Thursday 17 January 2013

K. There would be not enough new construction

Having argued that There would be too much new construction, Home-Owner-Ists are prefectly capable of changing tack completely and claiming, again on the basis of no evidence whatsoever, that with LVT, there would be less new construction and that buildings would fall into disrepair.

• It's like the Window Tax - a disincentive to improvements (skip to article)
• People will wreck or abandon buildings to avoid the tax (Business Rates) (skip to article)
• It will impede transactions (like Stamp Duty Land Tax, capital gains tax) (skip to article)
• Land taxes just don't work (Land Development Tax, s106 Agreements) (skip to article)
• What if a developer has paid out under a s106 Agreement? (skip to article)
• Owners will have no spare cash to pay for improvements (skip to article)
• Construction companies will either go out of business or pass on the tax as higher selling prices (skip to article)

The most important point here is that actual developers/builders would pay a lot less in LVT than they currently do in land- or planning-related taxes!
Here's an overview of all the taxes which are currently triggered by development:
Landowner – sells land, foregoes agricultural land subsidies on the area sold and pays Capital Gains Tax or corporation tax on the unearned capital gain.
Developer – buys land and pays Stamp Duty Land Tax
Developer – pays planning fees, Community Infrastructure Levy, s106 contributions and incurs costs of planning obligations.
Developer – claims VAT refunds as new housing is zero-rated for VAT, a kind of subsidy.
Developer – sells some “affordable housing” units at a low profit margin to a Registered Provider such as a Housing Association (this can be seen as a tax of nearly 100% on that fraction of the potential development profit) and sells the rest to owner-occupiers and private investors for a profit. The developer’s profit has two elements – the unearned increase in the value of the land since it was first acquired and the earned element (return for risk and effort) - and the total profit is subject to normal corporation tax.
Owner-occupiers and private investors – pay Stamp Duty Land Tax when they buy the finished homes.

All these land- and planning-related taxes would be scrapped and rolled into LVT as part of the initial shift. The average total currently taxes paid (less VAT rebates) is tens of thousands of pounds per new home (depending on where in the country it is). Even if LVT became payable as soon as planning is granted, the average would be about £7,000 per home per year. It seems sensible to give developers/builders an exemption for the first year or two after planning is granted, so developers/builders might end paying nothing at all.

As pointed out in the previous section (J. There would be too much new construction) "... with LVT, there would be far less need for new construction. Instead, more incremental steps would be taken to make best use of what we've already got - loft extensions, refurbishment, conversions, small scale developments, infill projects, replacing derelict buildings, building on vacant/under-used urban sites etc. Most importantly, some widows in large family homes would downsize so that young families can upsize. In 2011, the Intergenerational Foundation calculated that there were 25 million unoccupied bedrooms in the UK, i.e. about ten million homes' worth of bedrooms. All of this is great news for small, local builders and craftsmen, and will go down like a cup of cold sick with national land bankers like Taylor Wimpey, Redrow, Barratts et al."

When challenged on such contradictions, most Homeys will usually just ignore you, but the more inventive will do DoubleThink and say "Aha, you think you're so clever you LVTers, you think that it will increase the amount of development [which is not correct and is a secondary issue], but you are wrong, this is the wrong way to go about it, and actually if you want more development you should reduce taxes on land owners."

Which again throws up the contradiction that the Homeys want less new development as well as lower taxes on land. So why are they calling for the latter (which they do want) if they really believed it would lead to the former (which they don't want)? The only way to square this is to assume that they know perfectly well that lower taxes on land and subsidies thereto reduce the amount of new development, which is a win-win as far as they are concerned. Not that they'd ever admit it.

The fact is, by and large, LVT encourages incremental improvements and is neutral on new construction. Planning laws (or absences thereof) will still be the main factor.

The easiest way to explain why all these assumptions are wrong is to see LVT as a kind of 100% interest-only, non-repayable loan from the government to buy land, secured on the land and buildings only with no recourse to the borrower himself if there is negative equity. Once you grasp that, all the other objections melt away.

