Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 440 - 459)



  Q440  Paul Flynn: I am sure, Ms Barker, that your review will be providing us here with information in this area for a long time to come. Your work is greatly appreciated. You state in your report that "an unrestrained housing market could lead to significant negative externalities". You also state that "decisions made by individual players, without co-ordination, would not reflect the social optimum", and yet are not many of the points that you have just debated with the Chairman in the proposals you have on planning likely to ensure that these things will happen and that negative impacts will take place?

  Ms Barker: Not surprisingly, my answer to that question would be no, but it might be helpful if you could be more specific and say what leads you to have this concern.

  Q441  Paul Flynn: You say that the planning system should be more sensitive to market forces. The whole point of the planning system is that it is a long term basis on which to look at prospects. The whole prospect that it would become more sensitive to market forces is very much shorter term and looking at commercial factors.

  Ms Barker: I have tried very hard, and this again is another point that is very difficult to understand in the review, to draw a distinction—in fact, a difficulty of this in practice is that this will not be an easy thing to do—between the long term trend of prices and the cycle. For example, we have had an extremely rapid house price rise over the last six or seven years. It would not be consistent with the review to say that that should have been resisted because there are certainly very strong cyclical reasons why that has taken place, and indeed reasons in terms of the structure of the economy, the nature of the move to independence of the Bank of England, lower inflation, why you should expect house prices to rise in those circumstances. You are in the difficult position of thinking, "Yes, but they seem to have risen more than that. How far is this due to a long term trend in under-supply?". I do not think it is correct to say that this is about responding to every short term movement in the market. It is about trying to distinguish where you think the long term movement of the market has got out of kilter. My view is that, given the deterioration between this cycle and the last housing cycle and people's ability to access housing and the ability of young families to access housing, the long run message given by that system is that we are not building an adequate amount. That is the way in which I would describe it. I take the opportunity to make this point: I am not trying in the review to move away from a plan-led system. The system you will get out of this review is still be a plan-led system but I am suggesting that the planners themselves should be more informed by market forces than they are today.

  Q442  Paul Flynn: One of the proposals that has caused the greatest controversy is this requirement for the over-provision of housing land of 20-40%, and I understand that this land would be released automatically following certain market triggers. Some people have argued that this is a regressive step and is a direct threat to local democracy. How do you respond to that?

  Ms Barker: In the first place it would be the local authority, in conjunction with the regional institutions, which would have been responsible for discussing the original release of land in their area and the local authority, of course, would identify the sites. Also, if you look at the review, it is clear that the only change it would make in terms of whether or not that particular site was released was the argument that the local authority would not be able to use, that they have met their housing targets, because you suggest that the evidence of the market implied in those housing targets had not been high enough to meet the outcomes that the local authority was supposed to be committed to. Of course, if there are other things that come along with regard to that particular site, environmental considerations or, of course, if there are other material problems with the proposal that has come forward, they would indeed be able to deal with it. To turn the question on its head, if you are concerned with the adequate provision of housing in an area and you have a number of sites that you have already fulfilled but there is still clear evidence that the housing supply and demand in your area is out of kilter and an application comes forward that meet, your own criteria: design, environmental sustainability, and it is a site you have identified anyway, it is not clear to me that that is a threat to local democracy. You could say, reasonably, why would the local authority turn that down?

  Q443  Paul Flynn: I am sure there is an answer to that. Under your proposal all the allocated land, as I understand it, including the buffer, will have the same status, and local authorities would not have any control over that on this land which is designated. Can you not see a free-for-all developing on this which would make sure it was not a development that was coherent and desirable?

  Ms Barker: Yes, I think there is a slight risk of that. The first thing I should say is that the review also says that the opening out of the land should not put a threat on the 60% brownfield target, so that if all the developments that came forward in the first year were on greenfield the local authority would continue to be correct to reject them. The other point is that, given the costs which tend to fall on the developer if he starts suddenly to open up an entirely new area of land, it is unlikely that you are going to get wild applications that are very out of kilter to the sequential approach. It is difficult to get the balance right here and it is one of the difficulties which may be held in this going forward that people will find it desirable to go back towards the sequential approach. However, on odd occasions what can happen is that the very dogged approach about what you want to develop first can sometimes prevent development going ahead altogether and I wanted to try and have a counterbalance to that.

  Q444  Paul Flynn: In your final report you highlight the fact that people want to live in larger homes with larger gardens, and you also suggest that where there is a demand the policy planning guidelines should allow development of lower density. Is this not completely contrary not only to sustainable development but also to government policy which is aiming to build houses at very much higher densities?

