Abundance of land, shortage of housing: a rejoinder

I have received quite a bit of feedback for my recent paper, ‘Abundance of land, shortage of housing’, and would like to respond to those comments that were both critical and thoughtful.

One group of comments could be summarised as ‘Yes, planning is important, but it is not the only thing that matters.’ For example, one reader mentioned that house prices have been hugely volatile, experiencing many sudden and unexpected jumps, while the planning system has been largely the same for sixty-five years.

My argument, though, is not that nothing apart from planning restrictions matters. My argument is that planning restrictions amplify price drivers wherever they originate. Suppose two countries, Nimbya and Developmentistan, are identical in every respect except for their planning systems (you have probably guessed in which way they differ). Now both experience a wave of immigration of the same magnitude. In Developmentistan, house prices experience a minor, transitory bulge; in Nimbya, they shoot upwards and stay there.

You could now argue that planning was not per se to blame for the house price increase in Nimbya: had there been no immigration, there would have been no price escalation. But the relevant comparison is not between Nimbya before and Nimbya after immigration. It is between the house price increase in Nimbya and in Developmentistan, i.e. the difference in differences. Yes, immigration has ‘caused’ the house price increase in Nimbya, but it did not have to cause it.

A second group of comments refers to developers sitting on land for which they have planning permission, without bringing it to the market. Why give them yet more planning permissions, the argument goes, if they are not even fully using the ones they already have?

Here, we need to ask why a developer would hoard land at all, because after all, this involves a risk and huge opportunity costs. They do it for the same reason that you would hoard a bottle of vintage 2000 Bordeaux, or a rare first edition of a famous book, after observing that its price has gone up: you have good reason to expect the price to go even higher. But that requires very specific conditions; above all, supply must be largely fixed. You would not hoard a bottle of supermarket wine or a Harry Potter book. In Nimbya, developable land has a lot in common with fine vintage Bordeaux, so hoarding makes economic sense. In Developmentistan, it is more like a supermarket Rioja Crianza: if you can sell it now, you do it.

The third group of arguments is about ‘balance’; it holds that while the present system may be too much tilted in favour of NIMBYs, the alternative I am proposing would be too much tilted in favour of developers. What we should do, instead, is steer a middle course.

This argument makes sense within a corporatist setting, where big groups negotiate on a big round table, mediated by big government. In such a setting, less power for one big group (e.g. trade unions, consumer groups) must mean more power for another big group (e.g. industry federations, producer groups). However, I am not arguing within the corporatist logic, but for a movement away from corporatism altogether, and towards a more market-like process. Corporate developers are as much part of the present system as NIMBY groups. Restrictive planning raises the fixed cost associated with development, favouring a more concentrated market structure.

There’s a world of difference between being development-friendly and developer-friendly. It’s the essential difference between market-friendly and business-friendly.

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

3 thoughts on “Abundance of land, shortage of housing: a rejoinder”

  1. Posted 20/04/2012 at 15:15 | Permalink

    Many NIMBY objections to new build are the result of planning policies themselves rather than development per se. Government guidelines focus on ‘sustainable development’ and associated “stack ’em and pack ’em” policies which produce high density new housing estates with a large impact on adjoining neighbourhoods.

  2. Posted 20/04/2012 at 20:00 | Permalink

    I would be very interested in a detailed comparison with other European countries. From the data in the report we can see that the UK lags behind countries like France and Germany in terms of new dwellings constructed and it would be helpful to understand why. Can we learn from the approach taken by others? That could be a good basis for a follow up report.

  3. Posted 29/04/2012 at 17:04 | Permalink

    For anyone who’s interested there’s a useful utility at http://www.economist.com/node/21009954 which lets you view various house price-related measures over time for various countries. One thing it shows is that rents have not gone up as much as prices since 1975. Prices have as Kristian says risen over 250% in real terms but rents have risen around 210% in real terms, which is much the same as the increase in average income over the same period. Rents are therefore as affordable as they ever were, suggesting that current high purchase prices are a function of credit creation by fractional-reserve banks rather than of a physical shortage which has become more acute through low construction rates.

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