By Claire West

Large developers are ‘playing’ an outdated planning system and fooling the Government into potentially wasting taxpayers' money propping up land prices.

Policy Exchange has published a paper, Why Aren’t We Building Enough Attractive Homes: Myths, misunderstandings and solutions, recommending wholesale changes to the planning system. It says that 2012 is currently on course to be the year with the second lowest annual level of new homes since World War II and a change of course is needed to be taken by the government to get Britain building.

The paper says that the argument often used by developers that there isn’t enough credit to build is false. Between 2000 and 2007 new lending doubled but all that happened was house prices and land prices soared — the number of new housing built barely rose.

It argues that the actual problem is that there is no real land market in England. Councils have absolute control over land use in their area via long and overly complex plans which consistently fail to release enough land for homes. Developers purchase land as it is released by councils for homes and ‘land bank’ without building many new homes because the land with planning permission rises in value. This explains why developers have hundreds of thousands of plots but haven’t built any new homes on them.

To compound matters developers borrow debt wholesale to fund themselves. This means if land values fall their balance sheets are impaired and they can’t build in a downturn, so they relentlessly under-supply housing. There is a real danger of credit turmoil from the Eurozone driving down housing numbers yet further.

Releasing further credit like the £10billion recently announced by the government simply pushes up land and house prices. Developers will continue to borrow at high prices to buy land and continue to land bank as the value of the land rises.

The report recommends:

Before 2015, there are short term ways to get Britain building without causing political turmoil. Self-build schemes, new urban developments near existing cities and Garden Cities supported by local people should be allowed outside of the existing planning system. The government should also reduce brownfield requirements to help regenerate existing cities to allow commercial land to become homes. These policies would release new land into the market outside existing systems. Unlike releasing more credit they would avoid supporting a failing system while dealing with the legitimate fears of local residents. This would show developers that ‘land banking’ is no longer the best strategy

Long term reform needs to allow people living close to proposed new development to be able to vote directly on any proposed scheme. Local control, not planning rules, would drive up the quality of the development and strip out pointless or unpopular requirements. For greenfield, there should be compensation from the rise in land values to those nearby. This would both go to local people and pay for parks and open spaces selected by those living close to new homes.

Alex Morton, author of the paper, “The rise in house prices is really about a rise in the value of land with planning permission, not some magical process of wealth creation. This rise should mean more homes are built, but our existing planning system instead allows councils to decide where and how many homes need to be built.

“Developers know land release will always be inadequate. They therefore hold onto land because it rises in value and it takes a long time to get hold of, meaning that they don’t build enough new housing. The warped nature of the market is shown by the fact house prices have tripled but new homes being built have actually fallen.

"Meanwhile constant attacks on NIMBYs ignore that new homes are at best mediocre and local people see many costs and few benefits from new developments. We need a system where local people, not councils, are incentivised to accept new homes. Centrally imposing homes hasn’t worked. Fortunately there are many sensible options they can pursue in its place that will build the homes we need."