onsdag 11 juni 2008

Housebuilders' woes

The big housebuilders are in trouble. Barrett's share price fell by 24% yesterday, to 85p, down from almost £11 a year ago. Other big companies have suffered similarly. What is going on?

The housebuilders do not make their money from building houses. They make it from purchasing land at just above its agricultural value, getting planning consents for development and then, after holding it in so-called "land banks" for a while, trickling it onto the market slowly enough to keep prices buoyant. In this throttling of supply, they are aided and abetted by the planners who have a restrictive attitude to development.

The strategy fails from time to time as the artificial shortage causes land prices to be bid up so that people are borrowing more than they can afford to pay back. Then the bubble bursts.

With an effective system of land value taxation in place, supply and demand come into balance. When, as it needs to be, land value taxation is a substitute for existing taxes on labour, goods and services, the cost of construction comes down, making it possible to build larger houses on larger plots of land instead of cramming sites with sub-standard houses as happens at present; new houses in Britain are amongst the smallest in the EU. Because Britain has a high population density, this reform is essential.

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