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Paying less for land will provide more affordable housing

Posted: Sep 13, 2021 / By: Communications Categories:
Paying less for land will provide more affordable housing

On Sunday 12 September, The Business Post published a piece by John O'Connor, outgoing CEO of The Housing Agency, on recent changes to Part V of the Planning and Development Acts 2000-2020. You can read the piece below.

Paying less for land will provide more affordable housing
John O'Connor

Many of those arguing against the State's new 20 per cent Part V requirement assume that it will increase property prices. In fact it will do quite the opposite.

Land is a limited resource. It is critical that we provide housing that is affordable for people on low to average incomes and limiting the price of land is one way to achieve this. Land can be a significant element in the price of providing a new home, particularly in urban areas.

One way of reducing the cost of land is by what is known as Part V. This legislation allows the State, as well as the land owner, to benefit from an increase in land prices following the granting of planning permission. Part V is a positive measure to limit the price of land.

Part V of the Planning and Development Acts, to give it its full name, has its origins in the Kenny Report from 1973 which maintained that, if local authorities were given the power to buy development land at a reduced price, it would stop land speculation, stabilise land prices and reduce the cost of housing.

The Kenny Report argued that local authorities should be able to buy all development land at a reduced price. Until now, Part V allowed local authorities to buy 10% of each applicable site and the recent changes to Part V will increase this to 20% for sites purchased after 1 August 2021 and which are granted planning permission after 3 September 2021. Local authorities can then use this land to build social and affordable housing themselves, or they pay the developer or builder the costs of building it for them.

This aspect of Part V is seldom discussed. It is often portrayed as an obligation on developers and builders to sell a percentage of privately built homes to local authorities at a discount. A discount which is subsequently paid for by the buyers of the other homes in the development.

This is a misconception, and it is inaccurate.

Under Part V, the developer or builder gets paid the full costs of building each Part V home. The saving to the state or the “discount” comes from the lower price that it pays for the land associated with that home. Instead of paying market value for the land, the state pays existing use value, which is often much lower.

If a new house on a greenfield site is sold for €300,000, the cost of building the house could be €250,000 and the market value of the land associated with the house could be €50,000. If the builder sells this house to the local authority under the Part V agreement, the builder will receive €250,000 to cover the cost of building the house and will receive the existing use value of €2,000 for the land associated with the house. Existing use value is the value of land without planning permission and without the “hope value” of obtaining planning permission.

The knowledge that residential planning permission granted on a site will have a Part V requirement should inform how much developers and builders are willing to pay for that site and should reduce the price accordingly. This was the theory behind the recommendations in the Kenny Report and it carries through to Part V today. The higher the percentage of a site that the local authority can acquire at a reduced price, the lower the value of the site.

Once land is priced correctly when it is purchased, there is no “cost” associated with Part V to be passed on to the buyers of the other homes in the development.

The new 20% Part V requirement will apply to planning permissions granted after 3 September 2021 on land which was purchased on or after 1 August 2021. Planning permissions granted before 3 September 2021 and new grants of planning permission on land which was purchased between 1 September 2015 and 31 July 2021 will continue to have a 10% Part V requirement. After 31 July 2026, there will be a 20% Part V requirement on all new planning permissions granted, regardless of when the land was purchased.

Some of the debate around the increase in Part V assumes that it will increase house prices. In fact, it should assist in cooling the prices paid for land and the provision of affordable purchase housing through Part V may reduce house prices in the long run.

Paying less for land benefits us all.