Memorandum by Professor Alan Evans (AFH
24)
I have been Professor of Environmental Economics
at the University of Reading since 1981. My main areas of research
have been in urban economics and specifically in the economics
of land markets and of land use planning. I am the author of The
Economics of Residential Location (1973), Urban Economics
(1985), No Room! No Room! (1988), and numerous articles
in academic journals.
At the University of Reading I have also been
Pro-Vice-Chancellor (1990-94) and Deputy Vice-Chancellor (1994-96).
Since 1988 I have been the academic responsible for the provision
of (affordable) housing for the 4,500 students in residence. I
am also a Chartered Accountant.
RECOMMENDATION
A constructive step towards achieving more affordable
housing would be to try to get tax policies aligned with land
use policies. And a first step in this process would be a shift
in the tax burden to make the Council Tax into a property tax,
at the least, proportional to the value of houses within the local
authority area.
1. INTRODUCTION
1.1 The term "affordable housing"
is difficult to define in economic terms. Although it sounds as
though there should be some absolute standard, actually the term
is relative—this housing is more affordable than that. To
try to clarify the issue I shall approach the problem by what
may seem to be a circuitous route. It is, however, necessary to
understand the interaction of policies which have led to the present
situation.
2. PLANNING POLICIES
AND MARKET
FORCES
In the 1940s, when the current British land
use planning system was put in place, a number of limits were
put on the uses to which certain areas of land could be put. These
limits were not intended to be constraints. With respect to London,
for example, it was anticipated that the demand for housing in
the metropolitan area would not increase. Indeed it was thought
that both population and densities could be reduced by moving
some out to New Towns and by regional policies which would lead
to jobs being moved north. It was therefore believed that a Green
Belt could be put round London designating land which would not
be needed for development. All the development land which would
be necessary could be found within the area contained by the Green
Belt. Only later as incomes rose and people's expectations also
rose did the demand for housing land increase and the prediction
turn gradually into a constraint—not "this will not
need to be used" but "this must not be used" (Cullingworth,
1997: Inwood, 1999).
2.1 As a result of the constraints on the
availability of land for development which began to bite in the
early 1960s the price of land and the price of housing began to
rise, a trend which has continued to the present. The increase
has been most evident in southern England as regional policies
were not strong enough to shift demand elsewhere. The relaxation
of regional policies in the 1980s and the withdrawal of the state
from the supply of public housing at that time exacerbated the
situation. A further factor has been the greater willingness of
local planning authorities in areas of higher unemployment to
allow development than those in areas of full employment.
2.2 The increase in house prices was also
fuelled by the incentives for house purchase which were available
through the tax system. The most obvious of these was tax relief
on mortgage interest. Particularly in the 1970s and 1980s, when
inflation and interest rates were both high, this encouraged people
to spend as much as they could on buying the largest house that
they could, whilst, paradoxically, physical planning policies
were trying to restrict the amount of land available for housing.
Subsidies for local authority housing probably did not have the
same effect in terms of increasing demand since housing was allocated
by administrative fiat not through the market. It may even have
been that many families occupied smaller properties than they
would otherwise have done in order to gain the subsidy. The phasing
out of council housing may therefore also have served to increase
demand from the late 1980s onward.
2.3 It may be noted that for a long time
it was denied by the planning profession that restrictions on
the supply of land could and would affect house prices. The planners'
position was put by Grigson (1987) and the economists' position
by Evans (1988). After due consideration, and the employment of
consultants to review the evidence, the then DoE came down (rightly)
on the side of the economists, and accepted that physical planning
policies of constraint could and would, if the demand for land
and housing increased, have the effect of increasing the price
of developable land and of housing above what it otherwise would
be.
2.4 The apparent acceptance of the economic
argument by the DoE, and so, presumably, its successor Departments,
has nevertheless not been reflected in any recognition of the
problem in, for example, the Rogers Report or the Urban White
Paper. To cite an example, on page 67 of the Rogers Report it
is stated that "average floor space in new German homes can
be as much as 50 per cent greater than English equivalent house
types" and goes on to argue that English architects should
learn how to achieve this. But this quite fails to recognise that
the main thrust of physical planning policies in England has been
to constrain land use. The economic result, higher land prices,
means that people use the land which is available more intensively,
living at higher densities in smaller houses. The smaller houses
which the Committee observed in England were thus a consequence
of the policy of constraint, a policy which the Committee itself
endorsed and advocated.