1. The six taxes mentioned - Window Tax, Business Rates, SDLT, CGT, Community Infrastructure Levy and s106 agreements - are not LVT, so their impact is quite different

a) The Window Tax was a tax on windows, so clearly, the number of windows went down. It did not change the amount of land available or the value thereof.

b) Derelict buildings are exempt from Business Rates, so if you have no plans to rent out or improve your buildings, you are inventivised to let them fall derelict, often with a helping hand. If there were no such exemption, there would be no such incentive, and if the Rates were calculated on the rental value of the site alone (and not the buildings as well) there would be less disincentive to maintain and improve buildings.

c) SDLT and Capital Gains Tax are transaction taxes, they depress the number of transactions. Planning fees, the Community Infrastructure Levy and s165 agreements are taxes on (new) construction, so depress the amount of new construction.

d) All these taxes would be the among the first to be replaced by LVT, which tends to encourage optimum use of sites, be that actually using the existing building, selling it to somebody else or building on it.

1b. "What if a developer has paid out under a s106 Agreement?"

See Wiki for a brief explanation of s106 Town & Country Planning Act 1990.

If in doubt, apply common sense. If a developer has paid cash or paid for specified expenditure not directly related to works on the site itself, that is to all intents and purposes a prepayment of LVT. If the developer of a site has incurred such expenditure in the past and still owns the site, then the value would be amortised over (say) thirty years from the year of payment, and the developer/owner of the site gets a credit/deduction of 1/30 of the amount for the remainder of the thirty years.

For example, it is 2017 and a developer paid £300,000 (planning fees, SDLT, CIl and so on) in 20073, that gives an annual credit/deduction of £10,000 for the years 2003 to 2033. The first ten years have been used up and so for the next twenty years, the developer gets a £10,000 credit/deduction.

2. "Owners will have no spare cash to pay for improvements"

Nonsense on at least four levels:

a) If you are buying a building and it is in disrepair, you get the discount when you buy it which compensates you for the cost and hassle of doing it up once you've bought it.

b) If you buy the building with an mortgage, that is no disincentive to keeping it in good condition. LVT is like an interest-only, non-redeemable, non-recourse mortgage, so is no disincentive to keeping it in good condition.

c) The cost of maintenance and improvements includes a large element of VAT (and income tax, unless you do cash in hand) and those costs have to be paid out of your net earned income. If your net earned income is higher, VAT is gone and the tax which your builders have to include in the price to leave them with enough to live on is lower, then the overall affordability of maintenance and improvements improves dramatically. In real terms, the number of hours of paid work you need to do to earn the money pay for any particular job will fall by at least a third.

d) By and large, people would rather live in a home in good condition. If you over-occupy, so that your earned income isn't enough to pay for the LVT (or interest on the interest-only loan) and the improvements, then you are in the wrong house. You can just trade down to somewhere you can afford, and somebody else willing and able to pay the tax will buy it from you. That's quite different to current rules, where people hang on to houses which are becoming increasingly dilapidated because there is no obvious holding cost.

3. " Construction companies will either go out of business or pass on the tax as higher selling prices"
Caroline Lucas was harangued by somebody from the Home Builders Federation (or similar) on the radio, who claimed that Land Value Tax would make building new homes unviable.

She didn't actually rebut this with the obvious point, so here it is:


Residual valuation is the process of valuing land with development potential.

The sum of money available for the purchase of land can be calculated from the value of the completed development minus the costs of development (including profit).

The complexity lies in the calculation of inflation, finance terms, interest and cash flow against a programme time frame.

Please note - it is quite clear that the developer's costs do not push the selling price of the finished building up, that is fixed; the developer's costs push the purchase price of the land down!

Here's a real life example:

OVer ten years ago, I advised a company which was selling an acre of semi-derelict land in north London, they were unsure how much they'd get for it. Somebody from a larger homebuilder told me - blurted out in a meeting, really - that when they were buying land in that area, they'd pay up to £50,000 for each flat that they could build on it (it would be double that now).

