Written evidence from Paul Cheshire, LSE
(ARSS 07)
MAIN POINTS
1. The present system of housing supply, as articulated
via our planning system, is close to collapse. The responsiveness
of house construction to demand has been falling for at least
40 years and houses have been falling in quality (especially in
terms of space) and rising in terms of price relative to incomes.
Real house prices have risen by a factor of 4.5 since 1955; the
price of housing land has risen by a factor of 12 in real terms
over the same period.
2. While the RSS system did not address the underlying
problems and caused significant resentment, especially in those
areas where demand for housing was greatest, its abolition before
the introduction and testing of the New Homes Bonus was a serious
error which will further reduce house construction.
3. There is no reliable evidence base to judge
the level at which a New Homes Bonus needs to be set to ensure
a flexibly responsive supply of new housing.
4. While the evidence does suggest incentives
can be useful,l it is highly likely that they would need to be
both substantially higher than the level so far discussed and
would need to be shown to be in place in order to become credible.
If they are maintained then their credibility, and so impact,
should increase somewhat over time. But we would still have a
short term crisis of housing availability and price.
5. There remains a difficult issue as to what
body they should be paid if they are to be most effective. Costs
of new development are mainly felt at a spatial scale far smaller
than the average District, so if paid to Districts incentives
may do little to assuage NIMBYist pressures.
6. There are other solutions available which
would be more effective in relieving the unresponsiveness of housing
supply to demand. Without radical reform there is likely to be
a further uncontrolled, destabilising and very inequitable boom
in house prices within a few years as soon as the economy starts
to recover.
1. THE BACKGROUND
The evidence shows (for example Barker 2003, 2004;
Cheshire, 2009, or Hilber and Vermeulen 2010) that the interaction
between our planning system and planning policies (as they have
developed over the past two generations) and our system of local
government finance have created a near catastrophic situation
for housing (and commercial) development; and that this situation
would get not just progressively worse but probably violently
worse without quite radical reform. Not only will housing become
more unaffordable, but transmitted wealth inequality will worsen,
macroeconomic and monetary management will become more difficult
and ultimately significant damage will be done to economic efficiency
and to our international competitiveness. This is aside from the
social problems resulting from an increasingly sharp division
into the "housing-haves" and the "housing have-nots"
with the distributional consequences that carries.
There are four features of our planning and local
government finance system which together make the supply of new
development ever less responsive to demand:
1. We directly constrain the supply of land (for
each category of development) both via the insistence on 60% of
new housing being on brownfield land and by containment policies—most
obviously via Greenbelts.
2. Our system of development control, with associated
S106 and the implications arising from building on smaller sites,
is highly complex and imposes large and rising compliance costs
as well as restricting competition in the development industry.
3. Our system of local government finance has
given no incentive to local communities to permit development
of any kind.
4. The negative impact of these features is re-enforced
by an insider-outsider problem—those who bear the costs
of development (local residents/voters) control decision making
whilst potential beneficiaries—would-be house buyers—are
excluded from decision making.
Over the two generations we have been constraining
the supply of land for urban development the real price of houses
has increased by a factor of 4.5 and that of housing land by a
factor of 12 (see Figure 1). More unresponsive supply means that
not only do prices trend inexorably upwards relative to incomes
but that short run changes in demand require ever larger changes
in prices to accommodate them. The outcome is that Britain has
some of the most unaffordable housing and unstable housing markets
in the world. A recent study showed that measured from peak to
trough, house prices in England were more volatile for the country
as a whole than in any housing market in the USA (Cheshire, 2009).
While the real price of housing has increased 4.5 times in Britain,
in Switzerland it has not increased at all since 1970. New houses
in The Netherlands are 38% larger but 45% cheaper per square metre
than in the UK.
Figure 1
Real Land & House Price Indicies (1975=100)
Source: Cheshire, 2009
Despite radical diagnosis of the problems in the
successive Barker Reports, the post- Barker reforms were focused
on process and did not radically address the serious imbalances
and inconsistencies in our planning and local tax systems. The
top down RSS process did impose obligations on Local Planning
Authorities (LPAs) to provide for additional housing but was slow
and cumbersome and targets could be met while still not allowing
the building of significant numbers of houses of the type people
wanted to buy and in locations people wished to live in—primarily
greener locations in southern England with adequate living and
garden space.
2. THE NEW
HOMES BONUS
AND ABOLITION
OF THE
RSS PROCESS
Against this background it is understandable why
there should be more radical measures introduced to try to redress
the overwhelming bias in our system towards NIMBYism. The New
Homes Bonus attempts to reduce or even eliminate the fiscal penalty
presently imposed on LAs who allow development (because they assume
responsibilities for local services for new residents but in effect
the existing Council Tax system is a national tax and yields no
commensurate and direct fiscal reward to support the additional
services).