2.5 Other examples could be cited, but this
serves to illustrate the problem, physical planning is seen in
terms of land use not in terms of the economic effects of the
planning policies pursued or in terms of the market forces which
would be generated by the policies and would ensure that the policies
were achieved. The view of the planning profession would appear
to be that "Planning should lead, not prices. Land price
should reflect planning, not the other way round" (Jarvis
and Russell, 1999).
2.6 This neglect of economics and the economic
impact of the policies pursued is evident in the situation which
developed in the latter half of the 1990s. The availability of
green field sites was reduced and some 60 per cent of the new
housing which was planned was expected to be built on brown field
sites. It was calculated that this was physically possible. What
was not apparently considered was the means by which the market
would ensure that the objectives of the physical planning policy
were achieved.
2.7 Thus, whilst it may be true that there
are sufficient brown field sites, it is also necessary to observe
that the demand for housing is greatest in southern England whilst
the supply of brown field sites is greatest in northern England.
To ensure that the physical planning objective is met the demand
has to be diverted north, through market forces.
2.8 The way that this happens is clear.
The demand of housing in the south cannot be met at existing prices
with the existing supply of land. The price of housing and of
developable land therefore rises. It has to rise sufficiently
for demand to equal supply. This is achieved in several ways.
On the supply side the high price of housing makes it worthwhile
developing those brown field sites which exist. It also makes
it worthwhile demolishing some lower density housing (or industrial
buildings), particularly in suburban areas, and redeveloping the
sites at higher densities. Thus we increasingly observe small
blocks of flats built along main roads in South East England.
They may not live up to the architectural wishes of Lord Rogers
in creating a better environment but they achieve the objective
of higher density living.
2.9 On the demand side, the high price of
housing in the south will deter people from moving south, thus
reducing the number of families which have to be housed in the
south. This will be balanced by the fact that firms in the south
will increase their rates of pay to attract and retain their labour
force. And in turn the high cost of labour will cause firms to
cut back their labour requirements, either because their operations
have become too expensive, or by using labour more intensively,
or by moving operations elsewhere (or by going out of business).
2.10 Thus the high cost of housing in the
south is inseparable from the physical policy of constraint, a
consequence of the policy and a means of achieving the policy
as firms, activities, and people are discouraged from moving from
the areas where there is a relative surplus of brown field sites.
It is, in effect, a kind of regional policy.
2.11 Whether it is an efficient regional
policy is another matter. The economic activity which is choked
off in southern England by the high cost of labour and of housing
may, after all, not be moved to areas with higher unemployment
and a relative surplus of brown field sites in Britain. It may
be diverted across the Channel, to the rest of Europe or elsewhere,
where land and housing is cheaper. Of course to the extent that
activity is diverted north rather than south then this reduces
the movement south and increases the demand for housing in the
north, thus making it worthwhile redeveloping the brown field
sites there. And to the extent that brown field sites are more
expensive to redevelop than green field sites the increase in
the price of housing and housing land also makes it worthwhile
developing brown field sites in the south.
3. AFFORDABLE
HOUSING AND
PLANNING POLICIES
3.1 The argument set out above demonstrates
that the policies of successive governments have had the effect
of making housing more expensive. This may not have been their
deliberate intention, but it was an inevitable consequence of
the stated policy of constraining the availability of land. In
order to accommodate a larger more affluent population with as
small an increase in the amount of land used as possible, housing
has been made more expensive. Once this is recognised it raises
a question as to what the term affordable means. The policy has
meant that each successive generation has to live in less housing
that their parents could afford at the same stage in life. Thus
housing is being made less affordable in order to preserve green
field sites.
3.2 As well as an intergenerational effect
there is also a sectoral effect. Private sector firms are usually
more able to respond to changes in local labour market conditions.
Thus private sector workers may generally be paid more in London
and the South East, but in the public sector employers may be
less willing or less able to vary national pay scales by paying
higher wages in the south even though this is the logic of the
planning policies being pursued. Compounding this problem is the
fact that public sector services have to be provided to the existing
population. Some private sector firms may close down or may choose
to move elsewhere, but this form of adaptation is not possible
for hospitals or schools or the police. Where it has been possible,
for example in the case of the Inland Revenue, operations have
been moved, but many years ago.
3.3 There is also a differential effect
with respect to housing. Those who own their own homes benefit
from rising house prices. They feel richer. If they chose to move
elsewhere they would in fact be better off. However, although
their homes have become more valuable very few react to this by
selling up and moving. Because of this inertia a policy of restraint
is very slow to reduce demand. This wealth effect is also a reason
why a policy of restraint is politically popular. On the other
hand, for those who rent, increasing house prices mean higher
rents and they are made worse off. For renters, who usually have
lower incomes than home owners, there is no compensation for the
rise in housing costs in the fact that the house they occupy is
worth more. Since many renters may also work in the public sector
the sectoral and the housing effects will reinforce each other.