In round figures, each flat could be rented out for £7,000 a year, less costs = £6,000; they could be sold for £120,000; the pure build costs per flat were £50,000; and the developer expected a profit/contingency per flat of £20,000.

That leaves £50,000 which the landowner gets under the "residual valuation" method. The developer has to finance that purchase somehow, so he ends up paying £3,000 or £4,000 a year in interest to his own financiers (bank, bond holders etc) for the duration of the build
Now, what if the developer knows that for the duration of the build, he is going to have to pay full-on LVT for each flat/equivalent of £4,000 (net rent £6,000 less bricks and mortar allowance of 4% x £50,000)?

1. Let us assume that the shift to LVT pushes down the selling price of the flat to £80,000.

2. The builder will simply stick that into his calculations, deduct the £50,000 build costs, the £20,000 profit margin/contingency (the tax due on these elements would be much lower, so the £50,000 and required £20,000 would be lower, but by an unknown amount) and the £4,000 LVT he would have to pay (assuming project takes a year to complete) and offers (say) £6,000 per plot.

3. The developer's profits are entirely unaffected. And as it happens, the £4,000 LVT he has to pay is a straight swap for the £3,000 or £4,000 interest he would have had to pay to finance the purchase of the land under current rules.

4. The landowner has to accept the offer of £6,000 per flat; his alternative is paying [£4,000 x number of flats] each year for the privilege of owning a derelict site. In theory, there might be a flood of landowners literally giving away their brownfield sites.

5. Clearly, there will be marginal situations where the theoretical land value dips below zero (the finished selling price might be lower than £80,000 or the project might take much longer); so even if the developer is given the land for free, his profit margin of £20,000 will be so eroded that it's not worth the hassle.

6. In that case, if the council wants the development to go ahead, it can simply waive the LVT for the duration of the build, or for the next one or two years (or whatever), pushing our developer back into the black. That will just be part of the usual negotiations and haggling between the developer and the planning department/local council (the LVT exemption is like a Section 106 payment, but in the other direction).


  1. Henry not so George18 February 2013 at 22:04

    Hmm, sorry if this question is silly, but what would be the incentive for anyone to actually invest in the city centres/good locations? After all, all the possible profit deriving from these nice sites would be taxed away and therefore the profit from a tiny house in a village would be the same as from a skyscapper in central New York, wouldn't it? In the case of real estate for housing/business, the economic rent is simply the difference in demand for living in a particular area?.

  2. HNSG, do you mean invest in the buildings or in the land?

    Nobody can invest in land, it is just there, it is like saying "I will invest in fresh air", that does not increase the quantity of fresh air by one atom, the only way you can make money is by depriving others of fresh air and then selling it back to them.

    From the point of view of a serious investor in buildings, the impact of LVT is exactly the same as an interest-only non-repayable non-recourse loan used to buy the land. He keeps all the income from the building itself, the lender/the state gets all the income from the location.

    So the income from a skyscraper worth $1 billion would be worth a lot more than a tiny house in a little village, assuming both were built on land acquired with a 100% interest-only mortgage.

    I covered that one here.

  3. Henry not so George18 February 2013 at 22:36

    Hi Mark, thanks heaps for your prompt reply. Well, my point was probably more about the size of economic rent. If economic rent represents the additional demand for land (i.e. in this particular location 100 people will be willing to live as opposed to some middle of nowhere where only 1 person will be willing to live), then surely by taxing all this additional demand we create a situation in which there is no more profit per unit of labour in the city centre than there is in the countryside, right? So, if someone "invests" in a little house in a small village then he will get as much out of his investement/labour there as per unit of investement/labour if he was to build a massive skyscraper in central london? Is this correct?

  4. Henry not so George18 February 2013 at 22:38

    You write "The value is in the location. Had they spent all that money building Palm Island or Hong Kong airport off the coast of Alaska, then the final value would have been nothing, the location is fixed, the benefits of the location can only be enjoyed from that location, even if the price of that is piling up some rubble first". But at the same time advocate for taxing away ALL THE BENEFITS OF THE LOCATION, or have I misunderstood your points? I mean, if the rent is taxed at the level of 100% then all the benefits of a given location fade away, don't they?

