The Ground Beneath Us: What a Land Value Tax Would Actually Do to Construction

Andy Burnham has backed a land value tax since 2010. He is now the likely next Prime Minister. Our industry has spent sixteen years treating this as somebody else's argument. That is no longer a safe position.

There is a policy that both the Institute of Economic Affairs and the Labour left think is a good idea. That should make you curious, or suspicious, or both.

The policy is a land value tax. Andy Burnham first argued for it during his 2010 leadership run. He was still arguing for it when he launched his return to Westminster, saying he had long been persuaded by the case for it and that land remains under-taxed. Dan Neidle has made the detailed technical case for it in the Sunday Times, and Tax Policy Associates has been making it for years. Fairer Share, which Burnham publicly supports, has a proportional property tax model sitting on the shelf ready to go.

For most of that time this has been a seminar-room argument. It is not any more.

What follows is not a verdict. It is a set of questions I think our industry needs answers to before this arrives, and a few observations about who wins and who loses that I have not seen made anywhere else.

Start with what we already have, because it is genuinely indefensible

England has three property taxes and all three are badly designed.

Council tax is calculated on what a house was worth in 1991. Not adjusted, not indexed, not revalued. The actual 1991 figure, from a year before most of us had an email address, from a housing market that no longer resembles the one we live in. Every home in England sits in a band assigned before the internet was a consumer product. Burnham calls it highly regressive and he is right, because a flat set of bands applied to a market that has diverged wildly by region means that a modest house in a cheap area can carry a higher effective rate than a mansion in an expensive one.

Stamp duty is worse in a different way. It is a tax on moving. It punishes the exact behaviour a functioning economy needs, which is people and capital relocating to where they are most useful. Every housebuilder knows what it does to the second-hand chain, and every chain that stalls is a new-build reservation that does not convert.

Business rates penalise you for improving a building. Put a better roof on it, and the assessment goes up. It is a tax with a built-in disincentive against exactly the investment we say we want.

So the starting position is not "the current system works and this is a risky change". The starting position is that our property tax system is a museum of bad decisions. The question is only whether the proposed replacement is better, and whether the journey between the two is survivable.

Those are two separate questions, and almost everyone conflates them.

The appraisal argument, which is the bit our industry uniquely understands

Here is where construction people have an advantage over economists, and I think we should use it.

Every development appraisal works backwards. You start with gross development value at the top. Then you take out build cost, prelims, professional fees, finance, contingency and developer's profit. Whatever survives to the bottom of the sheet is what the land is worth. Land value is the residual. It is not an input you negotiate. It is the number that falls out at the end.

This has a consequence almost nobody says out loud.

If you levy an annual charge on land, that charge does not get added to the build cost. It cannot. Build cost is set by materials, labour and programme, and none of those care about the tax. The charge comes out of the residual instead. Which means it comes out of what anyone can afford to bid for the site.

So land prices fall. That is not a side effect of a land value tax. That is the mechanism. That is the whole thing working as designed.

And it points at the deeper argument, the one that has kept this policy alive for a hundred and forty years since Henry George. Landowners do not create land value. Planning consent creates it. Infrastructure creates it. A new station, a new hospital, a new employment allocation, a school that starts performing well. The owner's contribution is to be standing there when it happens.

We already half-accept this. That is what Section 106 is. That is what CIL is. That is what the entire land value capture conversation has been about for a decade. A land value tax is just the same argument with the politeness stripped out.

So the honest question is not whether land value capture is legitimate. We settled that years ago. The question is whether an annual charge is a better instrument than the transactional, negotiated, wildly inconsistent mechanisms we currently use.

Because if you have ever sat through a viability negotiation, you know how well those are working.

What it does to the pipeline

Right now, holding consented land costs almost nothing. That single fact explains most of the structure of the British land market.

It is why the option agreement exists. It is why land promoters exist. It is why strategic land portfolios are held for fifteen and twenty years. Patience is free, so patience is the strategy. If you can wait longer than the other bidder, you win, and the only thing you need in order to wait is a balance sheet.

Put an annual charge on that land and patience gets a meter running.

The plot that was going to sit until the market improved now has a monthly cost attached to doing nothing. The strategic portfolio that carried at cost for two decades now generates an invoice every year, whether or not a spade ever goes in the ground. The derelict city centre site that has been a car park since 2009 becomes a liability rather than a lottery ticket.

Some of that land moves. Some of it moves to people who actually want to build on it.

That is the theory, at least. And here is my first honest doubt about it.

Land does not move to builders just because holding it is expensive. It moves to whoever can absorb the holding cost most cheaply, and that is not always the person with the JCB. It might be the institutional investor with a lower cost of capital. It might be the party who can price the tax into a lower offer and simply carry on waiting, having transferred the pain to the seller once, at the point of sale, and then absorbed it as a modest annual drag.

Which is the difference between a tax that unlocks land and a tax that just reprices it. I do not think anyone knows which we would get. I would like to hear from someone who has modelled it properly rather than asserted it.

