Written evidence from Dr Leunig, London
School of Economics (ARSS 01)
ABOLITION OF
RSS HOUSE BUILDING
TARGETS AND
EVALUATION OF
PROPOSED INCENTIVES
SUMMARY
- The abolition of RSS house building targets is
welcome if accompanied by sufficient incentives…
- But the proposed incentives are manifestly insufficient.
- If nothing changes, house building rates will
fall, house prices and rents will rise, the numbers in poor quality
housing will increase, inequality will increase, and the housing
benefit bill will rise further.
- Much better alternatives are available, that
would give local councils big incentives to support new development,
particularly in areas and periods of greatest need, and without
any cost to central government.
IN DETAIL
1. The replacement of "top-down" RSS
based housing targets is to be welcomed, provided that it is accompanied
by incentives sufficient to increase total house building.
2. The proposed incentives are far too small,
and house building will fall dramatically.
(a) Some significant housing plans have already
been withdrawn or rejected.
(b) MPs generally see the changes as meaning
fewer houses in their area (in my area Zac Goldsmith has been
jubilant about cuts in house building that he expects locally)
rather than seeing new incentives that will lead to more houses
being built.
(c) No academic or independent expert I know
believes that the incentives are large enough to maintain let
alone raise house building rates. Glen Bramley (Herriot Watt University)
estimates that London house prices will double in real terms by
2025, to an average of £500,000 in today's money as a result
of falling levels of house building. Does anyone think that is
what we need?
3. Good incentives would have three characteristics:
(a) Large enough to induce councils to support
house building.
(b) Larger in areas in which additional housing
is most needed (ie areas with high house prices)
(c) Larger in periods in which additional housing
is most needed (ie periods in which prices are rising)
4. Ideas such a community infrastructure levy
and 6x council tax do not meet these criteria.
5. In order to make new housing electorally popular,
incentives have to be large. It seems plausible that the necessary
profit for the council, over and above the cost of providing new
infrastructure (ie not just the roads on which the new houses
are built, but also additional school and hospital places, etc),
will be in the tens of thousands of pounds per property, and self-evidently
that money must be received immediately if agreeing to new housing
is to be electorally advantageous to councillors. Both CIL and
6x council tax fail this test— CIL on size, 6x council tax
on size and that it arrives long after the development—
the political party that allowed the development could easily
not be in office by the time the money arrives.
6. House prices can be high for two reasons:
because an area is intrinsically attractive, or because it is
an economically attractive place to live. In general, high house
price areas in Britain are because they are economically attractive
places to live. Surbiton, where I live, has high prices primarily
because of proximity to London, a major employment centre, not
because it is beautiful.
7. Given this, expanding housing in high house
price areas, such as most of the south east, is economically much
more sensible than expanding housing in other areas with lower
house prices, since the high house prices indicate a well-functioning
economy that is good at creating jobs and wealth. This is where
people want to live, and it is where Britain plc should want people
to live.
8. We therefore want incentives to be greater
for councils in high house price areas. The 6x council tax idea
fails this criteria, and the CIL is not necessarily bigger in
such areas either. There is a danger that even if we get some
houses, we will not get them in the optimal locations.
9. House price booms and busts are unhelpful
to individuals, who cannot plan ahead, and who may get "caught
out", buying at the top, and for society, since busts can
lead to negative equity, restrictions on labour mobility and so
on. For that reason we need greater incentives to build when prices
are rising, and smaller incentives to build when prices are falling.
To some extent developers have those incentives already, but the
extent is clearly insufficient, given the observed cyclicality
of house prices. We therefore need an automatic incentive to councils
to support more development when prices are rising. Neither the
CIL nor the 6x council tax idea meet that objective.
10. A better solution is that set out in my pamphlet
"In my back yard" [see bibliography]. This shows how
the highly successful 3G mobile phone spectrum auction mechanism
can be applied to extract most of the rise in land values when
planning permission is given for local communities. (Note that
this is not a tax on development, and does not require funding
from central government). Councils would have a very large incentive
to support development (c. £100k per property over and above
section 106 levels in high value parts of the south east), the
incentive would be greatest in places where house prices are highest,
and greatest in periods when prices are highest. Thus all of the
desirable criteria for planning incentives are met. The Town and
Country Planning Association say that the idea is workable and
compatible with good planning objectives, the Barker Review said
that it should be piloted, Michael Gove endorsed it as Conservative
Policy when he was Tory shadow Housing Spokesperson, as did Edward
Davey when he shadowed the ODPM empire on behalf of the LibDems.
11. The failure to adopt this scheme, or another
scheme that would achieve the same objectives, will lead to falls
in house building rates. This increases the number of people who
are inadequately housed. This has bad effects on them in the short
run, but also in the medium term—we know, for example, that
children growing up in overcrowded conditions find it harder to
do homework, reducing educational attainment. It also means rising
house prices and rising rents. Although this is good for some
people (usually the older and wealthier), that is at the expense
of others (usually the younger and poorer). Rising rents will
also increase housing benefit bills, raising the tax burden on
all of us. Finally, higher costs for non-residential land increase
the cost of everything produced in Britain, raising living costs
and make the UK economy less competitive internationally.
BIBLIOGRAPHY
1. Tim Leunig In My Back Yard: Unlocking the
Planning System Centre Forum, March 2007
http://www.centreforum.org/assets/pubs/in-my-back-yard.pdf
2. Tim Leunig and Henry Overman "Spatial
Patterns of Development and the British Housing Market" Oxford
Review of Economic Policy 2008 24(1):59-78, special issue
on Housing Markets and the Economy.
August 2010
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