Select Committee on Environmental Audit Minutes of Evidence

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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