Supplementary memorandum from Kate Barker
Response to specific questions from the Environmental
Committee following Kate Barker's oral evidence session, 21 July
2004.
Q. Do you accept that environmental cost
externalities are not adequately reflected in the current economics
of house pricing? How would you suggest addressing this problem
to ensure a market led approach to reduce house price inflation,
as the one you propose, does not result in unacceptable environmental
impacts?
A. Before tackling the substance of the
question, it seems sensible to think about what the environmental
cost externalities of new housing might be. These costs seem to
fall into three main categories:
First: costs to the environment from
building new housing come from the use of materials and energy
in the construction process itself, together with the waste created
and the noise and nuisance value to those already located in the
area. On the last point, the Review suggested that the development
industry should consider whether these temporary disruptions should
be compensated directly to the households involved. This does
not generally occur at present.
On the costs of materials, energy and waste,
I would argue that these inputs should be taxed to ensure that
their prices reflect the environmental externalities. This would
ensure that the right incentives existed to create efficiency
in their use. Given that the price of housing is set primarily
in the second hand market, any additional building costs would
tend to lead to a reduction in residential land prices, in the
present context of the land and housing markets. (However, it
is important to realise that there are sites where remediation
and the costs of building are such that either profit margins,
or planning gain, or both, could be reduced.)
Second: More complex questions arise
from the environmental impact of ongoing existence and occupation
of a home. In the case of energy and water usage, much of the
growth in usage is likely to result from the rising population
(and rising use per head of electrical appliances), rather than
from the decision to allow more households to form which is implicit
in permitting greater supply. However, some increase in per capita
usage might be expected from a trend to smaller households. But
again I would tend to suggest that the pricing of energy and water
appropriately would be a better approach than trying to tackle
this issue indirectly through the mechanism of house prices. The
Sustainable Buildings Task Force has put forward recommendations
for changes to building regulations to improve the energy and
water efficiency of new homes. Although I do not have the necessary
expertise to comment on these, the principle of using this mechanism
alongside the right unit prices seems the appropriate way to ensure
that environmental concerns are met in this area (and in addition
there are of course real concerns about the energy and water efficiency
of the existing housing stock).
In terms of the transport implications of new
development, there is, as the Entec report suggests, great uncertainty
about the costs until locational issues are clear. But it seems
plausible that the environmental impacts of transport will be
affected more by population trends and developments in transport
pricing, rather than by new housing supply.
Third: The arguments above suggest that
for some of the environmental implications from new housing, the
prices of the specific inputs/related resource usage are important,
not the price of housing itself. Of course, house prices will
be affected by the costs of construction, certainly in the situation
where residential land prices are not particularly high. And the
relative price of a particular house ought to be higher if the
energy/water efficiency were greater—although as the developers
have argued, it can be difficult in practice to price successfully
for this benefit.
However, the key factor which ought to be accounted
for in the price of housing is the cost of land usage, perhaps
together with the cost of delivery of public services to different
locations. There are two aspects to this—the overall balance
between housing and land, and the relative price of housing in
one area compared with another.
It certainly seems conceptually feasible to
estimate the environmental land cost of different rates of new
housing supply, and indeed the Entec report carried out for DEFRA
represents an initial attempt at doing just that (although as
discussed with the Committee, and indeed as the report itself
indicates, this was carried out on a timescale which did not enable
a full assessment to emerge).
Against these costs, Government would need to
set the benefits of lower trend rates of house price growth, as
indicated in the report, and what these different trends would
deliver in terms of improved affordability over time (together
with associated benefits from greater economic efficiency and
potentially more equitable distribution of wealth). The key decision,
at the level of the whole economy, is where to strike the balance.
The two research contracts being tendered by ODPM (see Q4 below)
should help to inform this decision.
However, obviously this is not the whole story,
because the environmental costs of new building would be higher
(or lower) than those assumed in the context of the whole economy
decision, if the location and design of the new supply is worse
(or better) in environmental terms than the baseline case. Getting
this right, while supporting the overall housing supply objective,
is the task of the planning system. The decisions will of course
be informed by the overall guidance from Government on density
(with appropriate flexibility) and by the environmental assessment
of particular sites, either identified in local plans or which
come forward as windfall sites.
This analysis indicates one of the primary difficulties
in managing the housing market, which is that it is not possible
to identify a satisfactory price mechanism which would effectively
discriminate between sites on an environmental basis. It is for
that reason that the proposals in the Review fall far short of
what is implied by the phrase "market let system". It
is certainly true that the Review suggests more account should
be taken of prices, especially at a regional level. But the location
within the region will not be entirely market-led. A higher-priced,
attractive small market town would still, rightly, only grant
modest quantities of planning permission, probably directed at
maintaining a mixed community. However, this will only be consistent
with achieving the overall affordability goal if sufficient additional
supply within the same region is permitted in areas with lower
environmental cost.
Q. The various attempts in the past to
introduce development taxes have resulted in land being held back
by landowners hoping for a change in legislation. Do you think
there is any realistic chance that such a politically sensitive
tax will ever be seen as permanent? Does this problem lend support
to the use of VAT which would be seen as a permanent measure?
A. It is certainly true that previous attempts
to tax development gains seem to have resulted in a decline in
supply of land being brought forward, as the Review itself acknowledges.
The contention of the Review, however, is that although an increase
in the taxation of development, considered as a standalone measure,
could tend to lead to a lower potential supply, in practice the
present constraint on housing supply is less a willingness to
bring land forward than a reluctance to grant an adequate number
of permissions. The proposed tax therefore has to be seen in the
context of the changed approach to the volume of permissions recommended
elsewhere in the report, and also the greater willingness to use
compulsory purchase contained in the recent Planning and Compulsory
Purchase Act.
