Posted on January 30, 2013

This is a series of blog posts about development land economics, viability and CIL (Community Infrastructure Levy).  We aim to highlight some of the fundamental principles which will impact on the success (or otherwise) of Local Authorities looking to implement CIL and development.

This blog is a basic reminder of some supply and demand principles which are relevant for planners and policy makers setting CIL and other S106 tariffs (affordable housing).  It is based on the excellent book by Jack Harvey, Urban Land Economics (3^rd edition, 1992) which describes the pricing of land and land resources in detail.

Undeveloped land, or ‘pure’ land, refers solely to the land mass provided by nature.  For example, the land mass across the earth’s surface, or more particularly the area of a Local Authority District, can be considered to be in fixed supply.  Remember, your economics supply and demand curves – the land supply curve would be a vertical line on the graph where the x-axis is quantity and the y-axis is price.  See figure 1.

Figure 1

Therefore, in simplistic terms, the supply of land is fixed.  The price of the land is derived entirely by demand for a fixed quantum (supply) of land.  Hence the price is determined by the opportunity cost of different land uses (levels of demand).  As levies or taxes (e.g. CIL) impact on demand, supply (at the macro level) remains fixed.

The fact that the price of land as a whole is determined by demand is an important point for policy makers – land will still be there no matter how high the tax/CIL.  However, there are two important points to remember:

1. if land is not taxed equally, the pattern of land use will be distorted; and,
2. the costs of development include ‘normal’ profit; and where tax erodes this, developers may not continue in business – the developer must be able to earn a normal profit for the role he/she plays in the development process.

These are important considerations which are variables.  For example, many Local Authorities are implementing differential rates by zone or land use; and if they are not differentiated at the Local Authority level, there are certainly differentials emerging between neighbouring Authorities.

Future blogs will consider these issues in more detail.