Being just Brown won't solve the housing headache

23rd July 2007
By Alan Evans

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‘The fact that the price of land for housing is 250 times the price of land for farming is just the market’s way of telling you that people want houses more than farms — Evan Davies, BBC Radio 4

March 20, 2007.

It is a curious feature of town planning that it is usually discussed, by its practitioners and supporters at least, as though the only criterion of success relates to aesthetics. Certainly, in recent pieces celebrating the 60th anniversary of the Town and Country Planning Act of 1947, this has been the dominant theme. Don’t you think, one is asked, that Britain looks better with all the urban development being tidily constrained within green belts? How appalling the urban sprawl would have been without that Act?

The problem is that this attitude ignores the consequential effects of planning policies, the things that interest economists. Economists are inclined to agree that the results of planning look very good, but then ask awkward questions about what the consequential costs are and who bears them. So, they ask, if the demand for housing increases in a constrained urban area, doesn’t this mean that housing costs increase? Doesn’t this mean that people commute long distances across the green belt? And what do poorer people living in the inner cities get out of knowing that ten miles away there is unseen countryside?

Planners may say that it is up to them to plan and up to the market to follow, but this response is now no longer generally accepted. It has taken 60 years, but these economic questions have finally come to the fore.

Only a short time ago they were still seen as irrelevant. Lord Rogers and his task force cared little about economics and knew even less. Their response to finding that new homes in Germany were 50 per cent larger than in the UK was to ask how German architects did it.

That new homes were smaller in the UK because the policies of constraint meant that house prices were much higher, which in turn meant that the British could only afford small homes — this chain of reasoning was rather too long for them.

In the new millennium, however, these economic questions have become more central. Economist Kate Barker was asked to review land-use planning and the supply of housing. Fuelled by stories of continually rising house prices, questions about the consequences of planning — who gains, who loses — have become newsworthy. The crucial thing that appears to have happened is that the young, particularly the sons and daughters of the middle classes, have found themselves priced out of the housing market, and their parents, whilst largely deprecating housing development near them, have started to make the connection.

Faced with a choice between more housing being built and their children either emigrating or living in what their parents regard as squalor, these parents have started to demand that something be done.

This demand has begun to be voiced at the same time as it has become clear, to economists at least, that the present government’s planning policy for housing is a policy of high house prices. Current policy dictates that at least 60 per cent of new homes should be built on brownfield sites, on land where the previous use was ‘urban’. The general public has the idea that brownfield sites are pieces of land occupied by derelict eyesores which should be cleared away, but they are mistaken. Even Lord Rogers’ Urban Task Force, which endorsed the policy, estimated that only about a quarter of the housing built on brownfield sites could be on this kind of land. Three quarters would have to be built on land which was already in some perfectly viable use, whether housing, commerce or industry — a petrol station say, or a local pub.

It follows that to enable such redevelopment, the price of housing has to be high enough to make closing down the existing site, demolishing the buildings, clearing the site and building the new housing all worthwhile.

Moreover if the demand for housing increases in part due to rising incomes and in part due to immigration, then still more homes need to be built. The policy requires that most of these extra homes are built on brownfield sites.

This means that prices have to rise to make more demolition and redevelopment economically viable. On the supply side, the brownfield site policy is both the cause of the increase in the price of housing over the past ten years to ‘unaffordable’ levels, and the reason for the rate of house building falling to the lowest level for seventy years.

The problem is that governments want to achieve sustained economic growth and to a great extent this government has succeeded, but increased housing demand is a consequence of this successful policy.

Of course demand could be damped down by high property taxes or by an economic recession, and house prices would then fall. But neither of these two solutions are politically attractive. Since reducing demand is not a policy option, the only feasible policy is to increase the supply of housing by increasing the numbers built on greenfield sites without any commensurate increase in the numbers built on brownfield land.

But the government has set its face against this for two reasons. The first is that there is an intuitive presumption that high-density development results in less fuel use and lower CO2 emissions, and is thus a good thing. But as Barker’s Review of Land Use Planning demonstrated, whilst this may seem intuitively true it does not stand up to dispassionate scrutiny. Density has little effect on fuel use or emissions. The price of fuel is the important factor.

The second is because of a popular belief that Britain is short of land. So ‘saving’ land and not building on greenfield sites is politically popular. The trouble is that this popularity is based on a misperception, as Barker also demonstrated in her Review of Land Use Planning.

The majority of the population thinks the proportion to be 50 per cent or more. Yet the truth is that only about ten per cent of the UK is ‘urban’ and even in the south-eastern corner of the country, including London, the proportion is only about 20 per cent. And much of the ‘non-urban’ rural land is not even used for growing things but is ‘set aside’.

So how do we square the political circle? How do we get more houses built and yet make it politically acceptable to build much of the new housing on greenfield sites if it is to be sold at a reasonable, ‘affordable’, price.

 One could start with a campaign of re-education on the subject of land use in the UK. A far better tactic politically would be to set out how much greenfield land would need to be used as a proportion of the total. So it could be proposed that, say, one per cent of existing non-urban land should be made available for development in the next 20 years.

