107 years is a long time to wait, but better late than never.