These people cannot afford to buy, and they cannot afford to rent
in the south.
4. AFFORDABLE
HOUSING
4.1 The term affordable housing can have
a number of meanings. It could mean that the dwelling is rented
from a local authority or housing association, or some other non-profit
making body, which charges rent. Thus the housing is "affordable"
because the cost of occupation is less than the rate set by the
market rent.
4.2 Housing may also be "affordable"
if it is sold at less than the going market price. In this case
some conditions have to be imposed to prevent the buyer reselling
and pocketing a profit.
4.3 A third interpretation may be that housing
is affordable because it is smaller. Curiously this seems often
to be the position taken in public discussion of the problems
facing public sector workers—"they" should build
more small houses and flats for nurses and teachers to move into.
But this ignores the fact that for a teacher choosing between
a job in the north where he or she could afford a three bedroom
house and a job in the south, where even a two bedroom house would
leave little left over to live on, being told that there is a
one bedroom flat that he or she can afford does little to make
the job in the south any more attractive. The teacher in the south
is still worse off.
4.4 The problem is that most policies designed
to ensure the provision of "affordable" housing conflict
with other policies with other aims. Thus one response to the
shortage of housing in London has been a proposal that small units
should be built on public open spaces. Apart from the point made
above—if housing is expensive it isn't made less so by telling
people that if they occupied less space then they would be able
to afford it, there is the paradox that it is proposed to build
over accessible open space within urban areas in order to preserve
inaccessible open space outside the built up area.
4.5 The major conflict is one we have been
at pains to point out. There is an inherent conflict between the
wish to provide subsidised housing so that people can afford it
and physical land use policies which aim to restrict the amount
of land being built on by making housing less affordable. Widespread
subsidies would be likely to encourage a greater demand for land
and housing by those in receipt of them if only through encouraging
people to move into the area. But since this reduces the supply
of space for the rest the effect would be likely to be, over time,
still higher prices for the rest and renewed demands for greater
subsidies.
5. AFFORDABLE
HOUSING AND
THE TAX
SYSTEM
5.1 Of course in the past the conflict between
housing policies and land use policies has been even more evident,
even if unrecognised. Until the 1990s all house buyers were encouraged
to buy as much housing as they could through tax relief on mortgage
interest. Whilst this has now been abolished other fiscal policies
conflict with physical policies. A tax on the imputed income from
owner occupied housing existed, as Schedule A, up to the 1960s
when it was abolished. House construction has never been subject
to VAT. Capital gains taxes are not charged on the sale of the
principal dwelling.
5.2 Most importantly the switch from domestic
rates to the community charge to the council tax reduced the tax
on property ownership and made it regressive rather than progressive.
(In 1989-90 the tax payable on my house in Harrow on north west
London was £1,522. It fell to a low of £556 in 1992-93
and returned to the 1989-90 level only in 2001-02. In the 1970s
and early 1980s the rates payable were equivalent to 1 per cent
of the value of my house at that time. The Council Tax payable
now is equal to about one quarter of that percentage, the structure
of the Council Tax seems almost to have been designed to work
against the grain of physical policies. Small houses are charged
at a rate per £ which is higher than that for large houses,
and very large houses occupying large areas of land are charged
the same amount as those which are smaller. Moreover the tax structure
discourages high density development. Since high density low income
housing is taxed more heavily than low density high income housing
the effect is to encourage builders to put up larger more expensive
houses.
5.3 A constructive step towards achieving
more affordable housing would be to try to get tax policies aligned
with land use planning policies. And a first step in this process
would be a shift in the tax burden to make the Council Tax into
a property tax, at the least, proportional to the value of houses
within the local authority area. If the system were also adjusted
so that higher value properties paid more wherever they were located
this would mean that the larger more expensive properties in southern
England paid more and this would have the effect of damping down
demand in the south. The effect ought to be that less expensive
properties in the south should become more affordable.
5.4 If the British tax system is not to
be adjusted so that it does not conflict with land use planning
policies, then the only rational alternative is to bring the latter
into line with the former. This would entail the relaxation of
current policies of constraint in southern England. To discuss
these would, however, take us into areas where the Committee might
not wish to go since they have more to do with the state of the
economy than affordable housing. I can also be confident that
the question of land availability will be raised by other witnesses.
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