Those who think that Britain is over urbanised will be reassured by the small area considered. Those who are aware how much rural land there is, and how little urban land, will be aware that this would represent an increase of ten per cent in the area of urban land.

To argue against the policy, organisations such as the Campaign to Protect Rural England (CPRE) would have to demonstrate what a small proportion of Britain was actually urbanised. In other words, the re-education would be done by others.

Barker’s foray into this area is to suggest looking again at green belts. In this she is quite right. When they were proposed in the forties they were intended to be quite narrow and to provide recreational areas for the towns they surrounded. Yet when they came to be designated in the fifties, they covered far larger areas because they were largely designated by shire counties who wanted them to cover as large an area as possible to stop people from these towns moving in.

Green belts now have nothing to do with recreation, little to do with rurality and everything to do with keeping others out.

This means that looking again is unlikely to solve the problem. Fifty years on the shire counties have the same objective, keeping others out. They have no incentive to think in any other way. Indeed one of Barker’s proposals, the Planning Gain Supplement, would actually reduce the incentive to permit development by diverting the possible planning gains from Section 106 agreements away from local authorities to the Treasury.

What is necessary is to incentivise local authorities to allow development. At the moment there is no incentive apart from that provided by planning gain. The local government finance system actually discourages development.

Since about 80 per cent of local government income comes from central government grants, the income from allowing new housing is solely the council tax which does not go anywhere near covering the extra expenditure required to serve the new residents. Only after a year or so will the grant be reassessed and increased, but only to the level necessary to ensure that the local authority is not actually out of pocket.

What happens elsewhere? The most plausible and relevant model would seem to be Germany. It has low and stable house prices, its new homes are much larger than in the UK, and many more of these homes are built every year per head of population than in the UK. Moreover the average density of development, in the old West Germany at least, is about the same as in the UK. And having driven across much of it, the countryside seems to this observer, at least, to be just as beautiful as that in the UK.

German local authorities have some incentive to allow development. Because almost all their tax revenue is raised locally they are in the position where an increase in the number of houses will increase local revenue. Moreover the better the house, the higher the income.

Contrast this with the British situation where local authorities have to be instructed by central government to ensure that a certain number of homes are allowed to be built and respond by ensuring that what is actually built is as small as possible and located where it won’t be regarded by the existing voters as harming the environment.

In practice this means that they get built where the environment is pretty bad anyway — witness the housing built on previously disused land alongside railway lines, and the blocks of flats built along main roads replacing detached houses.

The difficulty with applying the German approach in Britain is that it involves central government giving up a large degree of central control through the devolution of local government finance. It would require a local income tax of the kind suggested years ago by the Layfield Committee of Inquiry into local government finance.

Failing that we have to fall back on other less radical but more ad hoc solutions, and a number of these have been proposed. Some years ago, for example, I suggested in a piece of the Institute for Economic Affairs (IEA) that what economists call ‘side payments’ might be allowed so that objectors could be compensated for damage, literally bought off.

This is a possible policy suggested by Barker in the case of small developments; perhaps it could be applied to large. More recently Oliver Hartwich and I suggested in a piece for Policy Exchange that a social cost tariff might be paid in respect of development on greenfield sites, to compensate the local community for loss of the open land. We estimated this at about £0.5m a hectare, a figure arrived at because it was the social cost implied by evidence in Barker’s Review on Housing Supply.

More recently still, Tim Leunig of LSE (whose article follows), has suggested that local authorities should be able effectually to auction land-use planning permissions. In this case as well as with the Hartwich and Evans proposal, the local authorities would reap most of the benefit. All the contributors agree that some incentive is necessary for local authorities. However, this would make them more independent of central government.

The problem comes down to the centralised nature of the British economy, at least as regards local government and land use planning. Whilst in the eighties and nineties, other sectors of the economy were felt to be able to cope with independence and market-based solutions, these two areas became increasingly centrally controlled. Thatcher reduced local independence in terms of income and expenditure. Major was in power when development became ‘plan led’, Soviet style, in 1991. Blair’s government increased the constraints on the availability of land for development.

Could Brown buck this trend? He has said that he regards housing as important, and it was when he was Chancellor that, at the behest of the Treasury, Kate Barker carried out her two reviews. However the actual impact of these reviews has so far been minimal, and certainly the general population does not believe that her proposals will have any significant effect on house prices. If they did, prices would have started to fall already.

The proposed contents of the Queen’s Speech trailed in July included several proposals related to housing; the number of houses built each year should be increased to 240,000 and some government land should be made available for development, largely for social housing. Fixed-rate mortgages should be promoted. But it was also implied that green belts would remain sacrosanct.

The overall effect is likely merely to be a further increase in the construction of small flats whilst the homes that people want — houses with gardens — remain out of their reach. Once again quality will be sacrificed for quantity. The Conservative and Liberal Democrat politicians now working on the sections in their manifestos, asking ‘do you want your children to have decent affordable homes?’ and ‘what has Labour done about it?’, can carry on polishing up the text.

Alan Evans is Professor of Economics and Director of the Centre for Spatial and Real Estate Economics at the University of Reading

Filed Under: Housing
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