Is it fair to tax undeveloped land?

There has been much talk about introducing an array of new property taxes such as a tax on undeveloped land. The idea is that not only will this provide additional tax income for governments but it will also encourage companies and individuals to develop the land they own. When you bear in mind that some of the larger housebuilding companies in the UK for example have land banks which will fulfil their requirements for the next decade, perhaps this would be one way to speed up development?

Competition in the housebuilding sector

In the UK there are many housebuilding companies but it is fair to say that a handful of the large companies dominate the market. Many of these companies will buy land for development many years down the line which will often starve smaller companies who tend to buy on an “immediate requirement basis”. The challenge of selling new houses as soon as possible has a massive impact upon cash flow for all sized housebuilders. The situation is perhaps a little more challenging for smaller companies because any delay would starve their businesses of capital – which is why many tend to buy land and develop almost immediately.

It is also fair to say that bulk buying of land for future development by larger companies increases the scarcity of quality land and therefore pushes up the market price. This is simply a case of supply and demand of relevant quality land for development.

Building more homes

One bugbear of politicians in recent times has been the amount of land used to develop large properties. The argument is that many more homes could be built on these sites while still maintaining a degree of luxury but without the surrounding gardens and fields. One way to ensure maximum use of undeveloped land would be to charge an annual tax. This would in reality increase the carrying cost of these batches of undeveloped land and encourage developers to squeeze more homes onto land than they would have done in years gone by. This would not only maximise their income but it could also go a long way to alleviating at least part of the U.K.’s housing shortage problem.

There is one additional issue which does need addressed, that of investment in apprenticeship schemes which in years gone by provided a constant flow of employees for the housebuilding industry. Perhaps any income streams created by introducing a tax on undeveloped land could be reinvested into a UK wide apprenticeship scheme?

Encouraging development

There are many ways in which the UK government could encourage the development of undeveloped land. Any such moves will often curry favour with voters but when everything is stripped back, there does need to be significant demand for new properties. At this moment in time, even though the UK housing market is struggling to remain in positive growth territory, there are still many potential first-time buyers who would switch from the private rental market – if more affordable properties were available.

The UK government made a number of concessions in the 2017 budget specifically in relation to stamp duty and the often difficult planning permission application system. It will be interesting to see whether the authorities get anywhere near their short to medium term target of 300,000 new properties per annum in the UK. If they stand any chance, they will need to encourage property developers to maximise the use of their land banks sooner rather than later. In many ways a land tax, and the financial hit in their pockets, is perhaps the most direct and blunt tool in the armoury of the government?

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