Wednesday 17 November 2010

A Just Price for housing

Standing Stone: reasons for adopting a 'just price' for housing

We live in a late capitalist society in which democratic politicians have deliberately stoked a speculative bubble in housing prices, because most voters are property owners and spiralling house prices mean that those who are already on the housing ladder feel richer. The consequence of this is that, over the country as a whole, house prices are already beyond the reach of many folk on ordinary wages. Along the Solway coast, the pretty villages have a price premium because they are attractive and pleasant places to live, but local wages are depressed. This means that folk working in the local economy cannot buy houses locally – unless they have inherited wealth.

So begins a process of clearance which is just as socially corrosive as the clearances of the eighteenth century, when the landowners enclosed land which had traditionally been common. The reaction, then, here in Galloway, was of a violent revolt by the country folk, throwing down the walls of the new enclosures and burning barns. Now, here in Auchencairn, I think the Caldows and Helen Sankey are the only people born in the village who still live on the main street (Geordie Milligan lives on Spout Row). Every other house is owned by incomers, and the native population has been effectively cleared across the burn into the bantustan of social housing. We have a very nearly complete ethnic segregation, with those who live in the old village now overwhelmingly rich and English, and the Crescent overwhelmingly poor and Scots.

It wasn't always like this. The three houses across the street for me, when last sold in the 1950s, were bought for less than two hundred and fifty pounds for all three. When I bought my first flat in the village, I paid four thousand pounds. Now, the only property for sale in the village under a hundred thousand pounds is Monty's flat – which is tiny.

Unless ordinary people without inherited wealth are able to afford to own houses in this area on wages earned in this area, the social dislocation and, effectively, ethnic cleansing is only going to get worse. Ultimately, that must lead to unrest.

Applying this to Standing Stone

None of this is the fault of anyone in the Standing Stone project. It is a consequence of political and economic forces which are far bigger than us.

However, if we do get planning permission to build new dwellings on the Standing Stone site, the market value of those dwellings when they are complete will be very much greater than what they cost to build. If we don't cap the resale price, then we are effectively giving one another a speculators' charter, and we risk the site rapidly developing into yet another rich incomers' enclave. We risk this both because the speculative opportunity will suck in spivs, and because your actual people – the sort of folk we would choose to live among, that we think in developing the idea that we are choosing to live among – simply won't be able to afford to buy into it.

People have objected – very reasonably – that they need to be able to get their investment out again. And it is true that if the housing market continues to spiral madly out of control, then if we put a cap on resale prices of dwellings at Standing Stone then people may not be able to leave, because the capped price will not realise enough money to buy a replacement property on the open market. These are real and reasonable issues.

The just price

Clearly if we are to derive a formula for a 'just price' for a dwelling, that formula needs to represent the investment which has been put in – including investment as 'sweat equity', our own labour which we've expended in creating the dwelling.

Furthermore, we need to notionally detach the value of the land from the value of the dwelling. The 'croft' part of the holding – without planning permission – has a value as agricultural land. So the capped value of a holding, if we choose to adopt a 'just price' cap, is the market value of the agricultural land plus the capped value of the dwelling, and (irrespective of what DGSHT's policy says) clearly the 'just price' cannot be less than the total amount reasonably invested. If Ruth has invested a sum in the farmhouse, then she must be able to realise at least that sum if at some time in the future she needs to sell. To expect her to accept less is just unreasonable.

But at the other end of the scale I'm expecting to spend less than £40,000 cash (and a lot of work) on structure. My dwelling, at the end of that, will have one bedroom, rather than the three or four that the farmhouse has, but as a modern designer structure with a nice view it's open market value isn't going to be a lot less. If I'm spending £55,000 on ten acres of land, then the pro-rata cost of the half-acre of that which forms the curtilage of the dwelling is about £2,500. For simplicity say I spend £7,500 on design fees and contractors, and value six months of my full-time equivalent labour at £10,000, then the investment cost of my dwelling is

Fees and contractors
Sweat equity

Should I be allowed to sell this dwelling which has cost me £60,000 for £120,000? Why? What justifies me making such a speculative profit?

The affordable price

The average annual wage in Dumfries and Galloway is around £20,000. This means that the cost price of my one bedroom dwelling is three times the income of a single wage earner – a multiplier which is certainly acceptable to mortgage lenders. Actually, DGSCHT consider a multiplier of 3.5 times average annual wage to be reasonable. And on a two bedroom dwelling, that's 3.5 times not the income of one wage earner, but the income of 1.5 wage earners – a household with one person working full time and one person working part time. So the affordable price of my one-bedroom dwelling would be £75,000, and the affordable price of a two or three bedroom dwelling would be £105,000.

Now, OK, in aiming for a £40,000 structure cost I'm aiming to build a structure which is affordable to me, so it has to be 'affordable' – I'm too old to take on new debt. But a cost of £1,200 per square metre seems a commonly quoted value these days, so (allowing the same figures for land value of the curtilage and for fees as in my example) you have £95,000 to spend on structure of two to three bedrooms (including sweat equity), which builds you 80 square metres of reasonable quality structure, which is equivalent to six rooms each 12 foot by 12 foot.

Thus it seems to me that it is possible to build new dwellings on the site such that the cost is lower than the 'affordable price'. Furthermore, knowing what I do of the group, all of us are going to have to build dwellings which cost less than the 'affordable price', simply because none of us are rich.

The just price revisited

This doesn't solve the Ruth conundrum, of course, because she's having to buy at full market rate and cannot be expected to take a hit to sell at an 'affordable price'.

So we need a formula which I think is something like this:
value of the land part of the holding
plus reasonable investment cost of dwelling
plus 2% per annum compound interest on the reasonable investment cost of the dwelling
value of the land is the agricultural value of the land as assessed by a qualified surveyor appointed by the Company
reasonable investment cost is for new builds and for the byre units an agreed multiple on the internal area of the dwelling in square metres, I'd suggest £1,200; for the existing dwelling, the price actually paid (including essential renovations).

This gives us a 'just price' which for all new units is likely to be lower than or equal to the 'affordable price' as seen by DGSCHT.

Non-idealistic argument for a just price formula

The arguments I advanced at the head of this document for a just price for housing are idealistic; they represent a rejection of the market in favour of enhancing social cohesion and abstract 'fairness'. I believe that most of us do have a degree of idealism, but I acknowledge that the exact degree varies.
However, bear in mind that getting planning permission for ten new dwellings on this site is a very big ask. It is precisely the 'sporadic development in the countryside' that the council has policy to prevent. We're going to have to do a lot of special pleading and special argument. If we fail to get planning permission, we're most of us going to have had a significant share of all our capital tied up for at least two years in land, with nowhere to live. And although it's probable that if it all goes pear shaped we can resell the land for the money invested, that isn't guaranteed.

So we need all the help we can get. We can get a certain amount of political if we're able to play the 'green' card, the 'low impact' card (but I'm not certain I can achieve low impact in my budget, and I suspect other people may be the same; concrete is cheap stuff). One card that we know we can play, though, is 'affordable housing'. And, we already know that if we play the affordable housing card, we will get not insignificant help from DGSCHT.

In summary, if we cap resale at an 'affordable' value, we will be able to recover the investment made in dwellings (provided we're don't built using solid gold taps and marble staircases), and we will get significant support which will significantly lower the risk involved in the project. That seems to me a substantial win for very little actual cost.

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