One of the easiest ways to make “free” money in Ireland is to buy a piece of land, seek planning permission or just wait for it to get rezoned. Then, when the land is revalued upwards, pocket the difference between what you paid and its revalued price.
Without having to sell, you might get the bank to take the land as collateral against a loan and, hey presto, not only are you wealthier, but that illiquid wealth has been turned into cash. And you can continue to hoard the land. You get cash without having to sell. So what do you do? Rinse and repeat, waiting for house and land prices to rise.
In economics, this neat little trick is called “land capture”. It refers to the fact that wealth associated with planning permission or rezoning is not “earned” in the normal sense of the word, but is a windfall which stems from a bureaucrat’s pen. No one made land. It was always there. Therefore any windfall is pure speculative profit.
Most contracts have a delivery clause that requires a party to carry out its contractual undertaking within a specific time, or forfeit a penalty to the other party. Why don’t we have the same with planning permission or zoning? In the absence of a levy on building delays, why would you build when you can wait? The consequences are there for all to see.
From 2013 up to 2022, there were 220,253 planning permissions granted for houses and apartments (CSO data). In that same period, only 121,404 houses and apartments were actually built – just over half the number of permissions. House prices have increased by about 130 per cent in the same period. Across the four Dublin local authorities alone last year, despite planning being granted for 62,247 apartments only 3,899 were built and a further 14,432 are under construction.
How can we explain why only around half of planning permissions granted are leading to homes being built and only about one-third of all apartment permissions have even been started in Dublin? What is happening? Land is not being used efficiently. The uplift on the value of land is being trousered as the land is left idle. Idle, but increasing in value. While the landowners sit on the increasing capital gain, the first time buyer works furiously to save. The worker is always going to lose in this situation.
As prices rise, so too do land values, and specification for home size and specs deteriorate, with smaller and smaller units planned for the same plot size. Small builders are edged out of the game as the market is dominated by large builders and deep-pocketed investment funds that can finance waiting, because they have access to capital, be it bank capital or investors’ funds. Over time, the house building industry, which used to be the bedrock of small business in Ireland, becomes concentrated in few hands.
From these simple observations flow many of our problems in the housing market.
Land capture is a significant problem in this country because all the windfall gains of the revaluing of land go to the individual and not the community. It is the community and the State that makes the land valuable, yet all the money goes to the individual landowner. This is ludicrous from a wealth equality perspective. And because it encourages hoarding, the situation exacerbates the housing crisis.
Ireland has an abundance of land. Unlike Hong Kong, Singapore or the Netherlands, land isn’t our problem. Ireland is the least densely populated country in Europe, with among the highest land prices; we have a market problem. The percentage of total land area dedicated to settlement has remained at 2 per cent since 1995, according to CSO data. Grassland accounted for 59 per cent of all land use in Ireland in 2020. Even in what are termed “urban areas” in the country, half of all land is still agriculture.
There has been some movement on the issue of land capture, and new legislation (approved in 2021 but not to be introduced until next year) will levy a 30 per cent tax on the increase in land value after zoning. (Incidentally, this was first suggested back in 1973.)
But why 30 per cent? Why not 50 per cent, particularly as all the upward valuation will come from State provision of local services such as schools, parks, buses, roads, trains, hospitals, clinics, gardaí – I could go on, but you get the picture. Almost everything that will make the rezoned area attractive, and thus determine the uplift to the individual landowner, is coming out of someone else’s pocket. That someone else, by the way, is you, the taxpayer.
Other countries pay for local public services directly from a tax on the uplift in land prices stemming from rezoning and planning permissions. Hong Kong financed their latest metro extensions from windfall land gains. The system works pretty simply. Most of Europe operates a form of the Hong Kong system of self-financing municipalities. It involves a bit of joined-up thinking, linking land revenues to the bond market and back to the municipality. Every local authority in the world has a stream of potential income flowing from land. In most countries, the local municipality uses this income to service the interest on bonds that the municipality issues to finance local government.
We can do this in Ireland. Consider it to be a completely different way of doing business. The municipality knows how much tax it is likely to earn from land uplift. This is money generated by the State for the State. It can be used to service the bonds issued by a municipality, let’s say Limerick city. The money from the bond is used to build council houses, a tram system, bike lanes and other public amenities for the city. The system is self-financing and the progressive infantilisation of local government is arrested.
As they say, nothing focuses the mind like a budget. Land-financed local government would also remove the need for local politicians to be involved in pork-barrel lobbying of the central exchequer, allowing the Dáil to concentrate on national issues. A move to decentralise finance would make land use far more efficient because delays in delivering homes would incur a penalty, and it would share the uplift in land values generated by the State’s rezoning with the rest of the community, instead of only the hoarding landowner. As land prices fall, so too would house prices and unit sizes could expand.
It all starts with windfall gains. Let’s share them.