Who wins

SME housebuilders. They lose every land competition to a longer balance sheet. If the price of land falls and the value of patience falls with it, the playing field tilts back toward the people who want to build now rather than the people who can afford to wait. We have spent fifteen years wringing our hands about the collapse in SME output. This is the most direct lever anyone has proposed.

Brownfield and urban regeneration. The derelict plot suddenly costs something to leave derelict. Every regeneration scheme I have watched stall has had a landowner somewhere in the chain with no reason to move. Give them a reason.

Contractors. More starts on site is the only metric that matters to us. If the policy delivers starts, we win, almost regardless of what it does to land values.

Anyone who wants to move house, if stamp duty goes with it. Unblock the second-hand chain and you unblock new-build sales.

The regions. Land in Lancashire is not land in Kensington. A tax based on land value moves the tax burden geographically, and it moves it out of the South East. That is not an accident of the design. For a Manchester-born Prime Minister with a place-led agenda, that is the point.

Who loses

Strategic land promoters. The entire model is optionality and patience, and patience is precisely the thing being taxed. I do not say that with any pleasure. Land promotion does real work in bringing sites through a planning system that is otherwise impassable for most landowners. But the model does not survive this policy unchanged.

Anyone whose balance sheet carries land at a value the market is about to re-rate. If you are a listed housebuilder whose share price is partly a function of the plots on your books rather than the homes coming out of the ground, this is a repricing event before it is a tax.

Landlords, who will attempt to pass it through. In a rental market this tight, most of them will succeed. The economic textbook says a pure land tax cannot be passed on because the supply of land is fixed. The textbook has not tried to rent a two-bed flat in Manchester lately. I am not sure the theory survives contact with the actual market, and I would want to see that tested before I signed up.

Homeowners in London and the South East, where the land under an ordinary terrace is worth more than the house standing on it. Fairer Share's own modelling accepts this and proposes a transitional cap. Whether a cap survives the first Budget is another matter.

The part that should worry you more than the tax itself

Development finance is secured against land. Land is the collateral for the sector's entire funding structure.

Charles Goodhart, formerly of the Bank of England, has said this plainly: introduce a land tax too quickly and house prices fall substantially, and because so much of the financial system is collateralised on property, you risk a financial crisis. He also thinks the arguments for the tax are overwhelming. Both of those things are in the same statement, and that is the whole problem in one sentence.

Think about what a fast repricing of land actually does to us. Covenant breaches on development facilities. Sites where the debt exceeds the land value. Schemes that stop mid-build because the funding line has been re-tested against a lower asset value. Contractors on those sites with retention they will never see.

We have watched this film. It ran from 2008 to about 2013 and it took a generation of subcontractors out of the industry.

So the transition is not a technical detail to be worked out later by officials. The transition is the policy. Phased over ten years with clear forward guidance, this could genuinely unlock delivery. Announced in a Budget with an April start date, it could freeze the land market solid while every buyer in Britain waits to find out where values land. And a frozen land market means no starts, which means no houses, which is the opposite of the stated objective.

The questions I would want answered before I formed a view

Who values it? Every plot in Britain needs a land value, separate from the building on it, updated regularly. The Valuation Office Agency has not managed to revalue council tax since 1991. What exactly makes us confident it can value the ground beneath every property in the country, and keep doing it? This is not a rhetorical objection. It is the reason no country has fully implemented this. If the answer is automated valuation models, say so, and let us look at the error bars.

What happens to hope value? Is the tax levied on existing use value or on value with consent? Those are wildly different numbers on the same field. Tax on existing use and you have barely touched the landbanking problem. Tax on hope value and you have to define hope, which is a lawyer's Christmas for the next twenty years.

What about the land we need to not develop? Agricultural land, flood plain, green belt, biodiversity net gain sites. An annual charge on land is indifferent to whether the land should be built on.

What happens in the announcement gap? Between the announcement and the start date, does anyone buy land? I think the honest answer is no. That gap is a delivery hole in the middle of a housing target.

And who actually pays? The theory says the landowner, because land supply is fixed. Our experience says costs travel downhill until they reach whoever has least power in the chain. In our industry that is usually the subcontractor, and eventually the renter.

Where I land

Land is under-taxed. I think that is close to indisputable, and the appraisal maths makes the case better than the economics does. The instruments we use instead are worse: a tax based on 1991, a tax on moving, and a tax on improving your building.

But being right about the destination tells you nothing about whether you can survive the journey. The strongest argument against a land value tax is not that the idea is wrong. It is that the transition is where the sector actually lives.

I have heard "developers just landbank" from people who have never opened an appraisal. I have also heard "we cannot build any faster" from people sitting on thousands of consented plots. Both of those statements can be false at the same time, and that is what makes this genuinely hard rather than merely political.

So the question is not whether land should be taxed. It is whether making land expensive to hold gets houses out of the ground, or whether it gets quietly baked into the next land offer while the same fields stay empty and the same sites stay boarded up.

If you are sitting on a strategic land portfolio this morning, you are already modelling this.

I would like to know what your numbers are telling you.