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The Planning Factor: Why planning is critical to solving London's housing crisis (part I)

05 October 2015

A striking feature of a recent Metro article on London’s housing crisis – sadly typical of many articles of this type – was the absence of input from any planners. Amidst talk of a ‘housing crisis’ there is a danger of becoming narrowly obsessed with increasing supply without giving due consideration to the kind of places we actually want to live in.

As one of the (non-planner) contributors to the Metro article rightly pointed out, planning is key to place-making, so if we’re to avoid just blindly building houses without thinking about the kinds of places we’re delivering then planners need to be involved.

This blog post first diagnoses London’s housing crisis and points towards where some of the solutions might be found; a follow-up post will put forward some of these solutions, that have planning and planners at their centre.

Lack of metropolitan level of planning

Firstly, we need to think about the city more broadly, rather than focusing on just on inner London. Population projections for London, taken together with the most recent assessment of development capacity, demonstrate that over the next 20 years it will not be possible to meet the requirements of the city’s growth within inner London alone. The ‘Compact City’ concept on which the current London Plan is based can deliver some of what is needed, but the scale of the shortfall indicates a need to either look to at outer as well as inner boroughs if the target of 49,000 per annum is to be met, or radically review the plan’s density objectives – or most probably both.

As a result, the need to look toward outer London to meet the city’s housing targets means it’s crucial to foster cooperation between local authorities within the London boundary. The duty to cooperate provisions of the Localism Act have worked in some areas, but in nowhere near enough. Something more is needed.

Turning land into housing

Secondly, the slow rate of land release that the current system facilitates contrasts sharply with the rapidly expanding population and concurrent demand for housing in London. One reason for the shortage of land is that as it stands there is an incentive for landowners to hold back land from development in the expectation of rising prices. One way around this which simultaneously addresses a number of other issues is to tax land values rather than property. This would both encourage development and discourage land banking, as the owner of any site would be encouraged to build and sell quickly in order to avoid paying the tax.

Importantly, this would also incentivise density and give the often criticised Compact City agenda some teeth. As land in central London is the most valuable and has the largest land tax liability, owners of land in central areas would want to maximise the return on investment in order to pay it. The denser the building that sits on the land, the larger the revenue generated to pay for the same levy value. This will mean fewer derelict sites and car parks in central areas, and denser housing development. The tax would also encourage a more efficient use of existing stock. It would disincentivise occupiers from consuming more space than they need because a land tax on larger properties would typically be higher than smaller ones in a given area.

However, on its own, encouraging density is not sufficient. If we want density to deliver places where people want to live rather than just more housing, planning is crucial to the process. We’ll expand on this in our follow-up post.

A market that can deliver sufficient housing

Policies such as the Government’s demand-boosting Help to Buy mortgage support scheme or suggestions to limit foreign sales of new builds may be important contributions but are tantamount to tinkering around the edges of the politically-challenging requirement to fundamentally address how development can be delivered.

In the 1960s and 1970s, the UK saw a large amount of public sector investment in housing delivery, which meant that in combination the private and public sectors were frequently delivering over 300,000 homes annually. Across the UK in recent years, total house building has been frequently less than 150,000 new completions each year, overwhelmingly delivered by the private sector.

We often hear, at least from more extreme free-market proponents, that one of the reasons for this low level of house building is an overly restrictive planning system that is not supplying the land upon which new homes could be built. However, looking at recent data we see that in 2014 alone, approved applications for residential units in England were over 100,000 greater than completed homes across the whole of the UK.

Further, in a recent interview on BBC Radio 4’s Today Programme, the CEO of Taylor Wimpey – Britain’s largest house-builder – suggested that there simply are not the bricks and mortar and labour to deliver housing at the frequently quoted required rate, circa 220,000 homes a year nationwide.

At this point, many in the discussion give up out of hopeless frustration, the debate descends into a circular logic trap from which it appears impossible to escape, whereby developers claim it is not profitable or possible to increase building and yet analysts continue to opine that our national rate of house building is derisory and causing a social and economic crisis.

However, the pretext of the radio interview with Taylor Wimpey was that they had just posted a growth in pre-tax profits of 33% for the first half of 2015. The financial model for most large developers allows for them to forecast 20% profit margins from new developments, which is said to be a requirement in the interests of shareholder responsibility. The very ability of developers to include such significant profit margins within their ‘viability’ calculations suggests a market that exhibits considerable oligopolistic features. This is not to criticise the practices of the companies themselves – they are responding in a rational way to their economic environment. And of course the market exhibits risks, and many developers go under when the market slows down, but any market that can effectively avoid risk may not be working effectively in the interests of consumers.

In 2014, over a quarter of new houses were built by the three largest house builders. It is highly unlikely that SME builders and individual custom-builders would hold out for such high profit margins, and could be expected to necessarily take a more entrepreneurial spirit to house-building. Encouraging this part of the sector should be a high priority for how we deliver new homes.

 

The planning factor – ensuring quality as well as quantity

The fundamental component of all of this is that if any new supply of homes is to meet the goals that we hope, that is, halting an ever increasing house price spiral whilst guaranteeing high quality homes and places, then planning is the only tool that can bring these two objectives together. Looking at house price growth data in London shows that house prices are far from evenly spread across the city.

What’s more, they are also not linked to journey times in a way that might be expected by traditional urban economic theory. From their pre-crisis peak to last year, house prices rose in nominal terms by 52% in Hammersmith and Fulham and 59% in Islington, whilst nominal house prices in Newham rose by just 11% and in Barking and Dagenham by 9%. This is despite the fact that parts of Newham, like Stratford and Canning Town, having an average public transport commute time to the City of London of a half and third respectively of those from Fulham.

Whilst transport connections are undoubtedly hugely important for determining value, it is one component of a range of amenities upon which individuals place value when choosing where to live. It is clear that individuals also place value on a range of area-based factors, such as the quality of local urban design, wider social infrastructure, crime levels, public and green space, active transport opportunities and recreational opportunities amongst others.

One of the key roles of planning is to coordinate the delivery of these components of the built environment and ensure that they are readily accessible in urban areas – again, this is something we will expand on in our follow-up blog.

 

Joseph Kilroy and David Pendlebury work in Policy and Research for the RTPI, specialising in Housing and Economics respectively.