In addition, the present system of extracting
planning obligations (primarily under Section 106 agreements)
already functions in a similar way to the proposed Planning-gain
Supplement. The intention is that S106 agreements should continue
to be used to secure affordable housing, and also for the costs
of infrastructure directly consequent on the development. This
ought to make negotiations over planning obligations simpler,
more transparent and more predictable. In addition, the principle
of taxing those who benefit from the granting of planning permission
(essentially, aiming the increase in value as a windfall) has
in the past been supported by most political parties at some time.
Viewed as a simpler way of tackling the question
of planning gain, it is difficult to see why it should be described
as politically sensitive. Relative to VAT, the main attraction
is that it is targeted on the uplift in land value, which means
that the tax take relative to the value of the house, will be
highest for building on greenfield sites in the South-East. Brownfield
sites, where the uplift in land values is often much less, due
to the higher construction and site preparation costs, would automatically
attract less tax relative to the value of the house. This would
be even more the case if, as recommended, a lower rate of tax
were charged on brownfield sites.
In theory, VAT could be used to achieve a similar
objective in terms of the brownfield/greenfield distinction. However,
VAT is a national tax covered by EU legislation, which sets significant
constraints on how flexibly it can be levied, and, once introduced,
a UK Government might not be able to reverse it. There is also
the disadvantage that a limited range of tax rates would be available.
VAT would need to be charged on the value of the house, which,
as well as being only indirectly linked to value uplift, also
makes the relationship to the environmental costs and benefits
of land take less clear. In particular, it is uncertain whether
a distinction between brownfield and greenfield sites would be
acceptable in the EU context. This means that the introduction
of VAT is a risky matter, since the eventual situation could have
a number of adverse features, which then proved irreversible.
Q. In your evidence you stated (Q441)
that there would be a need to distinguish between long term house
price trends and cycles, and that market triggers for planning
permission should only apply in the former and not the later.
You also acknowledged the difficulties between trends and cycles.
How do you envisage decisions being made about how and when market
triggers would be activated? Who would be the body/bodies responsible
for setting the triggers?
A. Both in the oral evidence and in the
report it is clear that the setting and operation of market triggers
is not straightforward. It is probably worth pointing out, however,
that the present methodology of planning for new supply, using
projections of household numbers and rates of household formation
is itself complicated, and has the added disadvantage that there
is no ready adjustment mechanism if the answer is not correct.
The underlying objective here is to get planners
to use and respond to market information. In taking this forward,
Government should build on current ODPM work to develop guidance
for local authorities in carrying out Local Housing Assessments.
These will look at the whole market, using information on factors
such as demographics, housing need and house prices in order to
develop a better evidence base for local plans and policies.
Since the Review's final report was published
in March, a considerable amount of work has been undertaken, mainly
at the ODPM, to establish the further research and analysis necessary
to resolve satisfactorily some of the detailed issues. Government
has committed to consulting widely on this recommendation. I understand
that there is an intention to consult publicly on draft revisions
to PPG3 in Spring 2005, although early consultation with stakeholders,
including environmental groups, is ongoing.
Q. Are there any measures you see as
necessary for Government Departments and other bodies to take
before your recommendations for improving housing supply can be
taken forward?
A. I am not quite clear what the main thrust
of this question is. The 36 recommendations in the final report
would require Government departments and indeed other bodies (both
public and private) to change and develop their current policies
and roles in the provision of new housing supply. Some of these
recommendations have already either been brought forward, or consultations
are underway or planned. These include the following:
First, the measures announced in the 2004 Spending
Review provided for an additional 10,000 homes a year of new social
housing, as well as the establishment of a Community Infrastructure
Fund of £150 million by 2007-08 to support the transport
requirements of new development.
Second, ODPM's accompanying spending review
settlement set out a revised PSA target for balancing housing
supply and demand, including an explicit reference to affordability.
I understand that ODPM will publish a PSA technical note in the
autumn, setting out how improvements in affordability will be
measured, and Government intends to consult on a national affordability
target next summer. To develop the evidence base, I am pleased
to note that ODPM are tendering for further research into the
relationship between affordability and housing supply, and into
the impact of additional housing on sustainable communities. This
should inform the Government's response on how ambitious it wishes
to be in terms of the trend relationship between house prices
and earnings, and what is an appropriate goal given the whole
range of social, environmental and economic considerations.
Third, a consultation document is due very shortly
on the merger of Regional Housing Boards and Regional Planning
Bodies, and on the provision of expert independent advice. These
new arrangements, I understand, are expected to be in place by
September 2005.
Fourthly, on planning, the Government has already
committed to consulting on a number of the reforms set out by
the Review, including how to bring forward (or withdraw) land
for additional (or reduced) development in response to market
triggers. These will be drawn together in the revised draft of
PPG3, due for consultation in the Spring.
Finally, the Government is considering the design
of the proposed Planning-gain Supplement to ensure that it is
effective and workable, and will consult with relevant stakeholders
before reporting back in autumn 2005.
These consultations cover the most significant
recommendations which apply to Government. In addition, the House-Builders'
Federation has established a steering committee to progress recommendations
32, 33, 34, 35 and 36 (which cover issues such as improved customer
satisfaction, construction techniques and construction skills).
It is equally important that the development industry comes forward
with a substantive response to these important recommendations
in a timely manner.
September 2004
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