  5. HNSG, forget about LVT being a tax.

    Just imagine the government owns the land and rents it to people to put their own buildings on.

    Or imagine that when people buy land, they buy it with a 100% interest-only loan from the government.

    The fact is that in London (where I live) more than half of people rent their homes. Wages are higher in London, but rents are also much higher in London, the amount that people have left over is hardly higher than if they did the same job somewhere else for lower wages and paying lower rent.

    So all these people are not deterred by the fact that they have to pay for the "benefits of the location" (in other words pay rent) are they?

    Now, these people (the workers and rent payers) are important. The people who collect the rent aren't. LVT is on the landlord, as long as the tax leaves him with just enough money to repair the buildings etc, then he will continue being a landlord.

  6. Henry not so George19 February 2013 at 10:07

    I get the principle and I agree with it. BTW thanks a lot for putting this whole FAQ together, it's been really helpful. My only doubt is the height of this "interest rate". If it was to reflect the 100% of the "value" of the land, then why would anyone want to invest in new developments in places with really high value? If I understood you correctly, with LVT in place a plot of land alone in central london could yield as much profit to an investor as a plot of land in northern wales, right? the difference being that in london the investor would need to risk more money and build a fancy block of apartments, while in wales he could get the same unit of profit per unit of labour by simply pitching a tent for tourists? In other words, why would anyone choose to build anything on the expensive piece of land? I am sorry if these questions are silly, but I am really not sure if I understand this right

  7. HNSG, no, you have not distinguished between the "site premium" and the "total rent". LVT is only on the "site premium" and not the "total rent".

    You have to understand this first, explanation here.

    "... with LVT in place a plot of land alone in central london could yield as much profit to an investor as a plot of land in northern wales, right?

    The difference being that in London the investor would need to risk more money and build a fancy block of apartments, while in wales he could get the same unit of profit per unit of labour by simply pitching a tent for tourists?"


    You are not comparing like-with-like.

    Let's start by assuming identical plot sizes (residential) and identical buildings (a bog standard house). You have to read that link first for real life examples.

    If you own a plot in LS28, you know that you can rent out the finished house for about £8,800 a year and the LVT is £4,800. So your net income after LVT is £4,000; the house costs £75,000 to build, so it is worth building, or if it is already built, it is worth owning.

    If you own a plot in IG9, you can rent it out for about £20,800 a year and the LVT is £16,800; the house costs £75,000 to build, so it is worth building, or if it is already built, it is worth owning.

    So using your "diagonal comparison", if you buy expensive land in London and for £ millions and build a hundred flats on it for a cost of £5 million, your gross rental income minus LVT will be (say) £350,000 a year; that's a fair return on £5 million bricks and mortar investment. The flats are worth building, or if they are already built, they are worth owning.

    And if you put up a tent in a field in Wales which you have bought for £1,000, then your LVT is about £10 a year, you get £100 a year income from the tent, which is (we assume) a fair return for buying and pitching the tent and replacing it every couple of years etc etc.

  8. Henry not so George19 February 2013 at 12:00

    Ok, I see. Should LVT capture the full site premium then? Is this how you calculated the LVT rates in your examples? Also, what is the basis for comparison? You wrote "if two physically identical houses in two different areas rent for different amounts, the difference between the rents relates to the "location, location, location" and that is subject to LVT." Well, are we talking two different location within one county, or within one country? Again, thanks a lot for taking the time to clarify these issues

  9. HNSG:

    "Should LVT capture the full site premium then?"

    In a perfect world, yes, but you can choose any tax rate between 1% and 100% of site premium.

    "what is the basis for comparison?"

    Always like-for-like within one country (LVT is a national tax, not a local tax or an international tax). All variables are kept constant apart from one.

    So compare identical buildings on identical sized plots in different areas (i.e. houses with houses, office blocks with office blocks, farms with farms). Different areas means different parts of the same town, different towns etc.

    And compare identical-sized plots in the same area with different uses (car park, home, shops, factory).

