Growth and Infrastructure Bill

Memorandum submitted by Professor Henry G. Overman (GIB 37)

Summary

1. The Growth and Infrastructure bill contains a number of provision addressing aspects of the planning system. One argument frequently advanced by supporters of the status quo is that there is no evidence that the current planning system imposes costs on the UK economy that may affect growth. This statement is misleading. The purpose of this submission is to direct the committee to research that documents these costs. Further details are provided in Nathan and Overman (2012).

Housing markets and house prices

2. The UK suffers from a problem of housing market affordability. This problem is particularly acute for families with low to modest incomes, although in many parts of the UK high house prices are a problem more generally (Barker, 2004).

3. SERC research suggests that planning restrictions substantially raise house prices, especially in popular areas. House prices react much more strongly to increased demand in communities where supply is more restricted. Specifically, SERC’s analysis suggests that an area moving from an average level of restrictiveness to having the lowest level of housing restrictiveness would see house prices fall by around 30% (Hilber and Vermeulen 2012). This is a considerable underestimate of the true costs because it ignores the effect on UK house prices overall, as well as any effects on the composition of housing (e.g. the fact that planning restricts the supply of land so that new houses are smaller, see Cheshire (2009).

4. Of course, physical constraints on land availability – scarcity of land, the presence of steep slopes or flood plains – have an effect on house prices, but in England the effect is generally very small. Land scarcity does raise prices in the most urbanised places, particularly Greater London. Even in London’s case, however, the evidence suggests that planning plays a much larger role (e.g. through height restrictions). Outside London, very few English local authorities actually face physical constraints on land supply (Hilber and Vermoulen 2012).

5. SERC research also shows that planning restrictions increase housing market volatility. At least until the recession, average house price volatility in the UK was higher than the most volatile single market in the US (Los Angeles). When house prices fall, supply is fixed in both the UK and US (unless you destroy houses). However when, as in the UK, housing supply is very unresponsive to increased demand, booms drive up prices rather than leading to more building. That means the UK sees more volatility on the up-side of the market and this leads to more volatility overall (Cheshire, 2009; Hilber and Vermeulen 2011).

Business activity

6. City size and diversity provide an economic payoff: a critical mass of people, resources and ideas help produce agglomeration economies. Increasing that critical mass helps raise productivity, therefore: the consensus from recent studies is that doubling employment in a city raises average labour productivity by around six percent, although these effects are much more important for some types of economic activity.

7. While some have argued strongly that the link between size and productivity relies on density, the exact nature of the relationship remains contested (to be precise, the functional size of cities matters but it is not clear if density matters over and above that). There is more agreement that overly tight planning frameworks for cities also have costs. For example, restrictions which have historically prevented sprawl and maintained urban sightlines are likely to place constraints on urban growth in popular cities today – both outwards (via Green Belts) and upwards (via height restrictions). By raising development costs, especially in urban areas, planning restrictions lower levels of business investment in these areas. SERC evidence shows that these costs can be high in both the commercial office and retail sectors.

8. Cheshire and Hilber (2008) carefully document how planning restrictions in England impose a 'tax' on office developments that varies from around 250% (of development costs) in Birmingham, to 400-800% in London. In contrast, New York imposes a 'tax' of around 0-50%, Amsterdam around 200% and central Paris around 300%. Such substantial implicit taxes on development should clearly affect investment in these cities. Koster et al (2011) show that in Holland, height restrictions specifically act as constraints on agglomeration economies from tall buildings, echoing analysis by Glaeser (2011).

9. We do not know of comparable evidence for manufacturing, but to the extent that factories tend to use more land than offices, we would expect the effects to be larger for manufacturing.

Other costs

10. In addition to these costs, there is also emerging evidence that current planning constraints lower retail productivity and lower employment in small independent retailers. These costs are discussed further in Nathan and Overman (2012). Other possible costs of the system are not well documented (e.g. the negative impact on land intensive manufacturing and wholesale distribution) but might be expected to be large.

Conclusions

11. Elements of the Growth and Infrastructure Bill propose reforms that attempt to address these problems by increasing the supply of land for development and reducing costs imposed by developers. It is perfectly valid to question the extent to which these reforms will be successful. Campaigners are also perfectly entitled to argue that these are prices worth paying to 'protect the countryside' or achieve other policy objectives. However, it is not helpful for public debate to pretend that these costs do not exist and that there is no evidence to suggest otherwise. Existing research, documented in this submission and further in Nathan and Overman (2012), shows that this is simply not the case. There are multiple links from planning to the economy and any sensible debate on the Growth and Infrastructure Bill must recognise this.

References

Barker Review of Housing Supply (2004). Delivering stability: securing our future housing needs. London, HM Government

Cheshire, P. (2009). Urban Containment, Housing Affordability and Price Stability - Irreconcilable Goals. Serc Policy Paper SERCPP04. London, SERC.

Cheshire, P. C. and C. A. L. Hilber (2008). "Office Space Supply Restrictions in Britain: The Political Economy of Market Revenge*." The Economic Journal 118(529): F185-F221.

Hilber, C. A. L. and W. Vermoulen (2012). The Impact of Supply Constraints on House Prices in England. SERC discussion paper number 2012.

Nathan, M and H. G. Overman (2011) What We Know (and Don't Know) About the Links between Planning and Economic Performance SERCPP010. London, SERC

About the author

Prof Henry Overman is professor of Economic Geography at the LSE and director of the BIS/ESRC/WAG funded Spatial Economics Research Centre (SERC). This submission presents his personal views and is not representative of any organisation.

November 2012 

Prepared 27th November 2012