There are however serious and perhaps near catastrophic
failings in what has been done and how the reforms have been implemented:
I. The changes have been introduced in the wrong
order. Before sweeping away the RSS system—almost the only
pressure to get houses built in areas of strong demand—the
new incentives should have been implemented first and demonstrated
to be available, appropriately directed and adequate before eliminating
the RSS system.
II. Given the other pressures opposing new housing
development—including the current crisis in public spending—there
is a serious danger the new incentives will not be perceived as
credible for quite a long time; and equally there is a probability
they will be inadequate.
III. There is an underlying problem of how and
to whom New Home Bonus incentives should be paid if the "insider-outsider"
problem is to be adequately addressed as the discussion of the
controversy in Chalfont St Peter (below) illustrates.
These points are expanded on below.
I. Sequence of Changes
Prior to the change in government there had been
a target of 240,000 net additions to housing stock per year. This
had been identified as the number needed to even maintain housing
affordability. Whatever one may think of the RSS top down system
this target was based on detailed research but even so was perhaps
optimistic since it is not just housing numbers but types and
locations of houses that determine the extent to which new constructions
satisfies demand (and thus influences prices and affordability).
The target was set against a background in which house building
had been lower in each successive housing market boom since 1973
(when completions of new houses were some 350,000). As Table 1
below shows, actual construction has fallen far below the 240,000
target and with the downturn of 2009, starts in 2008-09 were at
a lower level than at any time since the 1920s.
Given the pressures for NIMBYism the existing crisis
in house construction and supply has now been seriously added
to as LPAs reduce their aspirations and targets. According to
research from planning consultants Tetlow King some 85,000 houses
have been eliminated from plans just since May 2010, mainly in
the high demand regions of the South West and East. The House
Builders' Federation expect house building this year to fall below
even last year's total (Inside Housing, 19 July 2010).
Table 1
RECENT CONSTRUCTION
| 2009 Q3 | 2009 Q4
| Total in 2007-08 | Total in 2008-09
|
| Starts | 25,820 | 19,720
| 155,880 | 90,430 |
| Completions | 29,050 | 31,010
| 166,990 | 133,710 |
| Net Additions | N/A | N/A
| 207,000 | 166,570 |
II. Are the incentives credible and sufficient?
The answer to these questions is that no one knows for certain.
There simply is no evidence base against which to judge how large
incentives would have to be to neutralise the pressures for NIMBYism
outlined above. There is evidence from other contexts showing
that incentives can have some impact on planning decisions.
For example Cheshire and Hilber (2008) were able to estimate the
reduction of office building/increase in office costs consequent
on the introduction of the Uniform Business Rate (which eliminated
all tax incentives to LPAs for allowing office development). In
the US it has been shown that Impact Fees, payable to local communities,
increase the willingness to allow development. No research has
quantified the impact of payments to LPAs in Britain in the context
of housing development so there is no evidence base on which to
judge how large incentives would need to be set to ensure house
building responded to market demand and household needs. My informed
judgement, however, is that the level at which the New Homes Bonus
has been set will be inadequate to offset the biases against housing
development, especially in higher demand areas where additional
housing is most needed and most opposed.
The expectation that the level of New Homes Bonus is too low to
have a real impact on housing supply is re-inforced by the circumstances
of its introduction. While the crisis in public finances and cuts
in government spending might make LAs keener to find resources
wherever they can, new housing development brings costs (to service
additional citizens in ones area) and there is likely to be scepticism
as to how rapidly and at what level New Homes Bonus will be paid.
III. To Whom and at what Spatial Scale should Incentives
be Set?
As was noted above one of the forces generating opposition to
new development from existing inhabitants is the 'insider-outsider'
problem. Costs of new development are significant for a relatively
small number of households but are very local and so directly
affect local voters; benefits in the form of more jobs during
construction and slightly lower house prices/greater housing availability
are small per person but affect large numbers of households (or
would-be households) spread over a wide area. The beneficiaries
are therefore largely disenfranchised or very weakly represented
in the planning decision-making process. This bias has probably
been made worse by the 60% brownfield target for reasons indicated
below.
The problem is well illustrated in the recent case in Chalfont
St Peter. This is a small suburban community of about 4,000 people
in the Chiltern District of Buckinghamshire. The Chiltern District
has about 90,000 inhabitants. The proposal that was agreed by
the Chiltern Planning committee was in accordance with previous
plans under the RSS process and involves the construction of some
200 houses on what is officially brownfield land—the grounds
of a former convent. This has caused uproar in the local community.
The problems of the planning system are concentrated in this case.
