The long-run average price for homes in the UK has historically been around four times income. But since 2001, the ratio has consistently been higher. As of April 2016, house prices were 5.89 times average income, according to the Office for National Statistics, and this ratio may soon surpass the peak reached in 2007. The UK’s house prices are now second only to Monaco’s, with the size of houses considerably smaller than in similar European nations.
The current system of development dates back to the Town and Planning Act 1947, which laid the groundwork for what is the strictest set of planning laws in the OECD. It has contributed to a marked decline in the growth of the housing stock, particularly since the 1970s.
The Act stipulated green belt land to prevent urban sprawl, height controls, and reduced local fiscal incentives to allow development. The 1990 update to the Act with its 2004 complement, the Planning and Compulsory Purchases Act, changed some details, but did little to substantially affect the constraints on housing supply that the original policy created.
The fundamental tenet of the original policy, that private property requires government permission to be changed, is representative of the command economy that once existed in the United Kingdom. As a result of these Acts, the building industry has followed government incentives, which do not necessarily match up with economic demand.
This offers an explanation for why house prices rise fastest in London, where the demand growth is greatest but the disincentives to build remain quite strong. A study by Hilber and Vermeulen found that if all regulatory restrictions were removed, the growth in house prices would have vanished in real terms.
The result of this has been a housing crisis, which sees young people in particular spending a huge proportion of their wages on rents and mortgage payments. And the best way to address that, and to free up their incomes, is to remove the restrictions placed on housebuilding.
What I propose is that the Town and Country Planning Act 1990 and the Planning and Compulsory Purchases Act 2004 should be replaced by a Freedom of Housing Act. These two Acts create a series of supply-side constraints which have limited the ability of the UK housing market to expand and meet rising demand.
The Freedom of Housing Act would aim to increase the ability of homebuilders to respond to local demand for increased housing stock – freeing up land while protecting areas of natural beauty or environmental importance.
For example, one of the great supply-side restrictions under current planning law is the classification of land as green belt, the majority of which is neither of environmental or scientific importance, nor of outstanding beauty.
If the green belt were restricted to land which met the above criteria, it would free up a considerable amount of land for development – including some 20,000 hectares surrounding London. Such a reclassification update would deliver significant long-term economic benefits, especially as the demand for housing increases with population growth.
Another major improvement to the housing market would be to remove the planning requirements within usable land. Hundreds of pages of planning legislation exist for each local authority, which, despite frequent updates, remain true to the command economics of the original Town and Country Planning Act 1947. These contain endless stipulations about design and give extremely specific details about the nature of developments – responding to what councils believe businesses and individuals need rather than what the market demands.
The inefficacy of this system has led to the rationing of commercial land, with the private sector often unable to create new jobs without government permission. It has also driven up the cost of development throughout the country. This system results in permissions taking over a year to receive approval; ignores the market prices for already developed property; and creates barriers to entry for new developers.
The costs of all this add up. The market price of a hectare of land in Oxford is £20,000, but with industrial planning permission it rises to £1 million, and with residential planning permission, up to £4 million.
The removal of planning permissions is an initiative that would benefit not only the UK, but could be used by various developed nations to address growing concerns about a lack of housing. Germany, Canada and several US states, notably California and New York, are all experiencing housing shortages, which will only get worse as the populations of these countries continues to grow.
While not as strict as the system in the UK, all of these places feature planning controls which greatly restrict the supply of housing and drastically increase the cost of development.
The short- and long-term effects of the policy outlined above can be predicted with reasonable certainty. The reclassification of green belt land according to strict criteria rather than local authority designations would free up a considerable amount of the 12 per cent of England that currently has this designation. This freeing up of land would result in a series of positive economic developments that would help the wider economy and especially those who are most vulnerable.
Expanding land for building would extend the development of major cities, which has been linked to productivity growth by many major economic studies: the doubling of a city’s size has been correlated with an average 6 per cent productivity growth per worker.
These productivity gains improve the economy in several ways that benefit the most disadvantaged. First, the expansion of available land would lead to an increase in the construction of housing. Building these homes would require additional jobs in construction, increasing the availability of quality jobs for struggling families. These new jobs and homes would boost aggregate demand for consumer goods.
Another benefit beyond the increase in good jobs, is the decrease in housing costs, and the greater availability of new homes for families. As the supply of homes rises, access to homes for young people and struggling families increases tremendously. The ability to climb the property ladder has been seen historically as one of the greatest markers of social mobility and increased prosperity.
Because it logically follows that removing a supply-side restriction would help an economy move towards equilibrium, house prices and supply would tend towards levels observed in similar densely populated areas throughout the world, which have a greater rate of property ownership than the UK.
As the cost of a home falls versus income, this frees up the money the most disadvantaged can put towards other activities, either increased consumption to improve their quality of life, or investment in starting new businesses. The latter is also made easier as business space becomes cheaper.
As well as the boost to productivity, employment and home ownership facilitated by the freeing up of green belt land, the removal of local authority approval would significantly change the incentive structures for building. As the cost of approval diminishes to the market price for land, and builders can more freely enter the market without meeting onerous and unnecessary requirements, a much more adaptive market for developing land will emerge. Such dynamism will increase incentives to develop property that caters to the various segments of the market, allowing more affordable housing to be built by market processes.
It is sound economic logic to believe that if a producer can sell his product at greater than the fixed cost of production, he is incentivised to sell as many as possible on the market due to competition, rather than only cater to the richest segments and build fewer units.
However, under current incentives, the restrictions lead to an economy in which much of the work done is shoddy, while a great deal of resources are allocated to high-revenue dwellings. As profitability for developers becomes easier, the cost at which they are willing to part with the property would also decrease, improving both the consumer and producer surplus.
Accordingly, the group that benefits the most from these reforms is the bottom third of the income distribution. As the cost of housing falls to reasonable levels, it becomes easier for individuals to be approved for mortgages that no longer deprive them of financial security. It would increase the supply of rental accommodation, increasing competition between landlords, improving both access to and the quality of affordable rental space. Affordable rental units increase mobility for employees, as they are able to move around the country more easily, allowing for a more efficient jobs market.
It is obvious that the UK’s housing crisis has been responsible for preventing gains in productivity and social mobility, especially in the since the financial crisis. The old Planning Acts, based on command economics, have created numerous supply-side restrictions and have led to a great deal of inefficiency and lowered economic dynamism.
The globalised world of today is not the same as the one in which these planning restrictions were created. In order to facilitate greater economic mobility for all, and allow for more sustainable economic development, the Freedom of Housing Act is essential for modern-day Britain.
Repealing old planning laws would improve the stock and quality of housing, the availability of high quality and secure jobs, market access for new house-building entrants, and the potential for entrepreneurship. And it would thereby be the most advantageous means of aiding Britain’s poor.
This was a shortlisted entry for the Richard Koch Breakthrough Prize, organised by the Institute of Economic Affairs, and winner of its student prize.
Read the winning entry on why Britain needs a free market in taxes, and the other shortlisted entries on why we should scrap Britain’s planning laws, how to boost entrepreneurship among the poorest, the case for expanding private tutoring and how to liberate the education system from the state’s stifling grip.
