Pages 1   2   3   4

Submission to the All Party Oireachtas Committee on the Constitution - page 3

by Tom Dunne

Zoning and Development Land prices

If a planning authority does not zone an adequate amount of land, the value of the zoned land would be increased by an even greater amount than might be expected. Just what is an adequate amount of zoned land is, of course, a matter of judgement and judgements about this are hard to make and are influenced by political and financial considerations.

In any event it should not be simply based on an estimate of the amount of land required to build new accommodation to house anticipated future population growth. This implies control over the rate at which development land comes to the market during the timeframe of the plan. The Planning Act confers no such power and leaves the rate at which zoned land came to the market up to the individuals who own it.

In fact a marginal shortage, resulting perhaps from the personal decisions of individual landowners not to bring zoned land to the market, can have a disproportionate effect and drive up prices. Such a deficiency of the supply of zoned land on the market, even if it is just marginal, will result in a big increase in value of the land that does come to the market. Indeed, values may have to increase very substantially to tempt a reluctant landowner to sell despite personal reasons for not doing so.

The solution would appear easy. Simply zone and service much more land than that required to meet forecasted development needs. Local Authorities are, however, understandably reluctant to do this because the resources available to service land are scarce. Plainly it would be wasteful to provide services to land that may not be developed for a generation.

It makes sense only to service land that the plan sets out for development within the timeframe of the development plan. The implied expectation is that land will come to the market because of the uplift in values due to zoning. It is questionable whether windfall profits act as an incentive in this way. If they do not it means that development plans are based on what is essentially an act of faith when, as indicated above, no real control can be exercised over the rate at which serviced and zoned land will come to the market.

Development Land Values and Speculation

Inevitably, scarce resources for infrastructure must be used in a cost efficient way and prioritised. As a result there may be a perceived shortage of development land. Once shortages are perceived, speculators will buy land to cash in on anticipated price rises. Moreover, having acquired land a speculator has an incentive to maintain the shortage and keep values up by not developing the land until it suits their business interests. This may not be in accordance with the needs of the market or the timeframe of the development plan.

This is an inevitable outcome of a market economy interacting with the planning system. In a market economy, nimble entrepreneurs will seek opportunities to make money where the system creates suitable conditions. This is not bad in itself but it can be a problem if the planning system facilitates and encourages it. It is clearly damaging if it results in very high land prices and a shortage of development land coming on the market. If the planning system creates fertile conditions for speculators to amass super profits from their activities, this should be taken as clear evidence of a defect.

Plainly there is no sense in only zoning sufficient land to meet projected development needs if enough of it is not available to the market. The reality is that the planning system puts owners of development land in something of a monopoly position. As presently structured, however, it gives an economic and monetary incentive to developers to act against the public interest by timing their disposal decisions to maximise the gain to them. This situation is not a flaw with market economics, it is the way the planning system is allowed to operate that creates the conditions to allow this.

As has been noted above, before the '63 Planning Act, property development took place without planning regulation and the difference between the values of agricultural land and development land were not great. The zoning decision of the planning authority to concentrate development and confine it to particular lands is the mechanism that creates the primary escalation in development land values above those prevailing if the land could be put solely to agricultural use. Clearly the benefit of this should flow to the community and not just to the small number of people who happen to own the land that is zoned.

What was not appreciated nor understood when the planning system was devised was the difference the planning process can create in relative land values if there were marginal shortages in the amount of serviced land or if this land did not come to the market for development. Neither was it appreciated that this would open the way for intense speculation in development land. This lack of appreciation led to flaws in the 63 Planning Act that remain today.

A Brief history of attempts to deal with windfall profits from high land prices

Since the introduction of the planning system in 1964 public interest in the problem of high development land values has waxed and waned with the booms and busts of the property market.

In times of economic growth high development land values eventually emerge, hit the headlines and are seen as a problem. First they are perceived to drive up the price of property. Secondly the vast windfall profits made from the sale of such property offend many who have an instinctive feeling that something must be wrong with a system that hands vast wealth to a few for so little economic effort. Also high land values cause problems for public authorities in acquiring land for the provision of infrastructure. Eventually there is a move to investigate the situation.