The "brownfield" land in question was in fact of significant
amenity value to the local residents who surround it. 200 new
houses will significantly increase the size of the local community,
disadvantaging residents in terms of congestion of local facilities
and public services. Even if a New Homes Bonus were paid, the
revenues—approximately £350,000 per year for six years
if Council Tax on the new homes were the average for all houses
in Chiltern District—would be paid not to those who bear
the costs—the 4,000 local residents—but to Chiltern
District. Thus it would not effectively compensate those who experience
most of the costs of new development who would no doubt continue
vigorously to oppose the plans.
This highlights not only the question of to whom/what body should
the New Homes Bonus be paid if it is to be most effective but
also the understandable motivation of NIMBYism. The residents
experience a cost and also suffer a significant loss of amenity
in the form of very pleasant open space which is in effect a park
for Chalfont St Peter. This is not just a loss of amenity but
also creates a significant financial loss. As has been rigorously
demonstrated the value of local green space is capitalised into
the price of houses. The price of existing houses in Chalfont
St Peter will fall not so much because of the local increase in
housing stock (there is huge pent up demand for houses in any
suburban or ex-urban location in the London area) but because
the value of local amenities will be damaged.
Furthermore research now demonstrates that the value to residents
of open space falls rapidly with distance from their houses. Open
space more than one kilometre from ones house has no impact on
its value (reflecting the fact that there is no amenity value
to people from open space they cannot easily access). This was
the finding of Cheshire and Sheppard (1995) but has been further
demonstrated since then in independent studies undertaken in Minneapolis-St
Paul, Maryland and Baltimore. This means that most costs of development
really are very localised. It also means that unless it is of
particular environmental, habitat or scenic quality, Greenbelt
land has low amenity value since it is mainly not easily accessible
to many people. Ebenezer Howard, in his vision of a green city,
was on to something when he showed a narrow green parkland belt,
with public access, immediately surrounding his model city: the
origins of our now very extensive Greenbelts which in total occupy
one and a half times as much space as all urban areas combined.
3. OTHER SOLUTIONS
TO OUR
PLANNING/HOUSING
PROBLEM
The New Homes Bonus may help at the margin with housing supply
but is unlikely to even offset for the abolition of regional and
local targets set in the RSS process and will not begin to tackle
the fundamental under supply of housing (and other categories
of urban development).
There are three more radical and market/incentive oriented proposed
solutions that have emerged:
I. Use the price differentials that the restrictions on the
supply of land for different uses in different locations have
created as market signals which would be "material considerations"
to trigger development permission where the environmental, social
or amenity value of the land in its present use could not justify
the observed premiums. This suggestion (see Cheshire and Sheppard,
2005) ultimately relies on the belief that there is an ample supply
of land available for which no reasonable case could be made that
its social, environmental or amenity values—even combined—exceeded
the observed premium over its market price in its current use.
This assumption as well as the suggested approach is in line with
the logic and conclusions of the recent Land Use Futures
report.
II. The second suggestion is that LPAs should be allowed to
auction off development rights to land they have identified for
development;
III. The third solution, associated with Tim Leunig, is that
LPAs should make an open offer to buy land not presently identified
in development plans at some price significantly above its
market value in agriculture. They should then buy sufficient parcels
of the land offered to them where they thought there were good
planning arguments to allow development. LAs would then auction
on the land to developers—presumably with outline planning
permission—and retain the revenues realised.
Any of these suggestions would in my judgement be more likely
to succeed than either the RSS targets or the New Homes Bonus.
What is certain is that unless something as radical as these is
adopted, then when the economy recovers in a few years time the
housing market will take off in another even more explosive and
destabilising boom which will render housing even more unaffordable
than it has been for the past decade. Without radical action here
is a real danger that the supply of new housing will all but dry
up.
REFERENCES
Anderson, S T and West S E (2006) Open space, residential property
values, and spatial context, Regional Science and Urban Economics,
36, 773-89.
Barker, K (2003) Review of Housing Supply: Securing our Future
Housing Needs: Interim Report—Analysis, London: HMSO.
Barker, K (2004) Review of Housing Supply: Final Report—Recommendations,
London: HMSO.
Cheshire, P C (2009) Urban Containment, Housing Affordability
and Price Stability—Irreconcilable Goals, SERC Policy
Paper No 4, September.
Cheshire, P C and Sheppard, S (1995) On the Price of Land and
the Value of Amenities, Economica, 62, 247-267.
Cheshire, P C and S Sheppard (2005) The Introduction of Price
Signals into Land Use Planning Decision-making: a proposal, Urban
Studies, 42, 647-63.
Cheshire, P C and C A L Hilber (2008) Office Space Supply Restrictions
in Britain: The Political Economy of Market Revenge, Economic
Journal, 118, (June) F185-F221.
Hilber, C A L and W Vermeulen (2010) The effects of
supply constraints on housing costs: Empirical evidence for England
and assessment of policy implications, Final Report to National
Housing and planning Advice Unit, August.
August 2010
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