If land banking is the main problem, here's how to make forty times your money

If land banking is the main cause of the UK housing crisis, here's how to make forty times your money.

The market thinks the assets of the 10 biggest UK listed housebuilders are worth about £41 billion.¹ Of course, that includes the value of the houses they've built but not sold yet, as well as the unbuilt land banks. So the value of their land banks can only be a fraction of £41 billion, if the market is right.

is the market wrong by a factor of forty?

is the market wrong by a factor of forty?

But the total value of the scarce planning permissions that allow the current stock of UK housing to exist is about £3.7 trillion, as we explained in our previous post.

The top five or six housebuilders are vastly bigger than most of the rest. Even if the rest of the housebuilders have twice as much land between them as the top ten, that would mean those top ten housebuilders can solve one third of the housing crisis. If so their land banks are worth more like one third of £3.7 trillion, so £1.2 trillion.

All of the upside would go to the shareholders after paying off the liabilities of £13 billion. But the total value of the shares according to the market is only £28 billion.

So what the market thinks is worth £28 billion is actually worth about 44 times more.

If you're sure that's right, we assume you'll be betting whatever you can afford on the shares of the major housebuilders. Or perhaps land banking isn't the main problem.

 

 

1 Total equity market capitalization of Barratt, Taylor Wimpey, Persimmon, Berkeley Homes, Bellway, Redrow, Galliford Try, Bovis Homes, Crest Nicholson and Countryside at closing prices on 16th December 2016, plus total liabilities of approximately £13 billion based on last published balance sheets. 

The UK’s hidden handcuffs

UPDATE: a new article in CapX updates these estimates for the latest research, with graphs

If you live in the UK, you are getting by at three quarters of your full strength. So is everyone else, but most people don’t know yet.

The UK as a whole is running at three quarters of its potential, because of the shortage of homes. To put that in perspective, that’s more damage to the economy than anything since the Black Death.

As Matt Rognlie, a young economist at MIT, has pointed out, housing is the biggest cause of inequality. Half of the UK is worse off than 14 years ago because of housing costs.¹

But that is not all. The shortage of homes in the UK is now so bad that it hurts the economy by 25-30%.

Heard of the UK’s ‘productivity puzzle’? There’s less of a puzzle than you might think. There’s good evidence that low UK productivity is mainly down to lack of housing near the best job opportunities. That means everyone in this country is 25-30% worse off than we would be if we had a proper housing supply.

That makes us less competitive against other countries, like China and the US. It’s also a great reason for us all to get together and fix the problem. It doesn’t have to be about us vs. them, or one group against another. We can fix the problem and make the whole country better off.

What's the evidence?

In 2015 two talented professors, Enrico Moretti at Berkeley and Chang-Tai Hsieh at Chicago Booth, got together to measure the effect of shortage of housing on US productivity. They concluded that lack of housing had impaired the US economy by between 9.5% and 13.5%.

How? Mainly by stopping people getting the best jobs that they want. Lack of housing also causes stressful insecurity and long commutes. Expensive offices and factories damage businesses and growth as well, of course.

Is the UK any better? Not by a long way. 

The value of land under US houses is about $10 trillion,² or 12.5% of US total net wealth. That gives some measure of the artificial shortage of homes, because many more great homes should fit into a square mile than you'll find in sprawling Palo Alto or London’s zone 5. Think of the beautiful terraces of Kensington & Chelsea, or central Paris. If homes in London as a whole were more like one of those places, land for housing would be much cheaper.

KENSINGTON & CHELSEA: HARDLY THE UGLIEST PLACE TO LIVE

KENSINGTON & CHELSEA: HARDLY THE UGLIEST PLACE TO LIVE

The same number for the UK is £3.7 trillion,³ or 40% of UK net wealth: more than three times as bad as the US proportion. If we take the total market value of UK housing from Savills rather than the ONS, the number is more like £5 trillion.

That probably means that the damage to the UK economy and GDP is somewhere around three times as bad. It may not be 39.5%, but 25-30% is a reasonable estimate.

That’s an incredible amount of self-inflicted damage, every year. 30% of GDP is about £600 billion, more than central government spends in a year. Of course, it’s a rough estimate until someone does a proper UK study.

Has anyone done a proper study? We sent a Freedom of Information request to HM Treasury, asking for their estimate of the impact of the housing crisis on UK GDP. Despite being supposedly focused on the housing shortage, they answered that they had no idea.

What gets measured, gets improved. If we recognize how much damage the lack of homes is causing to the UK as a whole, and to our competitiveness against other nations, perhaps we can finally all get together to build enough homes.

 


 

Footnotes:

1 Resolution Foundation, The Housing Headwind, Figure 21

2 See, for example, William Larson, New Estimates of Value of Land of the United States, Bureau of Economic Analysis, 2015, and the studies cited in Table 6.

3 UK Office for National Statistics, Blue Book data series for 2015, CGLK minus MJF8. The actual number may be higher because permissions on land not under dwellings are counted separately. Value of land under buildings and other structures was £453 billion. The value of land currently used for agriculture (including the value of planning permissions on greenfield land) is currently combined within AN.115 and will be disclosed separately for the first time in autumn 2017.

How would you block as many new homes as possible in existing cities?

If you wanted to design a system to approve as little densification as possible, what would you do?

First, prohibit all building unless specific permission is granted.

Second, create a lengthy procedure with extensive appeals and ultimate recourse to higher levels of government, to make sure that NIMBYs get as much chance to block as possible.

Third, make sure that questions about beauty are put at the back of the queue, so that NIMBYs are as worried about new development as possible.

Fourth, make sure you have blocked as many homes as possible for forty years, so that the price of land with permission is obscene and buyers are so stretched that they just want square footage, and can’t afford to care about aesthetics.

Fifth and most importantly, make sure that every approval makes the neighbours clearly worse off (unless they have exactly equivalent property that will benefit from the precedent), and that the approval doesn't really benefit anyone in particular except the landowner.

Does any of that sound familiar?

 

YIMBY book list

If you are looking for gift ideas or just what to read next, here are a few of our favourite books on how to fix the housing crisis:

Matthew Yglesias, The Rent is Too Damn High

Ryan Avent, The Gated City

Edward Glaeser, Triumph of the City

Enrico Moretti, The New Geography of Jobs

Mancur Olson, The Logic of Collective Action – be warned this is drier than the others.

Thanks to yimby.wiki for giving us the idea!