Fix planning rules to reduce inequality

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ScreenHunter_06 Feb. 17 11.40

By Leith van Onselen

The Financial Times‘ Robin Hardin has produced a thought-provoking article arguing that the best way to reduce inequality is to relax supply-side constraints on urban land supply and make homes homes more affordable:

About 40 per cent of the stated wealth of the UK – more than £3tn – does not exist. It is a terrible illusion. For the US the figure is about 12.5 per cent of total wealth, or $10tn, and growing fast.

The “assets” in question are what planning or zoning restrictions have added to house prices. They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions…

It is wealth created not by improving our living standards but by making them worse… It is not earned by skill or effort…

A far better way to [alleviate inequality] would be building more homes. That would turn the false wealth of planning restrictions into the real wealth of houses and flats in places where people want to live, improving living conditions and creating jobs along the way.

…only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions…

Planning rules may seem like harmless bureaucracy. They are not. These rules have added billions and billions of dollars to the price of housing, money that must be paid to those who already own houses by those who do not. If we want to make society fairer and more equal, just let people build.

Can’t say I disagree. Wherever strict planning rules have been enacted, land prices have surged, significantly raising the cost of housing, at the same time as lot sizes have shrunk. Existing land owners have benefited greatly – experiencing a huge increase in wealth – whereas those that now wishing to enter the market (or future buyers) are required to pay astronomical prices, and take-out mega-mortgages in the process.

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Other things equal, strict planning have result in a transfer of wealth from the young to the old, as well as poorer members of society to wealthier members (especially those with large land holdings).

An obvious solution to this problem is to unwind the supply-side barriers that have restricted land/housing supply in the first instance, such that land prices deflate to more normal levels and homes once again become more affordable.

A complementary solution, not mentioned by Robin Hardin, is to implement a broad-based land values tax, so that the burden for taxation is transferred from productive effort – e.g. labour – and transferred to those who have not gained their wealth through hard work, but by lazily sitting back and watching their land holdings rise in value.

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The Henry Tax Review agreed when it concluded in 2008 that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”.

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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.