In the second blog from our series on the next generation of New Towns, Hugh Ellis explores the issue of funding
The case for larger scale new communities built to exemplary standards in sustainable locations has clearly been accepted by Government as part of the answer to the housing crisis. The burning question will however be, how we might pay for them. To date the government, while making a commitment to new places in its manifesto, has been silent on the issue. A recent report suggested 12 New Towns could cost up to £48bn, but that figure comes with many caveats and costs will inevitably depend on proposed locations.
The TCPA has long argued that any new community must be founded on a robust economic model that allows for upfront investment in infrastructure to de-risk development. Land value capture was at the heart of how Garden Cities and New Towns generated the vital income streams to fund high-quality place-making.
Significant values are generated when agricultural land is granted planning permission for housing. This betterment value is created by the actions of public authorities granting consent for higher value land uses, but the benefits accrue largely to landowners. Our current system uses Section 106 and Community Infrastructure Levy (CIL) to capture a proportion of these values. In the case of Section 106 agreements, the process is administratively complex and captures only a proportion of betterment values but still provides the finance for the majority of affordable homes delivered in England.
New Town Development Corporations provided an effective way of solving the land value capture problems inherent in our current complex system.
It is significant that New Town Development Corporations provided an effective way of solving the land value capture problems inherent in our current complex system. Through compulsory purchase powers, the first generation of New Town Development Corporations were able to purchase land at agricultural value and used the uplift in land prices, which development generated, to become highly profitable public enterprises. That allowed for the paying down of debt and the necessary infrastructure investment to unlock development.
The problem for the final generation of New Towns, however, was that from 1958, compensation for compulsory purchased land began to attract ‘hope value’ for future permissions, which the landowner had some expectation that they might receive. From that point onwards, property owners have received unrealistically high returns for development rights they do not own and infrastructure investment they have not made. These values have been extracted privately and have therefore not been available for investment in vital infrastructure to unlock housing growth.
The current development model sees profits from development privatised, while the majority of the costs of infrastructure are socialised.
In essence, the economic approach enshrined in the New Town’s legislation is a reversal of the current development model, where profits from development are privatised but the majority of the costs of infrastructure are socialised.
Even with effective ways of capturing betterment values, however, any future New Towns will still require major public investment through the necessary upfront loans. The lesson of the New Towns programme is that these loans can be more than adequately repaid so long as the assets of the new community are given the opportunity to mature to reflect their full value and are not subject to the kind of fire sales which so damaged the financial performance of the New Towns programme after 1980.
There are two extremely important caveats to the economic model pioneered by the New Towns. The first is that they were dependent on fixed-rate loans from the Treasury to finance the initial costs of land purchases, infrastructure investment and administration. While these debts were ultimately repaid, it could not take place without this upfront investment. Secondly, New Town Development Corporations benefited extensively from existing grants for the delivery of socially rented homes that were available to all local authorities.
The extent to which a new programme of New Towns is successful will, we believe depend on the extent to which the government will provide the necessary core investment to Development Corporations, the degree to which private sector finance can be drawn in to support the activities of Development Corporations (including from long-term institutional investment), and the availability of grants to deliver socially rented homes.