In the past by the time the matter was moved to a point where policy options are considered the economic conditions that created the problem have abated and perhaps this is why the problem remains unresolved. It is interesting to note that there is now increasing interest in finding measures to deal with issues arising from high development land values just as the economy moves down a gear or two. Nonetheless there is a lot to be learned from reviewing past attempts to deal with issues surrounding the high price of development land.

The Kenny Report

When the problem of high land values and the windfall profits made from zoning became a problem following the introduction of the '63 Planning Act a Committee on the Price of Building Land produced what is called the Kenny Report. In fact this Committee had divided views about what should be done and majority and minority reports were produced.

The majority report suggested that local authorities designate areas required for development for the next five years (the statutory period for development plans at the time) and buy the land, compulsorily if necessary, at existing use value (agricultural) value. It would then be sold to the market at development value. Clearly if all landowners were to get was agricultural land values, the incentive to bring zoned land to the market would have been removed and the state would have had to buy most of the land through compulsory purchase procedures which are necessarily cumbersome and time consuming.

This would have created a monopoly on the supply of development land. Also, the amount of development land coming on the market would have been dependent on the financial resources of the authority and their efficiency. If they were not able to acquire all the land needed and only acquired some land leaving others to sell privately on the market at development value this would have created the conditions for endless legal challenges to the legislation. The minority of the Committee felt that this procedure would have been cumbersome, unfair and open to constitutional challenge.

Moreover, it probably would have led to some undesirable practices to incentivise those who owned development land to bring it to the market. Developers seeking land on which to build might have created vehicles to arrange partnerships with landowners or other methods to circumvent the measures adopted to give effect to the reports proposals.

The majority proposals were in many ways a product of a time when, politically and philosophically, central planning by government and non-market solutions to economic and social problems was more acceptable. Nothing was done in any event and the problem faded with the recession in the mid 1970's which resulted in falling development land values.

Implementing the Kenny Report proposals have now become shorthand for doing something about the shortage of development land on the market and capturing the windfall profits made from the sale of development land. They remain an attractive proposition for the political left and are often cited as something that could be done by government. However the criticisms remain valid. The administrative problems associated with this solution would still need to be addressed. Moreover, it is unlikely that a public sector monopoly of the supply of development land would be successful in meeting the needs of a dynamic and highly market orientated property industry. It is entirely likely that such a scheme would collapse if it were to be implemented.

Joint Oireachtas Committee Building Land

The problem re-emerged in the late 1970s and early 1980s and a Joint Committee of the Oireachtas investigated the issue. This Committee concluded that the most appropriate approach to recouping the value from rezoning was through a combination of development charges and taxation. In a subsequent budget a rate of 60% (20% higher than the standard rate) was applied to profits from rezoning land through the capital gains tax code. The other part of the solution, development charges, could be applied in particular circumstances under the planning acts.

As a result of the Report some measures were implemented which dealt to some degree with the problem of speculative profits on building land. It was not an entirely satisfactory solution but it did serve to ameliorate some of the worst excesses of speculation in land.

But these measures did not address the problem of the connection between servicing and zoning particular lands and bringing those lands to the market. Nor did this solution provide the resources to local authorities to provide the infrastructure for development or a means of benefiting from the value they created by the provision of this.

There, however, the matter stood until recently when two things changed. The capital gains tax code was changed and the planning bill published.

The Situation Today

As a measure to encourage supply, the capital gains tax on the sale of residential development lands was reduced following the first Bacon Report. The Minister for Finance made it clear, however, that he intended to re-instate the higher rate in the future-- otherwise a landowner could gain more by holding on to land and capturing any increase in value.

Clearly this incentive depends upon the expectation that the minister will actually apply the higher rate of tax at some specified time in the future. But the argument that landowners need an incentive to bring land to the market will more than likely remain and will be adduced at any time it is suggested that the higher level of capital gains tax is proposed to be re-introduced.

