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What critics of planning should understand about solving the housing crisis

18 June 2015

David Pendlebury

This blog is about how, in order to help solve the housing crisis, planners and economists need to develop a shared understanding of the relationship between supply and value in the housing market.

How then do we define 'value'? It's perhaps helpful to consider two examples unrelated to housing. So, is drinking water a valuable commodity? In an economic sense, in places where the supply of drinking water is relatively abundant, no it is not. It is sourced, distributed and acquired cheaply. In a biological sense however, water is of course an essential ingredient to human survival, and therefore extremely valuable.

In contrast, diamonds are, in an economic sense, highly valuable. They are difficult to extract, and supply is both naturally (and artificially) constrained. In a practical sense of course, diamonds are worthless, and should they ever become simple to source and abundant in supply then the high prices they currently command would tumble. Alternatively, should water ever become dangerously scarce in supply, its price would sky rocket and it would soon become the most valuable resource around.

These are two extreme, but easy to conceptualise, examples of the relationship between supply and value. However, there are many other ‘goods’ for which the relationship between value and supply is much more nuanced. For example, what about the built environment, and in particular housing?

In a fairly typical piece, on April 4th 2015 The Economist published a special briefing (‘Space and the City) on how land-use policies which restrict the supply of urban built space lead to high land (and thus property) prices. The apparent logic is simple, and similar in theory to the water/diamonds case outlined above: restricting the supply of a sought after good, in this case the ownership of property in or near economically successful places, raises prices, to the detriment of consumers. This often hits the poorest hardest, whilst existing landlords make ‘Ricardian rents’ whereby the value of the land they own increases through scarcity rather than that the results of any effort on their part. The solution proposed by The Economist was derived from the work of commentators in this field who propose a liberalisation of land-use regulation (which they often broadly and incorrectly label as ‘planning’), in the belief that this will lead to an uptick in supply and a brake on house price inflation.

This is a basic but seemingly powerful argument which, superficially at least, simple economic logic seems to support. Indeed, that there are significant constraints in supply in the house building sector is now widely acknowledged, and the RTPI has repeatedly argued that the UK is facing a housing crisis fuelled by a lack of supply (see for example RTPI 2013, RTPI 2014) and is actively campaigning for the situation to be remedied as part of the Homes for Britain campaign.

However, the relationship between supply and value in the housing market is unfortunately not as straightforward as is often suggested. It is not solely a supply-side issue which has “turned houses into gold” (CEP, 2014) in many parts of the UK; there is also a quality component that drives demand which isn’t analysed in the water and diamonds dichotomy, or indeed in the argument made by The Economist and many others. This is that land values are also determined by the quality of place in which they are situated, or what is often referred to as the ‘amenity value’ of an area (Gibson and Machin, 2008).

[C]rucially, it isn’t just the quantity of housing supplied which determines price - what really matters is the quantity of good quality housing in good quality places.

Amenity value can refer to any of a wide range of area-based attributes which attract potential buyers to a location, such as: quality of schooling, levels of crime, quality of social and community infrastructure, quantity and quality of public and green space, and lifestyle and culture. Most importantly perhaps, in terms of the relationship between planning and economics at least, ‘quality’ as defined by amenity value also refers to wider benefits of an area, such as transport accessibility and connectivity, proximity to employment and retail opportunities, and proximity to flourishing urban economies.

As a result, crucially, it isn’t just the quantity of housing supplied which determines price - what really matters is the quantity of good quality housing in good quality places.

This is underlined by the fact that within London, 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% (GLA). 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 (according to Transport for London’s online ‘Journey Planner).

The mistake of those who advocate a simple liberalisation of land use policies as the solution to the problem is that they neglect this critical issue. Regardless of connectivity times to central London, demand is clearly hugely different in different areas. Therefore, solving the housing crisis isn’t solely a question of increasing supply. If we want areas to become more affordable, the crucial component is to increase the supply of good quality places.

The role of planning is then to try and bring together these various requirements that determine the economic and amenity value, or the ‘quality’ of a place. This is fundamentally what the campaigners for ‘less planning’ fail to appreciate. Private and public sector planners strive to ensure that places are developed to contain the kind of social, economic, and environmental infrastructure on which people place value.

If we simply increase the supply of places without regard to quality, which is to say places with low amenity value, contrary to the liberalisation hypothesis we will likely not see significant lowering in price or increase in affordability in the currently high demand areas. This is because housing is a so-called 'hedonic good' (as noted by researchers such as Paul Cheshire), whose price is dictated by myriad attributes unrelated to the property itself. That is, we aren’t actually paying for the rooms in the house themselves, the walls or the roof, we are paying for the area based amenities, many of which, including transport connectivity, cannot be delivered without proactive and effective planning.

Logically then, if we want to see an increase in supply that helps to lower house price pressures, rather than being repeatedly characterised as the 'problem', planning clearly needs to recognised as having a crucial positive role to play. The purpose of planning, understood properly, is not to restrict supply but rather to ensure that what we increase is the supply of good quality places. This would ensure that this additional supply meets both social and economic expectations, in providing good quality places to live as well as combatting the housing crisis. This is a position on which economists and planners, regardless of adherence to any particular intellectual traditions, should be able to reach consensus.

About David Pendlebury

David Pendlebury is Economics Research Officer at the RTPI, working on the value of planing agenda. His other interests include transport planning, international affairs, and public sector finance. Before joining the RTPI, David worked in public affairs in Brussels and also as an analyst within the management consulting industry.