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Submission to the All Party Oireachtas Committee on the Constitution - page 4

by Tom Dunne

Approaches to be Adopted to Deal with High Development Land Prices.

Having considered the issue of the high price of development land and the problems surrounding high house and property prices, it can be seen that the issues involved are complex. It would appear from the history of attempts to deal with the question of capturing for the state the value created by the act of granting a planning permission on development land, and providing the necessary infrastructure, that the most effective solution is a combination of three elements. A capital gains tax on profits made from the sale of development land, negotiated planning gain and development levies.

A combination of these measures could bring down the ambient value of development land and make the market for development land work more efficiently. These are dealt with more fully below.

Capital Gains Tax

An appropriate level of capital gains tax on profits made from the sale of development land should exist. Such a system existed until recently and could readily be reinstated. Reflecting the reality of windfall profits from development land CGT was at 60% in the past a rate of 20% above the standard rate of CGT. There would seem to be strong arguments on equity grounds, and on the grounds of economic efficiency, that a rate of CGT above that applied to other gains should be made in the case of development land. In particular, given the present CGT regime where inflation is not taken into account in calculating capital gains, this would provide a disincentive to holding on to development land for long periods of time. Moreover, such a high level of CGT would provide something of a disincentive to speculation.

Planning Gain

Planning authorities should be given a clear statutory authority to negotiate with developers and get them to provide additional infrastructure facilities to accompany development. This could be done quite easily. Large developments should come automatically with a range of social and public amenities, e.g. playgrounds for children. Also, a specific contribution should be made by developers to the education authorities for the provision of additional schools and to the health authorities for the provision of the local accommodation needed by public health system.

The justification for this is that property is sold on the implicit assumption by purchasers that these will be provided in the area and part of the value of a property is the capacity to access community amenities.

Development Levies

At present these exist but the schemes devised to apply them are based on the cost to the local authority of providing the infrastructure. This is then apportioned to development land in accordance with a specified formula. This measure is flawed in concept and only goes part of the way to recouping the value created by infrastructure provision. Local authorities should be empowered to devise a scheme for the application of levies in accordance with the value added to development land which is the subject of a planning permission and not on the basis of the cost to them of such provision as is provided for in the legislation.

The Planning Act of 2000, sets out a system of levying development contributions and specifies that these should have regard to the cost of provision of the services. The Act specifically excludes benefits accruing from existing services, which is significant.

This goes to the heart of the problems with the planning code in Ireland including the high price of development land. The formula used in the Act is inadequate to recoup value created by the actions of a planning authority. It also does nothing to encourage the owners of zoned land to bring it to the market speedily.

This can be best illustrated by considering a hypothetical situation where land on the outskirts of Dublin cannot be developed because of a lack of services which would only be provided by a public authority. The market value of this land would reflect the lack of supporting infrastructure and the consequent inability to develop. Clearly, the value would be substantially below that which would apply if planning permission had been granted and the services provided.

The Planning Act allows planning authorities to recoup part of the cost of providing infrastructure and services but not the increase in value conferred on the owner by connecting to these and the decision to grant planning permission.

It would be more equitable if the basis for estimating the contribution from developers was based on the value created by the activities of the local authority and not on the cost to them of these. To do this they should be able to charge to the developer the addition to the value of the land arising from the provision of the infrastructure, the services and by the grant of planning permission.

This would be the difference between the value before the services were provided and permission granted and the value afterwards. The 'before' figure would reflect a combination of hope value and existing use value. The 'after' figure would be the market value with the benefit of the services and the planning permission reflecting the certainty that development could proceed immediately. The difference between these figures should be the development levy.

To enable a planning authority to encourage landowners to bring land to the market it should have the power to rebate the development charge in the event of the landowner developing the lands within a specified time which could be specified in the development plan. This measure would deal with one of the main deficiencies of the existing arrangements under which planners have no mechanism for influencing the rate at which development land comes on the market or is developed.

This approach would change the role of a planning authority from being a regulator and provider of services and infrastructure, to one of development enabler. Under this arrangement the value created by the actions of the planning authority is shared between both developers and the community in proportion to their contribution to creating the development value.

In passing it is important to point out that any schemes for charging development levies should be devised in a form that creates certainty in the minds of prospective developers as to the nature of the obligations they may have to meet in the event of them getting a planning permission.

It would also be important that the planning function within local authorities employ professionals equipped with the financial and economic expertise needed to evaluate development proposals and negotiate with developers. These professionals should be qualified in finance and/or property economics

Using a combination of capital gains tax, development levies or charges and negotiated planning gain would have three benefits. First, it would substantially remove the incentive to speculate in development land. Second, it would help to ensure orderly development in accordance with plans devised by planning authorities by giving them some control over the rate at which the zoned lands will come to the market. Third, by being able to capture the increase in the value of zoned lands it should help to provide planning authorities with the means to service a sufficient quantity of development land to ensure that the market for development land works more efficiently and make the planning system self-financing. Such an approach would reduce the price of development land and contribute to the solution of the housing crises.

Summary of recommendations

• There is a need for greater research into and understanding of spatial economics at all levels in the planning process.
• Government policy in the area of planning and the built environment should be integrated with tax and other policies more closely to ensure a more joined up approach to providing the physical development which comes with economic growth.
• There is a need for increased transparency in property and urban land markets. This could be achieved by
  • Publishing transaction prices.
  • Reducing transaction costs by codifying the legal basis for property ownership and simplifying conveyancing.
  • Writing all documents associated with landed property in plain English
• The mechanisms for dealing with development land in the tax code and the planning acts should be reformed
  • By taxing at an appropriate level the windfall profits made from the disposal of such land
  • By facilitating local authorities negotiating with developers to attain planning gains as part of permissions to develop
  • By changing the Planning Act to allow Local Authorities to capture the value they create by providing infrastructure and services and by regulating development through plans.
  
  

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