Why the government should play house

7th July, 2012

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.

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