Why the government should play house
Building new homes could play a role in creating useful jobs, but the planning system remains a hindrance
I’m not a macroeconomist myself and so when I meet proper macro folk, I try to draw them on the topic of the day: how to stimulate the British economy. Should George Osborne reverse his tax rises and postpone his promised spending cuts? Or would any stimulus that resulted be lost in the turbulence of lost credibility and higher borrowing costs? With a £1.5tn economy, any stimulus spending that was big enough to make a difference should hardly be taken lightly. Hence my interrogation of any macroeconomist I could find.
To my surprise, on a couple of recent forays into this territory, I have found my inquiry sidestepped completely. The real issue, I am told, is microeconomic: the government needs to find a way to get more houses built.
This could certainly work in principle: there is a robust demand for houses at well above the cost of building them, and house building would be a good source of employment for semi-skilled or unskilled young people, a group badly affected by this recession and one that has not been in good shape for some years.
Could a house-building splurge make a difference? Surely. The UK has recently been building a little over 100,000 new homes a year, but the country is acquiring more than 200,000 new households annually, largely as a result of its internal demography, but with net immigration also playing a part. The shortfall has been substantial for many years; there is no reason to expect the UK couldn’t find a use for 300,000 or even 400,000 new houses a year for the next few years – and that means, very roughly, a million new jobs in construction, the entire number of unemployed people under the age of 25.
Building houses is an occupation that could plausibly play a substantial role in creating useful jobs and stimulating demand for several years. How, then, to make it happen?
The chief obstacle to house building in the UK is the planning system, which, 65 years ago, did away with the idea that if you owned land, you could build on it, and replaced it with a system where planning permission was required. Permission to build houses is severely rationed, and such rationing can be seen clearly in the gap between the value of agricultural land without planning permission (a few thousand pounds a hectare) and the value of such land once permission has been granted (a few million).
The difficulty is that local authorities have the ability to grant planning permission but have little incentive to do so, because it tends to be unpopular with existing voters. The huge windfall from winning planning permission falls to whoever has managed to speculate on land and navigate the tangle of planning rules. These serve as nice barriers to entry for existing developers, while driving up the price of building land and so driving down the size of new homes.
Tim Leunig, chief economist at CentreForum, a think-tank, has proposed a two-part system of land auctions to get around this problem. Local authorities would buy land at auction, grant planning permission on it and then sell the land on to developers – with some strings attached, if they so choose. The profits would be enormous, and enjoyed by existing residents in the form of lower taxes or better public services. This isn’t the only way to liberalise planning, but it retains local control and democratic accountability – while dramatically increasing the incentive to develop.
The Department for Communities and Local Government said last year it would “pilot elements of the land auctions models, starting with public sector land”. That is like practising a dinner party with a doll’s tea set. The government has been in office since 2010; the financial crisis is five years old. A bit of urgency wouldn’t hurt.
Also published at ft.com.
13 Comments
Mark Brinkley says:
If there is a flaw in this argument it is the weight given to the housing demand figures, which are little more than guesswork. Housing demand is elastic. If they were cheap as chips, everyone would want two or three each. If they were much more expensive, we would all live together under one roof, like our forebears. So to state that we are “acquiring 200,000 new households annually” is only true if our current household occupation levels are to remain constant, which itself is a measure of wealth, not demand.
7th of July, 2012Jim says:
Maybe this is just pedantry, but I get frustrated by accounts that blame the ‘planning system’ as though it is some kind of autonomous mechanism. The fact is that planning policies are set by elected politicians, and planners do what they are told. The planning system as enshrined in legislation is perfectly capable of delivering huge numbers of new homes, as indeed it has in the past. The problem is that we, the electorate, don’t want it to, so we elect politicians who promise to restrict housing supply and who do just that when in power.
The low level of house building is due to the visceral public hostility to new housing supply. The fault is ours, not that of the planning ‘system’ per se, and I wish commentators would be braver in saying so.
7th of July, 2012David Barnes says:
This would be great for young workers and young householders who need a drop in housing prices. Bad for middle aged Daily Mail readers who already own the most valuable house they’ll ever buy… And they’re the ones who decide elections.
7th of July, 2012cig says:
Aren’t speculators just going to bid up prices once they know of the plan the local authorities have? (and they will know about them in any vaguely democratic system.)
Compulsory land purchases at fair agricultural prices sounds simpler, if you could get enough public support for it.
7th of July, 2012Derek Tunnicliffe says:
Your article reminds me of a past business colleague who saw farmland as “a wasted building opportunity”.
