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As house prices continue to rise in the UK so too does the value of building land

The price of land for house building is continuing to rise in the UK but house price growth is now outpacing land value growth, having run in parallel since the economic downturn, the latest analysis shows.

The growth in land values is led by a rise of 4.8% in Scotland and 4.4% in the Midlands with the Midlands also seeing increased house building activity, according to the residential development land market report from Savills.

Land values are largely flat across the rest of the country and the report says that this is largely due to a sharp rise in planning consents for housing which are up 21% in 2017 across the nation compared to the previous year.

The report also reveals that housing associations need 138,000 building plots to achieve their ambitions and the growing Build to Rent sector is on track to deliver one in 10 new homes in the foreseeable future.

So, overall housing associations are now taking a more active role in house building, boosting their land requirements, while the Build to Rent sector continues to expand, supported by institutional funds.

UK greenfield land values grew by just 0.8% in the second quarter of 2018. A regional breakdown shows they increased by 2% in Scotland, by 1.5% in the East Midlands and East of England and by 1.3% in the West Midlands and the South West. Annual growth was 2.7% nationwide but that was outpaced by 4.8% in Scotland and 4.4% in the West.

However, urban land values hit a plateau in the second quarter, having risen by 4% in the first three months of this year, leaving annual growth at 5.2% across the UK as a whole.

The report explains that the performance of land markets reflects housing market strength. Housing land values fell much more than house prices post after the global financial crisis, down 50% for greenfield and 60% for urban land, compared to a fall of 17.8% for house prices, but recovery has largely tracked house price growth since the middle of 2009.

Over the past 18 months to two years, however, the gap between land values and house prices has begun to open up slightly. The strongest markets for housing land continue to be those seeing the highest levels of house price growth.

House prices in the East and West Midlands are up 5.8% and 6.2% year on year respectively, against an average of just 3.9% across England and Wales and Savills says that this strength in the housing market continues to support demand for land and boost house builder activity,

House prices in Scotland are up 5% year on year, making it the strongest-performing part of the UK, and by 9.4% in Edinburgh. Greenfield land values in Scotland increased by 4.8% year on year and by 2% in the past three months alone and this strength is expected to continue.

Housing associations are also taking a more active role in house building. The top 50 associations expect to deliver 250,000 homes during the next five years, increasing output by 50%. The report points out that to do this, they will need to secure 138,000 more plots.

Strategic partnerships deals between Homes England and leading housing associations, backed by a £590 million funding package, will also boost the sector’s requirement for land. Indeed, the recent Savills Housing Sector Survey 2018 found that 26% were looking to acquire strategic land without planning permission this year, while 35% already own strategic land.

At the same time, the Build to Rent sector continues to grow and now has 125,000 homes in the pipeline with a majority now in the regions and not London. Savills expects the sector to account for one in 10 new homes delivered within the near future.

‘Land values are currently underpinned by increased demand and a clear political will to maintain high levels of housing delivery. But rising consents and build costs will temper growth potential,’ said Lucy Greenwood, Savills research analyst.

‘The key to boosting housing delivery lies in unlocking land in locations linked to the strongest housing markets and to those with the most pressing housing need,’ she added.