Why is some land underused, and what can we do about it?

Why does some land sit being used less than it could be, when there is such a shortage of housing and space for businesses?

We are not talking about housebuilders, which we have covered elsewhere. That is a complicated and different question.

There are some plots of land in existing towns and cities that lie derelict or with dilapidated buildings that the community would love to see replaced or upgraded. Opinions differ about how many, but there are at least a few. That land is often owned by families or by investment companies. How can this make sense? Are they crazy?

Sitting on land can make sense if you think you will make more money by doing that than by building homes on it now. House prices have rocketed ever since the the 1940s, after 500 years of little change, so there are some good reasons to think that.

 700 years of UK house prices adjusted for inflation, from Global Financial Data

700 years of UK house prices adjusted for inflation, from Global Financial Data

Of course, they are losing out on rents that they could receive. They could develop the land and lease it out, like the great estates used to do, but after the leasehold reforms that means they would lose control of many aspects of it forever.

Couldn't they sell the land to someone to develop and buy another asset to sit on? They could, but that might incur capital gains tax. They have often owned the land for a long time.

They might also like the lack of clarity about the current value (due to lack of planning permission) but high potential end value, to keep inheritance taxes down in the meantime. They might have historical connections to that piece of land and to the local government who will make decisions about it, which makes that land more valuable to them than to a potential buyer.

The owners may not have the funds to pay for the development, and not want to borrow it or lose control by teaming up with someone else. Some people just like having an asset that goes up in value by, say, five or six percent a year forever. It has a lot of what economists call real option value – the freedom to choose later from a range of possible things to do with it.

What's more, they will know that the number of homes they will get permission to build on the land will probably increase over time, as the housing crisis gets worse. Building homes on it now would make it impossible to add more homes later, because the current system gives massive weight to the views of existing residents (but not so much weight that existing residents are happy about new development, as the frequent waves of protest show).

We've written about potential sensible property tax reforms here, but the idea we wrote about would only take effect after the next transfer of the land, which wouldn't help here. We'd love to hear any politically feasible plans for tax reforms to fix this sort of situation, if you have one.

If we can't fix that, the easiest thing to change is the expectation that prices will keep going up. After all, they stayed nearly flat for 500 years until the 1940s. That will create a race to use derelict plots now before prices drop. The easiest way to do that is to make sure that many more beautiful, decent, secure homes get built. That will end the housing crisis and make our existing places better.  We've written about a suggestion for that here. Please let us have your thoughts and other ideas.