UK moves to reform planning disaster

I have written previously on how the United Kingdom (UK) housing system is arguably the worst in the world because of a myriad of policies that work to severely restrict supply, pump demand, and make renting a highly undesirable substitute for home ownership. These policies have led to the UK housing market experiencing:

1) a higher level of house price inflation than most other European nations:

2) Relatively expensive housing on a price-to-earnings basis:

3) Extreme house price volatility:

4) Which has also increased the volatility of the economic cycle due to the positive effects on consumer spending of equity withdrawals from rising home values and heightened austerity in the bust phase:

At the core of the UK’s housing problems is the straightjacket that was placed on housing supply following the passage of the Town and Country Planning Act in 1947, which nationalised development rights. Essentially, the pre-existing right of landowners to build-on or re-develop their land was removed and handed to the state, thereby requiring land owners to seek planning permission before anything other than minor renovation work was undertaken.

UK housing supply effectively became a centrally planned system whereby government bureacrats would attempt to predict some years ahead the required numbers of dwellings that ought to be built in an area to meet demand. However, as explained brilliantly in a detailed paper by the Policy Exchange, the key outcome from the UK planning system has been a housing market that has delivered some of the oldest, smallest and most expensive homes in Europe of a type that are least preferred by households. Put simply, UK households are paying more for housing than their European counterparts and receiving less in return:

Central planning attempts to ensure that what is thought best for the people by the central planners is what is produced. So, as we showed earlier, the system currently attempts to produce exactly the number of dwellings which are estimated to be required from calculations of need, calculations involving assessments of demographic change, household formation, household splits, migration, deaths, births, etc. Built into the system is a pressure at all levels to provide the minimum. Using green field sites is politically problematic. The cry goes up that the countryside is being buried under tarmac. And anyway, as we have shown, the system adjusts. If too little housing is provided, house prices rise and housing becomes expensive. When it is more expensive, people can afford less and so buy smaller homes. With smaller homes, more dwellings can be provided on less land because homes can be built at higher densities, namely flats or houses with tiny gardens.

But is this really what people want? In March 2005, a widely reported survey carried out by MORI on behalf of the Commission for Architecture and the Built Environment found that over 50 per cent of those questioned wanted a detached house and 22 per cent preferred a bungalow. Only 2 per cent per cent expressed a preference for a low rise flat and less than 1 per cent a flat in a high rise block. But since detached houses and bungalows use more land than other kinds of house, fewer and fewer are built each year. And many are also demolished to make way for terraced houses or blocks of flats. So while as recently as 1990 only about an eighth of newly built dwellings were apartments, by 2004 the proportion had increased to just under a half…

So whilst people may not want to live in them or want them built where they live,more and more blocks of flats of just this type are being built because the central planners think that they should have them, and because the production norms are filled more easily in this way than by building houses or bungalows…

The British planning system means that the most important thing the developer has to do is to obtain planning permission. Once this has been obtained, given the demand for housing, whatever is built can be sold. So the way to make the greatest profit, having obtained permission, is to produce the permitted dwellings at the lowest possible cost. Adding good design is an unnecessary expense because whatever is built will sell. So the constraints imposed by the planning system work against the achievement of a better architectural environment, something which might be achieved with less pressure to build at the lowest possible cost. Competition between developers on design becomes largely unnecessary because they know that they will be able to sell whatever they produce.

So the current position is that what people want, when asked, is lower density housing. What they get, what the planning system now insists upon, is high density development, much of it in the least desired form – blocks of flats…

British housing tends to be older than elsewhere in Western Europe. Because they are older their efficiency, in terms of heating for example, tends to be less. The houses [also] tend to be smaller… New houses tend to be even smaller on average than existing houses. In addition, house prices rise faster in the UK so that, year on year, housing in Britain has been getting more expensive relative to that in the rest Europe…

If fifty years of planning has achieved one thing… Britain [now] has the oldest, pokiest, housing in Europe.

Compounding the above regulatory constraints on land/housing supply are the greenbelts that have been errected around all of the UK’s major housing markets, which have excluded large swathes of agricultural land from urban development and helped to push-up land prices. A map of the UK’s greenbelts is provided below:

In addition, the overriding planning objective in the UK has increasingly become one of ‘urban containment and ‘densification’. In the 1990s, the Central Government explicitly required that 60% of all new land for housing must be brownfield land – i.e. land which has already been developed for some other purpose.

