A lesson in housing policy stupidity

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By Leith van Onselen

Professor Paul Cheshire from the London School of Economics has produced a new report slamming UK planning policy, which has dramatically forced-up urban land prices, especially in the South East, and disproportionately harmed the poor. From The Guardian:

…restrictive planning laws have turned houses in the south-east into valuable assets in an almost equivalent way to artworks…

As a result of the policy that specifically safeguards green belts, Cheshire claims houses have not been built where they are most needed or most wanted…

Between 1969 and 1989, just over 4.3m houses were built in England, compared with 2.7m between 1994 and 2012…

“We have a longstanding and endemic crisis of housing supply and it is caused primarily by policies that intentionally constrain the supply of housing land,” Cheshire claims…

Once inflation is discounted, house prices have gone up fivefold since 1955. But the price of the land for houses has increased in real terms by 15-fold over the same period.

As a result, houses are becoming like investment assets, creating incentives to hold on to them in expectation of future price rises.

…green belts cover one and a half times as much land as all of England’s towns and cities put together…

“Green belts are a handsome subsidy to “horseyculture” and golf. Since our planning system prevents housing competing, land for golf courses stays very cheap. More of Surrey is now under golf courses – about 2.65% – than has houses on it”…

“The only value of green belts is for those who own houses within them,” Cheshire argues. “What green belts really seem to be is a very British form of discriminatory zoning, keeping the urban unwashed out of the home counties – and, of course, helping to turn houses into investment assets instead of places to live.”

Cheshire is spot on.

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The underlying cause of the UK’s housing malaise is its highly restrictive planning system, which has severely limited land supply and forced-up the cost of housing.

Most importantly, greenbelts have been established around UK cities, which have excluded large swathes of agricultural land from urban development (see below graphic).

Strict rules on development have also precluded high-rise development in brownfield areas, further precluding dwelling construction.

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These constraints are exacerbated by the centralised fiscal system in the UK, which has created another road block to the provision of housing. 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, they tend to be biased against development, which limits the provision of housing and related infrastructure.

Combined, these regulatory constraints on new housing construction have meant that housing supply in the UK has been incapable of responding to rising demand, with the amount of new homes built in the UK crashing despite rising prices and high population growth (see below charts).

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Cheshire is also correct to attack those whom claim that the UK is ‘running out of land’ and risks ‘concreting over the countryside’. According to the BBC, the urban landscape accounts for only 10.6% of England, with only 2.7% of the countryside actually “built-on” (see below graphic).

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The UK is a valuable lesson of what can happen when government policy chokes supply at the same time as it pumps demand via immigration, and should be acknowledged by Australian policy makers.

If it allowed more open competition between land holders and developers, land prices would be much lower and homes would be far more affordable.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.