    And compare identical sized buildings on different sized plots in the same area (house with big garden, house with small gardent).

  10. Henry not so George19 February 2013 at 21:44

    thanks Mark. just one more thing. I've discussed LVT with a friend of mine and he asked: "well, if EVERYONE has a natural and equal right to land, then why do we restrict this everyone only to citizens of one state? why should only one government be collecting and spending the rent? wouldn't lvt become an excuse for a world government or stronger eu?"

  11. HNSG, good question. I'm strongly against world government (or even the UN or NATO or the EU). But the fact is, we have this fictitious entity called "your country" or "the nation state" and that seems to work best as a unit of government and hence of tax collection.

    In other words, I really do not mind paying tax (especially if it's LVT) if I know that it will be spent for the benefit of everybody in my country (including me and my family). But I am against paying tax (LVT or not) in my own country to be given to people in other countries.

    But your friend makes a purely philosophical point of little relevance to the question of whether it is better to tax earned income or land rents.

  12. Henry not so George19 February 2013 at 22:59

    "But your friend makes a purely philosophical point of little relevance to the question of whether it is better to tax earned income or land rents."

    Good point. I believe one way out of the "philosophical" problem of the limits of community entitled to benefit from LVT could be to argue for open borders and allowing all people willing to make an honest living to enter the UK, work and benefit from the subsequently increasing land value..

  13. MW: How do you think the business of land-development in isolation would look like under more or less full-on LVT. I am thinking about the whole process of figuring out new use (yes, I know this is a very marginal form of business) subdivision, planning where the roads go etc. Kind of as a follow up to the Gonheur/Caplan treatment.
    Say we have a liberal planning regime. All that has to be approved is conversion of other uses (greenfield to built), and connections to infrastructure, other than that, it's all free use. And we have a tax on 90-100% of land rental value. If someone picks up something that is not up to scratch in it's use, and converts it to residental, subdivides it into lots, puts up roads, sewers, some greenery, etc. (the latter three then passed on to council adoption, which is the norm now), and maybe some building constraints in the form of covenants. Is there anything for the developer to sell? I'm not trying to overstate the role of the developer, but in theory, both subdivision, planning, infrastructure etc., are "improvements", but in practice how would these improvements be sold?
    Is the answer that the lots would have a capital value higher than surrounding, theoretically undeveloped lots, which would be the premium for land development? Or is there less of a role for "entreprenourial" development with LVT, and would this be more a local govt. role?

  14. Kj, I covered that at point 3.

    The LVT bill will have to be pre-agreed when planning is granted, i.e. the planning or change of use and the LVT bill are negotiated together. If developer think council is too greedy, he walks away. So - just like now - whichever developer has the cleverest plan will win the bid for the land or the planning permission.

    Or, thought experiment and without LVT - the council owns some land with planning and offers to sell it to developers. The council also arranges a 100% interest only loan. So during the construction period, the developer is paying the land rent to the council (in the form of interest).

    Why does it make a difference who is selling the land and who is receiving the interest? Why is that any different to a developer buying some land from a private individual for a few pence and paying LVT to the council?

    Answer - it's not.

    And "the developer" just has to do the calculations on what is the best thing to build and how much to pay for the land (in cash or in LVT). He does not do the work. The real work is done by architects, engineers, brick layers, plumbers and electricians.

  15. Kj, I covered that at point 3.

    Which point?

    Why does it make a difference who is selling the land and who is receiving the interest? Why is that any different to a developer buying some land from a private individual for a few pence and paying LVT to the council?

