Planning Myth: planning forces up house prices 

Background to the myth:

Ensuring that housing is available in sufficient numbers, at a range of prices that can assure access for all but without creating a housing market that might ‘crash’ and deter investment – as has happened in the US, Ireland and Spain for instance - is a tricky equation. Additionally, it is accepted that social and environmental considerations will impinge to help assure public acceptance of housing growth and its sustainability.

In her 2004 Review of Housing Supply, the economist Kate Barker suggested that in order to deliver a trend in real house prices in England in line with the EU average of 1.1 per cent per annum, an extra 120,000 houses each year might be required. The problem identified was that “Planning at present tries to ‘make the market’ without consideration of the consequences, for example the effect on house prices and affordability”. And the planning remedy was the “introduction of flexibility at the local level through the allocation of additional land …. with the release of this additional land triggered by market signals” ie more land is equated to more housebuilding and this in turn results in lower rates of increase in houseprices.

The influential Policy Exchange think-tank has been notable in pressing this argument:

“Looking for the reasons behind rising house and land prices, it is impossible to overstate the role that the planning system has played….Where demand is growing and supply is restricted, economic theory predicts that prices have to go up, and this is precisely what has happened.” Oliver Marc Hartwich, Research Director, in The Guardian 2007

“Land in Britain is made scarce and expensive by some of the world’s tightest planning laws….It also pushes up your rent or mortgage, and jacks up the bill for housing benefit.” Neil O’Brien, Director, in a Telegraph blog 2011

Evidence base:

More housing land equates to more housebuilding:
Take up of permissions: In 2007 the RTPI published ‘Opening up the Debate: Exploring housing land supply myths’ which inter alia showed evidence that, at that time, outstanding permissions were held by the top ten housebuilders for nearly 225,000 homes and using their own existing rates of building, this equated to 2.7 years supply. Given the general down-turn in the housing market since that time and the continuing flow of new permissions for housing (as well as the eased mechanism for extending existing permissions), it is likely that the landholdings have increased rather than diminished.

Availability of loan finance: Of course one of the factors inhibiting housebuilders from using the land with permission that they hold is the availability of loan finance, both to support the construction work and the prospective purchasers. It is therefore salutary to note the significant and recent (Forever Blowing Bubbles 2011) comment of think-tank ippr that high levels of financial leverage – already the case in the UK - are “empirically proven to contribute to greater levels of house price growth and volatility”.

In The Guardian (13 Sept Call this planning reform?) Simon Jenkins notes: "As for housing, it might seem odd in a recession for a chancellor to be directing savings (and bank loans) from productive investment into the housing market. Osborne and Pickles clearly regard housing as an economic driver. Yet even were this true, land is not the critical issue. It is not in short supply and cannot therefore be a curb on growth. Permissions exist for 330,000 unbuilt houses, with 280,000 of them in the banks of the 11 largest developers who now constitute the lobby. This is in addition to 750,000 houses lying long-term empty, thanks to the chronic inadequacy of property taxation. Brownfield sites are estimated to have room for a further 3m houses."

More housebuilding equates to lower houseprices:
The RTPI pointed out in its evidence to the Barker Review of Housing Supply, “such research that has been undertaken indicates that it would require an extremely large expansion of the house building programme to reduce house prices to any significant extent. For example, a study found that ‘increasing plan targets by 75 per cent would raise output by 16 per cent on average over six years and lower prices by 7.5 per cent, so enabling an extra 3-4 per cent of new households to buy a new home.’ It can therefore be fairly argued that building houses is an extremely inefficient way of reducing house prices and improving affordability.”

House prices locally reflect a number of community factors such as good schools, access to parks, council tax rates and perceived/real incidences of crime. No one is suggesting that good schools should close to reduce houseprices.

Controls on land supply can be helpful:
“The overwhelming common factor in all house price crashes that we have seen in the US, Spain and other parts of the world over the past few years has been an oversupply of housing. In countries where the supply of housing exceeded demand, price falls have followed. Tightly supplied housing markets, of which the UK is a prime example, have been protected from significant house price falls.” FT.com 2011

Our view:

House price inflation is not solely the result of a lack of housebuilding: the Barker Review found that the effect was marginal taking into account the other determinants of supply and price, i.e. the availability of finance and demand.

The unsustainable rise in house prices that ended with the credit crunch in 2006 was felt as badly in countries without constrained land supply such as the USA: these rises were the result of irresponsible lending.  House prices in England are not only affected by demand arising from those first entering the market, but also those wishing to purchase second homes, buy-to-lets and redevelopment opportunities.

Planning is not responsible for the lack of housebuilding.
The private sector has only ever been able to contribute around 150-200,000 new homes a year across Great Britain.  Until the government ended mass council housing in the 1980s, the public sector helped to almost double this.  If public sector housing had continued there might be at least 2 million more homes now. The current slump in housebuilding is the result of a lack of finance, both for homebuyers and housebuilders, prevalent since the “credit crunch”.  The slow-down in planning permissions is the result of a lack of planning applications.

There is not a lack of homes, premises to convert or sites to build on.  In England, there are around 750,000 empty homes, nearly half of which have been empty for over 6 months, and developers have permission for around 300,000 homes they are not building.

Providing more land for housing through planning will not necessarily reduce house prices.  Studies have shown that increasing housing allocations by 75% might raise output by 16%.  This could lower prices overall by 7.5%, so enabling an extra 3-4% of new households to buy a new home, but in many cases it will merely enable more existing homeowners to afford an investment property, such as a second home, holiday home or buy-to-let.

A recent report by DTZ, Pulling up the ladder 2, suggests that lack of access to finance is the major current obstacle to housebuilding. And another report commissioned by CPRE, Building in a Small Island, challenges claims that there is a shortage of brownfield land suitable for housing development.

Planning Myths Campaign,  Localism Bill: RTPI Activity

Author:

Andrew Matheson

Publisher:

The Royal Town Planning Institute

Date:

16-Nov-11

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