This 60% in-fill requirement necessarily meant the restriction of land supply and higher land prices. It has also produced some perverse outcomes owing to the fact that many brownfield sites that come onto the market for redevelopment are not necessarily located where there is demand for housing. Key amongst these perverse outcomes are the construction of high density developments in poorly located areas as well as ‘leapfrog’ developments far away from the existing urban fringe:

In southern England, where demand is great, the brown fields norm is complied with by constructing high-density developments whenever and wherever the land has become available, whether centrally, in the inner suburbs, in the outer suburbs, or in the middle of the country miles away from public transport. So the site of a house or hotel in the middle of the London Green Belt may be redeveloped to provide more houses or a larger hotel. The development is on a brown field site so that fulfils the production norm, to be sure. But the development neither preserves the countryside, nor does it reduce the use of private transport. Indeed, it actually increases it above what might have been achieved on a green field site bordering the town.

A final related roadblock to housing supply in the UK is its centralised fiscal system, whereby local authorities – which are the primary decision makers on development and have statutory obligations to provide services for new houses – receive very little revenue from increased population and housing. As such, these local authorities tend to be biased against development.

Combined, these regulatory constraints on new housing construction have meant that housing supply in the UK has been incapable of responding quickly and efficiently to changes in demand, thus placing upward pressure on prices and creating expectations of future capital growth.

According to the Joseph Rowntree Foundation’s (JRF) Housing Market Taskforce report on reducing volatility in the UK housing market, only an average of around 180,000 homes per annum were completed in the UK over the past two decades – only slightly above construction volumes in Australia, despite the UK having nearly triple the population (around 62 million).

And as shown below, despite the massive run-up in prices between 2000 and 2007, there was only a minimal supply response towards the end of the latest housing bubble, confirming that UK housing supply is highly unresponsive (‘inelastic’) to changes in demand.

More worryingly still, new home construction has reportedly fallen to its lowest level since the 1920s, with just 105,000 new homes completed in 2010.

The supply constraints present in the UK housing market ensured that the extra demand arising from the UK’s deregulated mortgage market – where lenders were offering 100% plus LVR (i.e. no deposit) mortgages to first-time buyers at the height of the most recent housing bubble – manifested into escalating prices rather than new home construction. By contrast, in the wake of the global financial crisis, UK lenders rationed credit and demanded higher deposits (reduced LVRs), which contributed to the falling prices.

In a similar vein, the UK’s deregulated rental market and lack of security of tenure (whereby six month leases are the norm) has ensured that renting is a second rate option, thereby encouraging residents to strive (and borrow big) for owner occupancy. With this extra demand for owner-occupied housing not met by increased supply, the inevitable result has been ’panic buying’ from first-time buyers when house prices are rising and the opposite when prices are expected to stagnate or fall.

Change in the air?

The concerns about the UK housing situation appear to have come to a head, with the Central Government moving to reform the planning system by:

  1. streamlining the development process by reducing more than 1,000 pages of regulations and red tape to just 52 pages; and
  2. implementing a “presumption in favour of sustainable development”, which has the potential to open up the greenbelts to new housing development.

The UK Prime Minister, David Cameron, has described the planning system as “slow and bureaucratic” and argues that reform is essential. He also laments the fact that the average first-time buyer without parental help in the UK is 37 years of age.

However, conservationists and NIMBY groups have rallied against the changes arguing that the reforms risk concreting over the UK’s precious country side and robbing the nation of productive farmland – a ridiculous claim when you consider that:

  1. only around 8% of UK land is urbanised, which is lower than the Netherlands (15%), Belgium (15%), Germany (13%), and Denmark (9%); and
  2. the proportion of UK land used for agriculture is among the highest in the old European Economic Community: 78% compared with an average of 64%.

According to Dr Oliver Marc Hartwich, an economist and planning expert at Sydney’s Centre for Independent Studies, concerns that the UK will concrete over the country side if the proposed planning reforms are implemented are misguided:

Dr Oliver Hartwich, an economist with the Centre for Independent Studies, who has studied the British system, believes that without the postwar planning system, the UK would only “look slightly different, but not much”.

Instead, he suggests the real impact of the green belt has been to fuel house price inflation and push development further into the “real” countryside beyond the green belt, leading to more commuting, fuel use and stress.

“No-one wants to concrete over the countryside,” he adds. But British cities are overcrowded.