    True. But I am talking about the capital value of subdivision improvements/planning currently sold as a land premium.
    Hereabouts, new developments at town edges, when it comes to detached homes, are usually bought in tracts from council-owned strategic options/land banks. So far so good. The developer may or may not be a builder, but the way they usually operate is that after land purchase, the developer plan, subdivide, bung up some roads, trees, playgrounds and rules, and then sell the planned lot to the end-consumer. The end consumer then buys a kit-house or site-built. So the capital value premium I am talking about is before actual construction. Since there is usually a market premium for these lots compared to single lots of comparable size (including the added costs of utility connection fees and ground preparation on the single lots), there does seem to be, at least as of now, some value to the developers actions before actual construction. Sold with LVT, there would be the expectation that any subdivision improvement over above general locality premiums, would be assessed within a couple of years, so not such a clear premium to sell that role for (the premium is moved into a higher LVT-assessment). Which leads me to the question whether planning/subdivision amenities (also for redevelopments where the planner/subdivider is also the builder, which then sells to the end-consumer), would naturally fall on govt. since they'd collect the premium.

    Not a KLN, just a train of thought.

  16. Kj, OK, let's focus on new residential development at the edge of town, where the land belongs to the local council.

    The council sees that the LVT being collected per existing house is £10,000, and thinks "Great, if we allow another 100 houses to be built, we get an extra £1 million".

    So we know that once the houses are built, the tax is no longer the developer's problem, because the people who buy the houses will pay it.

    So it says to developer "You can have this land to build 100 houses, which will take you one year. Pay us £1 million a year in LVT and you can keep the profit".

    The developer can say "F- off, that is too greedy, we'll give you £200,000" and the council will say "How about £600,000?" and they will agree a price of £500,000.

    And the developer will say "OK, I'll build the houses but I want the council to do the water pipes, electricity, gas and broadband and pay for the roads" and the council says "We'll pay for the roads but not the water, electric, gas and broadband" and then agree on that and then they finalise who does what and finalise the price.

    So then the LVT for the one year of construction is whatever the developer thinks is low enough to give him a reasonable chance of making a profit.

    Remember - all the developer does is make decisions and gamble on his decisions being right. He does not do any work, so there is no need for him to make a capital gain of £10 million from those 100 houses. If he can make a capital gain of only £500,000, then that is still a good return on a few hours calculating and negotiating and planning.

  17. Ok. But if we just think of the developer as the one that plans how many lots, what to put where, and put together on-site infrastructure, while the lot-buyers build their own houses, what's important for him is the increase in capitalized rent he can collect immediately on sale. When he sells the lot, it's sold with the expectation of the site value premium being collected. So any additional premium owing to the planning and infrastructure bit, will probably not lead to a higher capital value of the ready lot. Except maybe any connection fees/groundwork that would have been paid by the lot-owner if it had been bought as a single lot directly from the council.
    So even if the developer gets a 500K discount from the council, which is like a cut in the interest rate if there was no LVT, he doesn't receive 500K profits at the sale of the lots. I'm here using 100% LVT, but it also applies to 70-80-90%. The role of the planner/developer, not builder, as I mentioned in the last post, would only get 30-20-10% of the added value of planning/development.
    If he also builds the houses, he'll get the market value of the house, but the same thing applies, the value of the whole development would be reflected in increased land rents, not capital values, which is kind of the point, but it also reduces the incentives for developers to do large-scale planning/infrastructure development for added value. Or?

  18. Come to think of it, it's more or less the same case as the whole Disneyland KLN. Disneyland creates a lot of value uplift on it's own land etc.. We counter that with assessing disneyland as any built land around it. But for the purpose of the subdivided lot, the value of the single lot, from the point of the sale is then a function of the immediately surrounding lots, which in Disneyland would mean the value of a shop on main street would be the proximity to space mountain and that castle and whatnot. And when we collect full rent, Disneyland, if subdivided, wouldn't be a claimaint anymore when it doesn't own the whole area, and it does not get any capitalized rent at the point of sale either.

  19. Kj, the costs of building is a constant, the rental value of the finished plots is a constant, the only variable is what sort of discount the developer get, i.e. how the future land rents are shared between the council (as LVT income) and the developer (as largely unearned capital gain).

    If his new plots get a 100% LVT discount in eternity, then his (largely unearned) capital gain is the same as without LVT. If there is no discount, his capital gain is zero.

    So the council and developer have to argue over how big his LVT discount is. If it is not big enough, he walks away and there is no increase in future LVT revenues for the council.