  Ms Barker: Every development is done in terms of averages, but if you look at some areas, for example, which are being regenerated at the moment, sometimes the sense of what is needed in that area is actually larger housing because the existing stock is not very big. Also the value of land in different areas is rather different. I simply tried to reflect that. I do not have any feeling against a general proposal that we should try and build at higher densities, nor, as is clear from the review, that we should make the best use of brownfield land.

  Q445  Paul Flynn: But is this not an example of the dangers of allowing market forces to rampage red in tooth and claw, leading to lower housing densities which are undesirable?

  Ms Barker: The review certainly does not allow market forces to rampage red in tooth and claw. A lot of the recommendations and policy proposals that were sent to me would, I think, have moved in that direction. I started this off with a very open mind but on the whole it struck me that it did not take much thought—and the sentence you read out earlier reflects that—to realise that that would not be the right way forward for housing. In term of this it would not be the developer who would make the point about density. This would be something that the planning authorities would want to do, for good planning reasons. Perhaps they find that it comes up, after all, in the context of affordable housing where we know that there are big problems with overcrowding in some areas and what is needed is additional larger affordable homes. I am just making the point that there can be good reasons for diverse densities and national policy should not be so dogmatic that it prevents that happening. It will certainly come from the planning authority itself for good planning reasons and not in this be purely market driven. I agree with you, that if you allowed the market to run riot in this area you probably would get too low a density.

  Q446  Chairman: One of the things that has attracted comment is the difference between your interim report and the final report, and it is particularly striking in your approach to house builders. Your interim report seemed to be very critical of house builders for the way that they operate within their market and on grounds of quality of development as well, so they all held their breath and then your final report came out and you let them off the hook completely, making it much easier for them to build wherever they want. You turned from being a stern critic to being the house builder's friend. What happened in between?

  Ms Barker: I can truthfully say that I was genuinely surprised by this comment. The analysis of the interim report is that it talked about the house building industry as not delivering for customers, and I have to say again today that I think the house building industry does not deliver as well for its customers as it should and in my report I reiterated some of the points about customer satisfaction that were made. It also pointed out that one of the reasons that the house building industry does not deliver very well for its customers is that it is subject to a great deal of risk. It has to face market risk, the risk of volatility, and this of course in a sense is one of the issues that the review, alongside the David Miles review into corporate finance, is supposed to be addressing, and it also faces a considerable amount of regulatory risk. They are very uncertain about what is going to happen in terms of planning guidance and certainly in terms of the planning regulations that may arise in a particular development. Therefore, house builders are very concentrated on issues of land, getting land through the system. They then have a market which, because it is constrained, is not very difficult to sell new houses in, so they are inadequately focused on the issue of quality of build. They vary; some of them are rather more focused on it than others, and on what the customer needs. The intent of the review is not to make house builders' lives easier. The intent of the review is to make it difficult in a different way, i.e., in a sense when you have a weak supply in this very constrained market—and this is a bit of a caricature—house builders can sell what they like. In a market that was working better that would be harder for them and they would have to look at selling houses which responded much more to people's needs and requirements and I think that is a very important part of the focus. The review also lays down for builders and developers more widely the proposal that they will need to think very much harder about whether or not the development of skills in their industry is sufficient. It draws attention to the low rate of apprentices in house building relative to other countries, and draws attention to the rather poor record on productivity. It is very clear that what the government ought to be hoping for from the building industry is that they come forward with some very concrete proposals to address these issues in order to be able to go forward. I do not think in that sense the industry has been let off the hook.

  Q447  Mrs Clark: If I can turn to the much fabled north/south divide, in your report you conclude and indeed advocate that development should be focused on where there is greatest demand, with areas of abandonment being demolished. But in fact would you agree that there are many government policies in place as we speak which are aimed at achieving quite the opposite when it comes to regenerating many areas? Which, if any, of the measures you propose will have a positive impact on housing abandonment?

  Ms Barker: I think that has described the report rather brutally with regard to that. I think nobody would disagree that there are some areas where demolition is the answer which takes people forward either because—

  Q448  Mrs Clark: What sort of examples can you give me of that?

  Ms Barker: I mentioned earlier the example of an area where you want to achieve regeneration and you decide that you will regenerate by demolishing the least desirable housing with the aim of moving the rest of the area up and improving it. There are examples of that—

  Q449  Mrs Clark: In terms of social problems as well, of course.