“What this sort of planning does is encourage a system where bubbles are likely. The idea that you need to get into the property market in your early 20s is very harmful but it’s something that this planning system promotes.”

Dr Hartwich is particularly well placed to comment on the UK planning system given that he was born and educated in Germany – a country regarded as having one of the best planning systems in the world – before residing in England in the 2000s. He has also written detailed studies of planning systems from around the world (for example, see Why Some Countries Plan Better than others).

Whether the UK Central Government will ultimately succeed in reforming the UK planning system remains to be seen. Nevertheless, it is heartening to see it taking on vested interests and fighting the good fight.

[email protected]

www.twitter.com/leithvo

30 Responses to “ “UK moves to reform planning disaster”

  1. The Prince says:

    Wow, great post Leith. The supply side matters!

    I don’t understand how the price volatility can be helpful for smoother household formation, informing consumer choices and/or labour mobility either.

    Surely the productivity gains from removing supply restraints outweigh the loss of productive farmland?

    Is there also a tendency, similar to Oz, to denigrate renters and have fewer tenancy rights and shorter termed leases?

    Again, excellent post.

    • PhilBest says:

      You are exactly right, Prince, this is about a lot more than “housing affordability”. You are right to make the connection with labour force mobility and also with productivity. It is idiocy to sacrifice urban economy productivity just to maintain the output of the agricultural economy.
      Urban economies typically produce as much in dollar terms as agricultural economies that take up around 50 times as much land.

      THIS blog posting from the London School of Economics “Spatial Economics Research Centre” is a useful summary of the very latest advances in analysis of the productivity issue, with links to the relevant papers:

      http://spatial-economics.blogspot.com/2011/07/productivity-every-little-helps.html

      • PhilBest says:

        The effect on productivity is one reason why I insist that no nation in the world is going to sustain urban land prices way out of proportion with incomes/GDP – the effect on productivity will itself cause the stagnation that ultimately will pop the bubble.
        The other BIG effect, is the effect on discretionary incomes. The longer time goes on with younger demographics mortgaging themselves to the hilt, the LOWER that total spending on a whole host of non-mortgage items will fall. This has to create a vicious cycle in the economy, with the industries that suffer from the reduced demand, having to downsize and lay off workers.

      • arne says:

        ‘It is idiocy to sacrifice urban economy productivity just to maintain the output of the agricultural economy.’

        pure gold

        presumably debt backed fiat is edible?

    • Mike says:

      It is worse than Oz. In OZ, at least the landlord pays the council bills. In the UK, the tenant does. And they are monthly and add up to a lot more. Very feudal.

    • littleguy says:

      “Surely the productivity gains from removing supply restraints outweigh the loss of productive farmland?”

      They are already importing most of their food. What happens when oil supplies dwindle, which they will have to do, and food transport costs rise? You can’t just stop eating.

      • Mike says:

        What does the UK have anyway? The only reason they ever had prosperity was when they had the Empire. It’s been a long continuous decline since then.

        Just a small overcrowded island with little natural resources and a large welfare mentality. I’m amazed they are doing as well as they are.

      • The Claw says:

        Good point. I propose that UK government immediately restricts imports of food. This will cause a tremendous boom in the value of food and will allow UK farmers and the UK population to adjust before oil supplies dwindle.
        [another problem solved by a restriction brought to you by your helpful far-sighted government]

  2. Leith – a superb article.

    The unfortunate reality is that our urban governance / planning in Australia and New Zealand has been heavily influenced by the Britiash system. Little wonder we have such massive housing bubbles in this part of the world.

    The Canadians were more fortunate in being influenced more by the United States.

    The Annual Demographia International Housing Affordability Surveys illustrate this.

  3. When discussing build / consent volumes over time, it is better to employ the build / consent rate per 1000 population, so that population changes are appropriately accounted for.

    At a whisker over 100,000 builds for its population of about 62 million, the British build last year was just 1.6 per 1000 population. California – another basket case – in 2009 put in place 37,000 new builds for a population of 37 million – a build rate of 1 per 1000 population.

    My sense is that adjusted for population changes, the above build rates are the lowest in recorded history within the developed world. Further research is required though.

  4. PhilBest says:

    Leith, the other piece of evidence that is useful here, is a graph of house price volatility in Britain SINCE 1947.

