Last month, the Department of Housing, Local Government and Heritage released an update to its Land Value Sharing Scheme (LVS). This is a contributory mechanism by which local authorities can claim up to 30% of an increase in the market value of land that has been zoned for development. A first draft of the scheme was published in 2021 and focused on residential development; the updated version extends its reach to land zoned for commercial and industrial use This contribution of profits generated from the uplift in land value will be a condition of planning permission to be granted to developers. Income generated by the scheme will be ringfenced by local authorities as capital for the provision of public infrastructure and facilities.
The LVS is just one of a series of initiatives from the Government’s Housing for All strategy, which aim to decrease the costs associated with building housing by taxing land. The Residential Zoned Land Tax (introduced in 2021 to replace the Vacant Site Levy) is a 3% annual tax on land that has planning permission for properties but is lying vacant. The stated objective here is to increase the supply of housing by bringing land that is serviced and zoned for residential property into use, as well as limiting the speculative practice of land hoarding.
Land speculation – the practice of holding on to land for extended periods instead of building on it – is a by-product of our market-based housing system and is undoubtedly a contributing factor in the escalating cost of new properties. Residential zoned land – land with planning permission and access to services (water, electricity), increases in value as property prices rise. The key issue is that the rate at which land value increases is much higher than the associated percentage rise in property prices, and this fact makes it inevitable that the practice will continue, if things remain as they are.
Residual Modelling to Establish Land Value
Architect Maoilíosa Reynolds offers a quick explainer of the calculations involved in establishing land value, using residual modelling. This model is the industry standard to value land for development and comes from a guide provided by the Royal Irish Chartered Surveyors (RICS), known as the ‘Red Book’. The value of a site is calculated by subtracting costs (the hard costs of construction (materials, labour), the soft costs of the project (finance costs, professional fees etc.) VAT at 13.5%, and the developer’s margin (estimated at 13%)) from the sale price of a property. The land value is the amount that is left over, or ‘residual’.
“Using the RICS residual model, an increase of 10% on the sales price of a house translates to an increase in site value of 46%” Reynolds explains, and as land value “is multiplied by the number of units in a scheme, this increase is even greater for apartment blocks, where an increase of 10% in sales prices can result in an increase in site value of 68%.”
These figures illustrate why land speculators are hoarding assets which are increasing by up to more than two-thirds of their value, without having to take any action or incur any risks to profits that could occur during construction. It’s a win-win situation for them, but a losing scenario for ordinary citizens.
Tax is Ineffective as a Deterrent
Residual modelling calculations also show that 3% tax is not going to make a significant difference to the practice of land hoarding. The 3% tax remains stable at just 3%, no matter how much the land value increases. The increased tax that is due on land whose value has increased from rising property prices is small beer when compared to the chance for speculators to make a 46% or even 68% return on investment. But predictably, many of the biggest developers are objecting to the tax being imposed at all.
The proposed LSV contributory mechanism of 30% is a significant sum, but it is still not a panacea to the problem of unaffordable housing. Critics (albeit from the housing industry) have suggested that it will even increase the cost of property at the point of sale. As property developers are unlikely to absorb the cost and decrease their own profit margin, this does seem likely to be one outcome from the scheme. Other possible issues with it are that it may discourage the building of housing on the scale we require it, if potential developers decide that the financial outlay is not worth it. The updated scheme has exemptions for housing developments of five units or fewer, which has the potential to be a loophole that could be exploited for tax avoidance – something that any developer with a good accountant will already be familiar with.
In any case, it is (thankfully) not necessary to be well-versed in the vagaries of land taxation to identify a more fundamental problem with this approach. It is still immersed in the ideology of the market. Taxation on the profits gained by developers from the zoning and sale of land valued at ‘market’ prices is still playing the same game, and merely asking for a share of the winnings. It is akin to the phenomenon my colleague Keith Adams identified in Tenant State of Mind, his analysis of the evolution of the rental housing sector – the Government ceding control of housing to private interests who are pocketing money that should be in the public purse.
Kenny Report and CPOs of Land for Housing
The 1973 Kenny Report, (which we in the JCFJ have written about on several occasions, championing its recommendations for control and use of land for the common good) is cited as one source which has informed the decision to introduce the Land Value Sharing Scheme.
The explanatory memorandum which accompanies the LVS Bill says “it has long been apparent that the State needs an up-to-date mechanism that can be applied in a fair, equitable and proportionate manner to achieve national housing and urban development objectives.” It is good to see that the neglected report has been dusted off and read by housing policy-makers, but if their wish is to control land speculation and unaffordable property prices, it contains a more radical and effective way to do so.
The Kenny Report recommends that land suitable for housing be bought by local authorities using a Compulsory Purchase Order, for its agricultural (un-zoned) value, plus 25%. This is approximately the same percentage value as the LSV mechanism but the difference is that the State obtains the land. The implementation of this recommendation would be highly contentious of course, but (despite what is commonly believed) there is no legal or Constitutional barrier to doing this. CPOs have been used in Ireland for decades for ‘common good’ construction projects.
If land that has been identified for the RZLT was instead purchased by local authorities using the CPO mechanism and used to build public housing, it would be a step in the right direction. Corporations and private individuals accruing vast amounts of wealth from land speculation is unconscionable and does not serve the common good. We need a Government that will take radical steps to stop it.