  Ms Barker: Yes, because you are trying to address all those issues. I went a couple of weeks ago to speak at a conference on the Northern Way where I certainly heard examples of that kind of approach being adopted in areas of Manchester, and I think that is absolutely right. Is there anything in my report which encourages it? I offered very significant support for the work of English Partnerships in terms of their ability to assemble land and move it forward and there are also proposals in the report which are supposed to encourage the use of brownfield and in particular contaminated land.

  Q450  Mrs Clark: In your view is the money and effort being spent by the government in tackling this north/south divide being well used or is it being wasted?

  Ms Barker: I would frankly find it difficult to answer that question. I have not spent enough time looking at those areas to know whether it is being wasted.

  Q451  Mrs Clark: Surely it is worth doing that though?

  Ms Barker: If you are asking me if it is worth doing, yes, absolutely it is worth doing because you would not want to have areas that presently have these difficulties being simply left. The waste of infrastructure would be terrible. The point that I would want to make alongside that is that just to think you can achieve this through changes in the housing market is clearly not right. They have to sit alongside the original economic strategies. That was one of the points that I tried to bring out in the review, that the housing market to some extent will have to follow the regional economic strategies. If you supply lots of houses in areas where there is not very much economic activity I think you would agree that that is not going to achieve the right answers.

  Q452  Mrs Clark: Yes indeed. If we look at the growth strategy, and I am speaking as somebody whose constituency in Peterborough is part of that, is it really a very sensible idea just to go entirely focusing all our house building in the south east for the next 30 years? Is this not really badly balanced? Will it not be detrimental to the housing market and also to our more general economy?

  Ms Barker: You will know that my report does not make any particular recommendations about where we should put the weight of development.

  Q453  Mrs Clark: Where should we put it? You must have formed some views.

  Ms Barker: There are quite a lot of areas in the review where I wish I had had lots of time to form views. Yes, it would be detrimental. It would not seem to me to be sensible to do all the building in the south east. You are asking me to comment on the policy of the government. I do not sit here as an apologist for the government but I would say two things. One is that the existence of the Northern Way strategy is clearly an attempt to counterbalance the suggestion that everything should be done in the south east, and the second thing is that the recent spending review set out proposals to have development elsewhere. These will not all be in the south of the country and that must be absolutely right because it is following what has been quite successfully done (and done to some extent by the RDAs) in terms of attracting greater economic growth to the other parts of the country and the housing market must respond and support that. These strategies must go alongside each other.

  Q454  Mrs Clark: I certainly take that, but in that case surely government is not getting the holistic message across because if you pick up any national newspaper it is all about heating up in the south east, building in the south east, nothing at all about these wider strategies of the north west or whatever, or indeed what came up in the spending review.

  Ms Barker: That is a question for government as to why, if those messages exist, it is not getting them out.

  Mrs Clark: I think we might put that in our report.

  Q455  Mr Challen: You obviously believe that if the measures in your report were implemented that would reduce house price volatility. That clearly must follow.

  Ms Barker: Well, I am not—

  Q456  Mr Challen: How can we be sure that is your view?

  Ms Barker: There are two things to be said here. The review was trying to do two things. One was to try and achieve a more adequate housing supply in the long term. The key focus of the review was not so much on house price volatility. I did mention house price volatility but I mentioned it alongside the David Miles review because I think the David Miles review was much more an attempt to address house price volatility. My review was really an attempt to address the long-run underlying trend of house prices. In terms of volatility it is absolutely clear that the key drivers of volatility in the short term are the demand side factors and that is why I referred to the David Miles review. I think that more explicitly addresses the demand side matters. How does supply fit into volatility? I think it fits in through this old friend, expectations. Because we have this long term trend in supply there is a culture and belief in this country that investment in housing is a good long term bet. Over recent years, I think rather undesirably, this has been increased by people's lack of faith, rightly or wrongly, in the more general pensions investment system. Consequently, as house prices started to rise, primarily because of demand side factors, this perception about long term supply and the weakness of long term supply and how that affects people's long term expectations of the market has then rather unhelpfully come in on top of the demand side factors and exacerbated the volatility we have had.

  Q457  Mr Challen: Your report would make more land available. That would be a consequence if these measures were implemented. How would we go about preventing builders developing their land banks purely for speculative reasons rather than for house building? You cannot force somebody to build on land they have bought with permission for housing developments.