    If you can get graphs of other nations too, you will see that Britain is the outlier. More recent comparisons are not so glaring because other nations have gone down the route of messing up “supply”, since CAGW mania took hold.

  5. Anne says:

    Very interesting, especially the explanation as to why no effort is put into making new houses attractive or well designed! However, it is misleading to compare the rate of urbanisation between the UK (8%) and countries like Denmark and Holland. Large parts of the UK are rugged terrain, such as the highlands of Scotland (Scotland’s population is only 5.2 million). England, however, which also has significant areas unsuitable for housing, is only 54% of the UK by land size but has 84% of the population.

    • PhilBest says:

      The Lincoln Institute’s “Global Atlas of Urban Expansion” is very helpful when making inter-country comparisons of this nature. It includes tables that give urban land coverage by country, as a percentage of “arable land” as well as a percentage of “total land”.

      For the UK, their figure is 5.73% of total land, and 23.39% of arable land. For the Netherlands, the figures are 10.68% and 38.34%.

      The issue of “food security” is a vexed one. Some nations eg Japan, could use this as an excuse to invade other countries. As a rule, it is cheaper for land-pressured countries to buy their food from land-rich food exporting countries anyway. As long as international peace prevails.

      There is no correlation at all, between a nation’s ability to feed itself, and its wealth. Wealth is always correlated with the extent of “value added” industry in a nation. Even a nation that has to mostly import commodities, but successfully exports value added goods, will be far wealthier than a nation that produces mostly commodities whether for domestic consumption or export.

      Even nations like the UK and the Netherlands, could “grow” their urban areas and keep urban land prices affordable, (and their industries competitive) for centuries before they finally did “run out of land” – if they ever did. Demographic busts and reduced immigration are highly likely in both cases.

      By the way, urban growth is far more equal in its social and socio-economic effects, and far less unsightly, if densities are LOW and there is abundant “green space” conserved, around and beyond which urban development is permitted. “Green belts” and Urban Growth Boundaries result in “a green and pleasant land” for the enjoyment of a wealthier minority, and “overcrowded squalor” for the majority of lower income people.

      Britain’s system actually lacks the “pretty” peri-urban “sprawl” of Paris and Rome and other continental cities, and even the extremely “green” LOW density sprawl of Atlanta and other US cities, where the amount of “green” visible on Google Earth is visibly several times greater than the amount of rooftops. On the ground, the result is a highly “democratised” enjoyment of local greenery.

  6. The Claw says:

    Very good article that describes the problem very well. Of course in Australia we have a similar housing disaster.
    If government restricts a certain thing then that thing becomes harder to obtain.
    If the existing quantities of that thing are sold on an open market the price will be high enough to reflect the difficulty in obtaining it. HOW SURPRISING!!!
    Government restricts housing in many ways. Now young people struggle to afford housing to buy or rent. Prices are very high. I wonder if there is a connection.

  7. Mav says:

    However, conservationists and NIMBY groups have rallied against the changes arguing that the reforms risk concreting over the UK’s precious country side and robbing the nation of productive farmland
    .
    I wonder how much of the farmland is actually owned by farmers, as against tree changers (like Jeremy Clarkson).

  8. hamish says:

    Does the UK have similar problems with re-developing established areas to Australia, ie. well located suburbs with generously sized lots cant be developed to higher densities due to local restrictions? Which leads to weird outcomes like 200sqm blocks in greenfield developments on the fringes 30km from the cbd, yet areas within 15k preventing subdivision into lots smaller than 400sqm, or some other size carefully chosen to rule out most houses in an area from redevelopment.

    Has anyone done any research into the role private land developers have in restricting supply in Australia. I’ve looked into the NSW planning website, and can see quite large areas of land around Sydney are zoned for residential, but they all seem to be owned by large developers who exploit their local monopolies to the fullest. The seems to be a failure of competition here, so that even though plenty of land is zoned, it isn’t as readily available as you would think.

    • The Claw says:

      Landbanking is encouraged when when govt zones barely enough land. It makes it worthwhile to buy up the limited supply and hold out for higher prices safe in the knowledge that more land will not be released to people who actually need somewhere to live.
      If plenty of land was zoned then developers would not be able to corner the market in the way you describe.

      • RDO says:

        Alternatively if when land was released it was sold only to those families without a home of their own. The released land would be developed by local council who’d recoup the money over time via rates (all the while keeping in mind that councils are not-for-profit organisations).