    Assuming that the developer wants a maximum discount to give the capital gain (but he is in competition with other developers) and that the council wants to give the smallest possible discount which is just big enough to persuade the most competitive developer to do the job, I am sure they will be able to agree a discount.

    It might be a 50% discount for one year. It might be a 100% discount for three years. That is up to negotiation and market forces.

    And of course political forces (NIMBYs) say that no new houses should be built. The council also has a difficult trade off between maximising future LVT revenues and keeping the NIMBY voters happy.

    But whatever the outcome, it can't be worse than it is now. The real strength of LVT is to keep existing buildings in use and in good condition.

  20. If his new plots get a 100% LVT discount in eternity, then his (largely unearned) capital gain is the same as without LVT. If there is no discount, his capital gain is zero.

    Yes, but. A time-limited discount for the developer can't be sold after it's run up. It's definetly a saving for the developer, but the potential gains to improving the whole development can't be recouped, because this will be internalised in rental value -> tax. It seems to me that the only one that has an incentive to create local improvements, at least intentionally (as opposed to normal external effects of individual improvements), is the residual claimant, i.e. govt.

  21. But whatever the outcome, it can't be worse than it is now. The real strength of LVT is to keep existing buildings in use and in good condition.

    Agreed, ofcourse.

  22. Kj, let's assume that the market clearing level of discount is 100% for two years from grant of planning. So the developer gets his housing completed as quick as possible, and if he can finish it in one year, he can sell the houses to people who won't have to pay LVT for the first year of ownership (so he can add £10,000 to the price).

    So the developer's capital gain is £10,000 per house, and good luck to him. From Year Three onwards, the council gets the LVT.

    The point is, there is no need to allow developers to keep a £100,000 capital gain to encourage them to develop. They'll be quite happy to do it for £10,000 pure profit per house. All the people who actually manufacture the building materials and dig the foundations and lay the bricks are not getting an unearned profit, but they are still happy to do their bit. Why should the "developer" get an unearned bit on top but not them?

  23. Hi Mark, I come to your site to arm myself with all the arguments. Thanks for putting them together. I was wondering how LVT would change the development business model. At the moment since there is no cost to hold land with development potential, the main skill of the developer is to landbank. They admit in their various annual reports that their main skill is 'planning uplift' or 'planning enhancement'. That is to say, paying a price for the land assuming some poor level of planning permission with a view that their skill is to get better planning permission.
    However, there is a big cost to processing planning permission. My sister recently wanted to put a wall back on the front of her garden by the pavement where a previous owner had removed it to use the space for car parking. Getting drawings prepared and applying (twice) cost her relatively large amounts. It set me thinking why any developer would embark on an expensive and uncertain planning uplift project, if LVT would take all of the possible gain.

    You write above, "The LVT bill will have to be pre-agreed when planning is granted, i.e. the planning or change of use and the LVT bill are negotiated together. If developer think council is too greedy, he walks away. So - just like now - whichever developer has the cleverest plan will win the bid for the land or the planning permission."

    To walk away, they would have to sell the land. They have lost their transaction costs, and the costs of the failed planning process.

    So perhaps today a developer buys a plot of land for £30m and sinks £3m into an uncertain planning application project that would double his money if granted before anything was even built (i.e. put at risk losing £3m in denied planning, but for a possible gain of £30m), but with 100% LVT would that mean the land was worth close to £0 and the cost of preparing planning would still be £3m but would not increase the value of the land at all since extra LVT would take it?

  24. OTOH, you start off an example with planning application costs of £3 million but you do not provide enough realistic information for me to be able to reply properly. How much will this project cost to build? What will the total rental value be once finished? How long will it take to build?

    Either way, the argument "We can't have LVT because local councils make the planning process so difficult" is one of the worst KLN's I have ever heard.

    Does it not occur to you that with LVT, local councils have every interest in planning being dealt with as swiftly and cheaply as possible?

    And that it is the lack of LVT which makes the planning process so difficult? There are too many vested interests and NIMBYs getting involved, which would melt away under LVT.