LAND AND THE UK ECONOMY
Land is an essential factor of all economic activity alongside capital and labour but it also has distinctive features. It is immobile: unlike capital and labour, it cannot be moved. It is fixed in supply: unlike capital and labour, more of it cannot be produced. What makes land valuable therefore is its location. Inability to move it or make more of it means that the value of a piece of land increases with public and private investment in the surrounding area. Investment in a railway station or road improves access to jobs and means that the value of the land rises. The building of schools, companies, investment in a local park, increasing access to green space for a community, means that the value of the land rises. It also rises with the rising wealth and growth of the population. In most cases, the increases in the value of land come about not as a result of the exertion or the labour of the landowner but instead, from the “labour and outlay of other people”. However, this fact is one that mainstream economic thinking in the United Kingdom has largely ignored in recent decades and has brought about universal negativity on the economy.
Land is now the most valuable asset in the UK, going at the rate of £5 trillion. The UK’s land is worth more than all homes, commercial property, machinery, equipment and all other non-financial assets in the UK combined. Since 1995, the value of land held by households has soared by 544 percent while the combined value of the property built upon it has only increased by 219 percent and this is not unconnected to the failure of public policy to either regulate the use of land or tax it appropriately. The broken land market has a key role in driving wealth inequality in the UK. Rising land values have helped drive up house prices and rents, reducing home ownership and driving increases in wealth inequality. The increasing capital gains from housing and the underlying land values have driven the increase in the wealth-to-income ratio. In 1995, the price paid for a home was almost evenly split between the value of the land and the property but fast-forward to 2016, same cannot be said of land as its price had risen to over 70 percent of the price paid for a home. Since the most significant cost involved in building a new home is the land it sits on, the price of a new home is however driven by the cost of land. The high cost of land makes it more expensive, difficult and risky to build homes at affordable prices, all of which reduces the rate at which new homes are built in the UK. Land is limited in quantity while the demand for it in a prosperous country like the United Kingdom, is constantly increasing. The rent and the price which to a large extent depend on the demand for it, progressively rises by the growth of wealth and population.
The fact that the unique features of land have been ignored by mainstream, economics helps to explain how land has become a driving force behind rising inequality, the broken housing market and the financialized, unproductive and unstable UK economy. Classical economists recognized that highly concentrated landownership leads to renter behaviour and a whole host of economic and social problems. They also posit that land due to its scarcity, immobility and permanency is a unique form of production which has always been subject to a series of laws and customs regarding its access and use. However, neo-classical economics, in its pursuit of achieving an objective science, disregarded the political, legal and cultural context by seeking to treat land as a generically substitutable form of capital. In simple terms, it means an input to production that can be used in greater or lesser quantities depending on its price relative to other available types of capital. The unique features of land, that is, its immobility and fixed supply, means that characterizing it as just another type of capital doesn’t really work. Unlike other forms of capital, an increase in demand for land tends to drive an increase in its price rather than in its supply. In short, landowners are much more likely than owners of other types of capital to benefit from what is called ‘an economic rent’ – a financial return that they did not earn. The failures in the UK land market have been significantly exacerbated by the process of financial deregulation that occurred in the 1980’s which saw banks apply a greater focus on creating credit collateralize by property (and the underlying land value), shifting away from their more traditional role of directing savings into productive investments. The liberalization in the 1980’s ensured a rapid expansion of private credit that has driven up house prices. Research revealed that, between 1979 and 2017, house prices in the UK rose nearly tenfold while consumer prices increased by half the rate over the same period. However, when the price of land is separated out from the price of the buildings occupying it, it is clear that what is characterized as a volatile housing market is actually a volatile land market and that it is land rather than property, that responds to financial market swings. In addition, this process of financialization has also been identified as a central cause of the UK’s poor productivity performance, as investment in housing is crowding out more productive investment. According to UK economic analysts, Stirling and Muellbauer; ‘Bank lending in the UK is particularly focused on real estate lending-loans to business and individuals account for over 78 percent of all loans to non-financial UK residents’. They argued that instead of this to raise the productive capacity of the economy, wages or GDP growth, the primary impact of the financialization is to drive up asset prices. Muellbauer also points to the poor productivity in the house building industry as a contributor to the UK’s poor productivity performance. The speculative house building model having brought about market concentration has also lowered productivity growth. This is due to the fact that UK house builders are far more focused on the process of securing land because the capital gains that arise from it is where they secure the majority of their returns. Thus achieving greater productivity in the provision of high quality housing is not a central concern of UK house builders.
In conclusion, land is playing a destabilizing role in the UK economy and England’s housing market. The consequences of ignoring the central role of land within her political economy are not abstract. They include increased wealth inequality, large geographical economic imbalances, a volatile housing market and wider macro-economic stability and until these issues are looked into, securing land or properties in the UK will always be an herculean task.