        But it’s not like that will happen when all levels of government are in the pockets of land developers.

    • LandDeveloper says:

      Hamish – I can’t speak for every developer, but in my experience, most developers work on an IRR performance measure rather than a static ROI measure. This means that cash-flow is important and as such, unless land is acquired exceptionally cheap, its in the interests of the developer to develop and sell the land as quickly as possible.
      There is no doubt that land-banking occurs, but that is largely for economies of scale rather than “cornering the market”. It would take a longer post to explain this thoroughly, but on a very broad basis, the larger developers need cash flow and so its better to continually develop than to sit and hold for some perceived future capital gain (again, broadly speaking).

      • Rumplestatskin says:

        From my experience, land banking is as much speculation on town planning changes as anything else, and it typically happens only when the site is FAR cheaper to acquire than it would be under new planning rules (the gains need to be massive).

        I have never had the experience with developers NOT selling as quickly as possible their stock of approved dwellings/lots. Why take the risk?

      • LandDeveloper says:

        Agreed.

        Remember too that lenders to developers typically require zoning in place (or near enough) prior to funding an acquistion.

        So speculation on future rezoning is largely for buyers that don’t require funding. And this is not usually your larger developers because their stockholders / owners usually require better allocation of capital (broadly speaking again).

      • LandDeveloper says:

        I should mention though, that larger developers often “option” land, which has the same effect of land-banking.

  9. LandDeveloper says:

    “…when all levels of government are in the pockets of land developers.”

    It’s more accurate if that is the other way round. There is no limit to the ingenious ways govt agencies mine developers’ pockets. No this isn’t a “poor developer” post.

    The unfortunate fact is that govt levies and charges are a massive part of new land costs. But the reported costs are easy to account for. It’s the unreported costs that local govts demand (i.e. fix a path here, upgrade a road there, repair something along the way), that soon add up. Doing a few odd things here and there on an individual basis isn’t all that expensive, but collectively they’re a substantial sum of money. The classic one is the deliberate negligance of infrastructure (especially parks) where the local govt deliberately under-maintain an asset so that the developers have to fix things up in order to keep presentation standards up.

    • indo says:

      I agree, people forget that profit after tax for the big developers are pathetic!

    • It may be a good idea if the Australians and New Zealanders studied Texas to learn how new fringe lots for starter housing are supplied to production builders for around $US30,000 each – and more basic starter manufactured housing lots for US20,000.

      I covered all this within an article early ladt year “Houston: We have a housing affordability problem” within the Highlighted Articles Section of my website http://www.PerformanceUrbanPlanning.org .

      Also on this website is a Definition of an Affordable Housing Market. Real simple stuff.

      Just follow the numbers to learn what the problems are in Australia and New Zealand, with our grossly inflated new fringe lot / section costs.

      The whole thing is a nonsense.

      • Johnno says:

        Would never work here. Local councils and State Governments wouldn’t be able to gorge themselves on obscene charges and levies to prop up their inefficient governments. The sooner we revert to the days when rates and charges paid for infrastructure over the life of the asset rather than screwing all and sundry with up front charges the better. Regressive thinking is all we aspire to these days.

      • Johnno – you are quite right. Its just basic. Those who own the infrastructure should be responsible for its financing, for what should be obvious reasons of economic efficiency and intergenerational equity.

        Check out the Texas Municipal Utility District Bond Financing Model.

      • LandDeveloper says:

        Johnno + 1.

        One local council we’re working with requires a 50 year asset life with no on-going maintenance for a pergola in a park. What that means is that all we can provide is a plain galvanised steel pergola (no paint). Not exactly attractive , especially in 50 years time, and it comes at a very high upfront cost. Crazy stuff.

  10. hamish says:

    I figure somebody is making a huge windfall, as you can buy blocks of land up in the Blue Mountains for under a still expensive $100k, yet apart from some Landcom sites that have a public housing component, I can’t find anything in greater Sydney for under $200k, and anything reasonably sized is more like $300k+. It’s no wonder new housing starts have dropped right off, most of the potential customers have been priced out.

    It’s not like the charges and infrastructures costs should be radically different, if anything Sydney should be cheaper due to economies of scale, so somebody along the chain is pocketing a healthy profit.

  11. These could also will give you a lot of stress. If you have a lot of credit in your list! The more clearer in your history,you will have more chance for a good outcome when it comes to financial!