  Ms Barker: No, that is true. In terms of the house builders having land banks, this was an issue that we looked at in some detail in the interim review, and the conclusion that was reached there was that, in terms of having great banks of permissioned land, builders do not have enormous banks of permissioned land that they are ready to go ahead on. I hasten to add that I do not think there is no instance where they will have a piece of permissioned land that they could be building on that they are not. Although I have to say that no such convincing case has been drawn to my attention, but that does not mean it will not be in the future. Part of the trouble is the way in which builders deal with land and how they speculate, and in the present cycle they have often been accused of holding back. The weight of evidence in the present cycle is that builders have not necessarily been reluctant to build but that the nature of the planning process—and this is not a criticism; it is just a factual comment—has meant that adjusting to PPG3 has been difficult for everybody. It has been difficult for planners and difficult for builders. I am relatively sure that that is one of the reasons why 2001 and 2002 were not easy years. If you look at 2003 you can see rates of applications and permissions picking up again, so to some extent that problem is out of the system. The difficulty is that volatility cuts both ways. Indeed, at the moment, at the top of the cycle you are starting to see, because there is a lot of discussion about what is going to happen to prices over the next few years, that builders rightly will start to become rather more cautious about what they do. This is referred to as a backward bending supply curve. In some sense having a market that is volatile and has this upward trend is more difficult for builders as well. It adds to their risk and that is really the fundamental point about the way in which the market works, adding to builders' risk. What I hope is that if there is a better functioning market, from the review I propose, and the David Miles review if adopted, you will see less volatility and less of a tendency of builders to respond with their land banks in this way because the market itself would be functioning better.

  Q458  Mr Challen: In my constituency there is some anecdotal evidence that builders are buying land which has not got permission because with their local knowledge they can see where the likely trend is and they can sit on that land for ten, 20 or 30 years just waiting for it to fall into their lap, and at the moment, I suspect, they will be building on whatever they have got permission for because they can derive more profit from that than if they let it sit there. You mentioned the possibility of a windfall tax on land profits. This is something that is very worthwhile looking at but would you also consider perhaps a house builders' profits windfall tax worthy of consideration? Just to expand on that, I have recently looked at the five-year profit summaries of several building companies which show a profit increase in that period of up to 300%. Their executives are getting paid more and more and compared with the FTSE 100 clearly house building has shot up dramatically. Should they not also face, in the absence of any other measures, a windfall tax on their profits as well so that they are prevented from speculating on the future in a way which is to the detriment of customers?

  Ms Barker: There are a number of questions rolling around in that. It is not inconsistent with the nature of house builders' business for them to acquire land which in the future may get planning permission, and, of course, we all know that sometimes it does and sometimes it does not and they can incur losses on a piece of land. In terms of the question you asked about windfall profits, no, I do not think that would be a sensible way forward. There are certainly windfall profits that are earned in the system and the review is pretty clear about that and draws attention to the very large nature of those profits in terms of certain pieces of land. Sometimes these profits accrue to the house builder or developer, sometimes they accrue directly back to the land owner. The proposal in the review is that these windfall profits should be taxable. My opinion is that that is the best way to do it.

  Q459  Mr Challen: Could I ask where the proceeds would go from that taxation?

  Ms Barker: Can I just finish my previous answer and then go on to that, which is another rather difficult question? In terms of house builders' profits themselves, house builders' profits are very cyclical if you look at the last five years. Let us be blunt about the last five years. If you were a house builder and you were not making profits in the last five years your shareholders would have wondered what the devil you were doing. If you look over the longer period house builders have not always made such very large sums of money and if you look at their standing in the market in terms of where they stand in terms of P/E, it tells you that the financial market has worries about what is going to happen to those profits and frankly does not expect them to see such good profits growth as the rest of the market. This is back to the question about risk. There will be years when house builders will make some money and there will be other years when they will not. Clearly, I do not think that windfall profits existing simply on the basis of planning permission should simply rest with the people who own the land. That is clear in the context of the proposal for the planning gain supplement. Where do I think the receipts and planning gain supplement should go? Certainly some of the receipts from planning gain supplement should rest with the local authorities that granted the planning permission. How much they should rest there though is a question that is not answered in detail, because part of the purpose of the planning gain supplement will be to raise money from planning permissions given around the country for infrastructure projects which are large, or run wider than one particular local authority, and which will require central government funding, so to that extent they should go either to central government or, more probably, to the regions and deal with some of these big infrastructure issues which may be connected with transport or even with water supply.

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