The reason the UK has a Planning system is because land is a finite resource. Thus, the more of it that is built on, the less there is available. Further, housing is not the only demand on land. Apart from shopping centres, business parks and other such projects there is a need to maintain a sufficient area of agricultural land. The UK needs to produce at least some of its own food, right?
7th of July, 2012Treasa says:
It’s a finely balanced requirement though. A cursory look at Ireland should tell you that this can be fraught. Property may not get built in the right location, and property may not necessarily be designed with the needs of the inhabitants of said property uppermost. We have a system of planning permission here which didn’t prevent a bubble. I’m all in favour of building more property but it’s not as simple as If you Build They Will Come. At the end, we had imported a massive amount of labour to build the houses which ultimately, we do not currently need.
7th of July, 2012Martin says:
It would indeed be more equitable for the public purse to capture planning gain but this depends upon Local Authorities being able to buy suitable land cheaply. They would have to decide what land should be designated for building before buying it, but once this becomes known the price will go up significantly. And so there is a danger Local Authorities will end up buying land which should never be be built on for environmental reasons (and so remains cheap) rather than more obvious building land, which will rise in price.
8th of July, 2012Grad says:
Personally I’d love for there to be some more houses! As a recent grad just about to finish my first year in full time employment my monthly expenditure (post tax, NI and student loan) breaks down as follows:
50% rent
6% council tax
4% utilities
10% food
10% entertainment (inc. internet + phone)
20% saved
A nice touch is that my rent increases each year with UK inflation but my landlady lives in France!
8th of July, 2012HAMISH_MCTAVISH says:
There is already a several year supply of houses with planning permission in builder land banks. And an estimated 10 year supply of banked land with planning permission application ongoing.
The real block in the system is not planning permission, but the mortgage famine.
Builders won’t build what they can’t sell.
In order to build more, first we have to lend more. A lot more… Only then will any kind of recovery in the housing market, and wider economy, become possible.
8th of July, 2012hotairmail says:
I fully support the planning gain going to the community and the favct that incentivises permissions where there is none at present.
I think Panning Permissio may actually be a red herring in fact. Construction is dominated by a few large firms who have huge land banks even with planning permissions attached. It is just that they play the ‘land game’ for their profits. They eke volumes out to the market that maximises their returns. They know perfectly well what is involved with planning and manage their pipelines accordingly.
To stop the hoarding of land, I would also tax land banks – and those with permissions at the higher rate taking into account their value. The land should be released to those who are prepared to build. Profits for builders should come from building and not the land game. Taking these steps would encourage many more builder firms to grow as land becomes more readily available to them, increasing competition.
8th of July, 2012Pat says:
there is little doubt that the macro-economy could be stimulated by an expansion in house building. Causality is difficult to disentangle between lack of credit for mortgages and developers, the regulatory costs (albeit the benefits are often ignored) of the planning system, the strategic behaviour of landowners who may be rationally waiting for market conditions to improve and inherent risk in housebuilding in the current macro-economic environment. For lots of reasons, there is substantial resistance to new housing. The negative externalities associated with new development are concentrated and the benefits are dispersed. Existing owners have vested interests in limiting supply. My wife is a planning consultant and, in her view, the system is currently an omnishambles. However, I suspect that we’re getting the planning system that we deserve. It is an instrument rather than a cause. The intrinsic causes seems to be our inability as a society to agree where houses should go and a difficult economic environment.
9th of July, 2012Gary Turner says:
There is also an element of nimbyism to the planning process, which is not altogether a bad thing. The elected few represent the community and will block applications that affect quality of life, in an ideal world.
More palatable; the development of brownfield sites should have favourable incentives over and above greenfield sites, that is easier to achieve in the sentiments of the average voter.
For example, I know of acres of disused and ruined industrial parks while there are longer term development plans in train to replace glorious rolling hills and countryside with housing.
And I am not too sure that I would trust my LA not to buy cheap and sell with permission granted each time the Icelandic banks snaffle their funds.
9th of July, 2012Rob Gilliam says:
Sadly, a boom in house construction is unlikely to deliver the extra jobs for the young unemployed British that you suppose, as the increase in demand would drive wages for newly-time-served brickies, chippies, etc., back up to the level at which experienced craftsmen from the Eastern European members of the EU are willing to travel. This is basically the problem my cousin had in 2007 when he finished his apprenticeship as a carpenter only to find there were no jobs in the construction industry for him and his mates.
10th of July, 2012