27 October 2023

Wonks have been warning about the housing crisis for decades – so why has nothing been done?


Last month, the Director of the Centre for Policy Studies, Robert Colvile, tweeted about a CPS publication from 1990 which was far ahead of its time: NIMBYism – The Disease And The Cure by Richard Ehrman. Although written in the early stages of (what we now call) Britain’s housing crisis, the author already demonstrated a much better understanding of the issue than, for example, a typical Guardian contributor writing about it today. 

The CPS booklet has certainly aged like a fine wine. Were it not for the occasional giveaway (for example, when Ehrman talks about German Reunification in the future tense), you could almost think that it was published last week. 

Nonetheless: in the spirit of friendly competition between Westminster’s free-market think tanks, I would like to point out that the Institute of Economic Affairs already got there two years earlier. The IEA book No Room! No Room! The Costs of the British Town and Country Planning System by Prof Alan Evans, published in 1988, already tells you almost everything you need to know about Britain’s housing crisis. 

Prof Evans’s overall assessment of the system is simple:

‘The planning system has an impact on the process of development in a way which was not foreseen by those who originally devised it. […] The planning system has evolved over time from a system designed to guide development into what is regarded by the planners as ‘socially optimal’ land use into a system to control and restrict development’ [p. 34]. 

Why is that a problem?

Because ‘if […] development is prevented […], there is an economic cost to this lost development which is seen in higher prices and a lower standard of living. […] [T]here is a connection between spiralling house prices in the South East and the reluctance of the counties and districts to permit development. But the costs of the planning system are not limited to higher house prices. These are only the most evident of economic costs’ [p. 14]. 

Which sounds plausible enough. But is there any evidence for it?

According to Prof Evans – yes, there very much is. First of all, we have indirect evidence from abroad: 

‘To obtain such evidence we must study a variety of urban areas which are otherwise similar but differ in the amount of land which is available for development. This cannot be done in Britain where all cities are subject to similar constraints on development. It can be done in other countries, however’ [p. 19]. 

Evans mentions a study of North American housing markets, which compares urban areas subject to stringent growth controls to otherwise similar urban areas where such controls are looser. It finds – believe it or not – that growth controls raise residential land prices.  

In the meantime, a mountain of evidence has accumulated which confirms this. Two years later, in 1990, a literature review in the journal Land Economics would find:

‘There is now a large empirical literature documenting the effects of growth controls on housing and land markets. The evidence to date conclusively establishes that growth controls raise housing prices in communities where they are imposed’ [p. 237].

Plus, it is no longer true that this kind of research ‘cannot be done in Britain’. In 2014, a paper in The Economic Journal found that more than a third of the average house price in England is directly attributable to planning constraints. 

But back to 1988. Evans finds direct evidence for the bite of planning constraints in the growing gap between the value of land with and without planning permission. Of course, even in a very liberal planning system, we would expect land with planning permission to be worth many times more than land without it. But we would not expect that gap to systematically grow wider and wider over time:

‘These differences between the price of agricultural land and the price of the same land but with planning permission […] indicate that if planning controls were relaxed, many owners of agricultural land would be able to sell it for development. […] The difference in prices in the two markets, at the margin, is maintained only by restricting the transfer of land from one market to the other’ [pp. 17-19]. 

The result is not just higher house prices and rents. It also means higher consumer prices in all sectors that require more than a minimum amount of space:

‘[T]he price of hotel space in Britain tends to be higher than in other developed countries, as those who have travelled in Europe or North America can confirm. The same is true of restaurants. […] [M]ost travellers will have noticed the higher cost of dining out in Britain as opposed to North America or Europe. […]

Planning restrictions on the amount of space available for housing, shopping, hotels, restaurants, and leisure affect the cost and kind of facilities available to consumers and thus directly lower their standard of living’ [pp. 30-31]. 

And it means lower wages:

‘If the cost of land and space in Britain is higher than elsewhere, the higher cost of space is a burden which British manufacturers and commercial services bear and which they have to cover by reducing their costs elsewhere. […] [T]he higher land costs must either result in the firms going out of business or in their paying lower wages and salaries to their employees than those they compete with in international markets. In this way the costs of the British planning system are borne by the population in the form of lower real incomes’ [p. 32].

Planning constraints have their greatest effect in high-demand areas. High-demand areas, of course, are high-demand for a reason: they tend to be the parts of the country which offer the best employment prospects. By making it harder for people to move to those areas, planning constraints make Britain poorer overall:

‘[T]he house price differential also acts to choke off […] migration. House owners in the north find that they would be worse off if they sold up and moved, even if it meant moving out of unemployment into employment’ [43-44]. 

These are some of the ways in which planning constraints make Britain poorer. The overall effect is hard to quantify, but it is certainly not trivial:

‘[T]he planning system […] has significantly increased land and housing prices […] and distorted the economic structure, all of which have led to the British standard of living being lower than it otherwise would be. […] The aggregate reduction is […] probably of the order of 10 per cent or more of national income’ [p. 50]. 

The words ‘Nimby’ and ‘Nimbyism’ had not yet caught on in Britain, so it does not appear in the book. But the concept certainly does: 

‘At present residents always oppose any development near to them. Only the extent of their opposition varies, and that can be measured by the amount of pressure put on local councillors to turn down planning applications by lobbying, petitions, letters, public meetings, and so on’ [p. 52]. 

Evans points out a major inconsistency in the planning system, which still plagues it today: while it is easy to mobilise the opponents of housebuilding, it is almost impossible to mobilise the potential beneficiaries, who cannot be identified in advance. 

‘The future occupiers of the development […], who in one sense are those most affected by the decision, are usually unrepresented when the decision over land-use is made’ [p. 51]. 

While a bit vague on the solutions, Evans suggests that we need to find a way in which Nimbys can be bought off, through direct compensation payments. 

I will stop just short of calling Prof Evans a prophet. His main concern was the conversion of agricultural land into residential land, with densification of existing urban areas almost an afterthought. But we now know that urban Nimbyism is as much of a problem as edge-of-town Nimbyism. 

Also, the idea that Nimbys can just be ‘bought off’ assumes them to be economically rational actors, which I am not convinced they are. There may be an element of projection going on here, in the form of an economics professor trying to explain Nimbyism by asking ‘If I were a Nimby – what would motivate me?’ 

Nor is there a discussion of the discretionary nature of the planning system, which, we now know, makes it more susceptible to Nimby capture, and harder to reform, than a more rules-based one. 

But then – I am armed with the benefit of 35 years of hindsight, and this is pretty much the only criticism I’m able to muster. The fact that someone could see this problem so clearly 35 years ago makes it all the more depressing that we’re still not one step closer to solving it.

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Kristian Niemietz is Head of Political Economy at the Institute of Economic Affairs

Columns are the author's own opinion and do not necessarily reflect the views of CapX.