Here are a few basic stats for my area:
An average house costs close to the national average of £160K
A plot of land with planning consent to build a “average house” costs about £50K
An acre of agricultural land fetches less than £10k.
Building an average house cost about £100K
Now, let us consider these figures. It is not very remarkable that the value of a house is usually roughly what it would cost to build an identical house, plus the value of the land on which the house sits. If this wasn’t the case then either people would be building houses like mad, in an effort to cash in on whopping profits to be had from building houses, or the price of plots of land would fall dramatically, as no-one would want them. Things only deviate from this rule when the price of houses falls to below the cost of building new houses – at which point the entire building industry collapses (see also what happened in America recently, that caused this whole global recession business).
So then, the cost of land accounts for about a third of the cost of an average house, and probably more than half in the case of a small house. This is because land is scarce. Except of course, it isn’t. With the exception of a small part of the south east, in the UK we have only built on a small percentage of the total land area.
Land isn’t expensive either because agriculture is so profitable. If it’s fields you want, then they rarely change hands for more than a few grand an acre. So how-come are building plots so expensive? Because they require planning permission, and that is itself a scare resource. Planning permission converts £1000 worth of field into £50,000 of building plot with the flick of a bureaucrat’s pen. If you want to know the real reason why Britain’s houses are so expensive – it’s Britain’s planning system, more than anything else, that holds house prices up.
Of course, there is a further complication in all of this. Unlike many other scarce resources, (gold, land, oil etc), planning consent is an artificial construct. This means that it could be abolished, made twice as stringent, or left alone – and almost the entire country has bet the farm on it staying the same. Just imagine what would happen if the whole thing was torn up tonight. The average house would lose a third of it’s value overnight. Around a third of all home owners would be in negative equity. The mortgage default rate would go through the roof, and probably bring the banking system down. Lots of people would be very, very, unhappy.
Of course, when the dust had settled (20 years later?), the whole system would be structured on a sustainable basis financially, and as a result we would all be much better off, but the immediate pain is almost certainly more than the country could bear.
At some point, I intend to write a further blog post detailing what I would do about the whole mess, were I anywhere near the levers of power. In the mean time, treat this as an explanation of the growing chorus of moans and groan emanating from the Tory grass root every time the leadership mention the words “planning reform”.