In reality it seems unlikely to many given the present approach to taxation that the higher rate will be reinstated for the foreseeable future. Therefore, the incentive to bring land to the market early to avoid a higher rate of tax rather than waiting to capture future increases in value fails.

The Experience in the UK

Not surprisingly, given that the original planning legislation in Ireland, the '63 Planning Act, was based on UK legislation there are a lot of similarities both in the measures adopted but also in the problems arising from them.

The problem of the effect on land values of establishing the role of planning in a welfare state had been the subject of much debate in the UK when the planning process was reformed there after WWII. As might be expected in a more urbanised society which had seen a vast amount of urban development in the 19th and 20th centuries, there was a great awareness of the effects of planning decisions on land values.

By the end of WWII the question of capturing the increases in the value of some property holdings flowing from favourable planning decisions and compensating those who lost the right to develop or were otherwise adversely affected, was the subject of political debate in the UK for well over a century. This was commonly referred to as the Compensation-Betterment problem. Attempts to deal with it had been made in the nineteenth century in England both by Local Authorities and by some railway companies with mixed success.

In the UK also the introduction of a legislative planning process effectively removed development rights from all property owners and created a process where the right to develop any particular property would be granted by a planning authority following an application for permission to so do. This permission was granted following an assessment of the development proposal against criteria laid down in a development plan adopted for the area in which the property was located.

The principal recommendation of the Uthwatt Committee, set up during WWII to consider the issues surrounding the proposed introduction of a new planning regime after the war, were that the development rights in all land outside built up areas should, on the payment of compensation, become vested in the state and that there should be a prohibition against development of such land without the consent of the planning authority.

What it was intended to compensate for was the loss in the value of land which prior to the introduction of the planning system could have been developed but after planning was not zoned for development and could only be used for agriculture. This recognised that the introduction of a planning system which zoned land for development and reserved other land for agriculture or as a green belt increased the value of some land and decreased the value of other land. The intention was to acquire land, zone some for development and sell it at a premium. The resulting profits were intended to provide the funds to compensate those who were not lucky enough to have their land zoned for development.

What was called shifting land values was a consequence of introducing the planning system which provided for land zoning. The Uthwatt Report of 1941 discussed in some detail the problem of shifting land values under such a planning code. It defined betterment as an increase in the value of land resulting from the action of government (local and national) whether positive, an increase due to public works or improvements, or negative, an increase due to the restriction on the development or use of other land.

It should be remembered that in the absence of planning all land would have had some development value but as this was spread over all land and not confined to that land zoned for development, land values would have been substantially less. Confining all development to particular zoned lands concentrated development value to those lands.

Two main pieces of legislation, The Town and Country Planning Act 1947 and the Land Commission act 1967, were based on this report.

Not surprisingly the UK Labour Party proposed the nationalisation of development values with the Conservative Party arguing against. The Town and Country Planning Act 1947, introduced a system of nationalising development values and the supply of land for development land dried up because there was not sufficient incentive for landowners to free up land for development. Naturally on the return to government the Conservative Party it was repealed in 1954.

The UK Finance Act of 1965 brought in a system of Capital Gains taxation that captured some of the windfall profits made from development land but the matter still remained one of considerable political contention. A Land Commission Act was passed in 1967 but repealed in 1971.The UK Finance Act again tried to come to terms with the problem in 1974 and again in 1975 a Community Land Act was passed but again repealed shortly afterwards.

It can be seen from the above that many proposals to deal with the issue failed because of insufficient political consensus or because the procedures involved proved to be unworkable or too complex.

It can be said that in the end a pragmatic solution evolved using combination of capital gains taxes, development levies or charges, negotiated planning gain and rigorous enforcement of the Green Belt policies. In short the UK experience indicates that the compensation betterment problem this is a complex problem not amenable to easy solutions.

Continue to page 4

Pages 1   2   3   4