Housing and Planning

Our terrible planning system causes untold damage to labour mobility and productivity

What if we brought back the 1351 Statute of Labourers, and required a permit for people to live in a given city, rather like the Chinese hukou registration system?

Then imagine those permits to live in highly productive cities with high wages like Cambridge or London became so scarce over time that they ballooned in total value to £3.7 trillion pounds, or two-fifths of the entire net worth of the UK.

Can you doubt that productivity and average wages would be gravely harmed?

But that is exactly what we have done with housing: a 21st-century Statute of Labourers. Yet because these permits are concealed within homes and called planning permissions, the problem is less obvious.

Homes within reach of the best opportunities are now so scarce that the total value of UK housing exceeds the cost of building it by an eye-watering £3.7 trillion pounds based on the most recently available ONS data.

That is some 40% of the entire net worth of the nation. It mainly arises from needless scarcity caused by the planning system – a massive but unseen tumour taking up two-fifths of the net national balance sheet.

The scale of that distortion dwarfs every other. It dwarfs any subsidy you can name. It dwarfs the losses from any other bad regulation. It may have impaired GDP by more than any other single event in centuries.

There is no other problem we could fix that would have anywhere near the same benefits.

Quite apart from the construction boom, ending the shortage of housing would unleash a productivity boom on a scale not seen in living memory.

The shortage of houses holds down wages in places with fewer jobs than homes; and holds people away from high wages in places with fewer homes than jobs. No wonder the young are unhappy.

If young people could move more freely between, say, Lancashire and Cambridge, wages would not be so much lower in Lancashire.

Net of housing costs, some parts of the population are worse off than fifteen years ago. It’s hard to defend a free market economy to a youngster who must either be priced out of living near good jobs or live with six others in a London flatshare paying rents inflated fourfold by a needless shortage of homes.

That’s not a free market, nor a fair one. Economists call that arrangement a cartel: a regulatory cartel, caused by bad regulation. A very British hukou.

Re-balance the country all you like, but not like this. Fairer to move the capital to Manchester. (I wish you luck.)

High rents in this country are mainly caused by a regulatory cartel stemming from badly-written planning laws. Those rents are a large fraction of the cost of living of the poor.

But fixing that problem is hard because homeowners make up two thirds of voters and they are happier when house prices go up.

Trying to get reform without addressing that has doomed a thousand prior attempts. By way of perspective, it is still official government policy, set out for the Letwin Review, for house prices to keep rising.

But the good news is that the economic damage is so huge that we can afford to spread the benefits around to get more support for change.

One obvious way to do that, in the spirit of a brilliant suggestion by Mark Pennington in his 2002 IEA book, is to give an additional power to approve development to small groups of residents at a very local level so they can agree among themselves what makes sense for them. Because people do defect from cartels if you let them.

For example, we found parishes who wanted to allow cottages on some scrubland but were blocked by the county because it was green belt. Our report last year suggested local people should have power to allow that if they want to. Twelve months later, that is now in the National Planning Policy Framework and we know at least one village planning to do it.

Other than villages, another small grouping that makes sense is a single street within a town or a city. People are mainly affected by what happens on their street.

If you ask residents on a single street if they would like the right to vote – say by a two-thirds majority – to set a design code so that the end result will look good and to give themselves the rights to extend or replace existing houses, they very often say yes.

Think of it as a mini neighbourhood plan, but with a few dozen people rather than thousands, to make it easy. We suggest height limits that the Georgians would have found unremarkable – say, five or six storeys – and other rules to protect the neighbours and the houses behind.

There is vast scope to allow more homes within existing settlements, while making them more beautiful – fairer streets in every sense.

If you take a street of 1930s two-storey semi-detached houses and let people pick a design code and get permission for five storey Georgian-style terraces or handsome Edwardian-style mansion blocks, you can increase the amount of housing by a factor of five, while often making the street look better. Simply getting the permission can double or treble the value for the original homeowner.

You may not be surprised to hear that many homeowners like that idea.

Just that one single change, giving power back to residents, would unleash a building boom that over time could add millions of houses across the country, while being wildly popular.

Many streets will vote no, but that is fine. The current ways of getting planning permission will still exist, so people can always use those. Allowing local people to opt in focuses change where people want it, and prevents a backlash where they do not. That’s much politically easier than trying to impose change everywhere at once. Even the objectors on a street that votes yes will be somewhat consoled by the bump in their house price. The surrounding streets may also see a bump as people realise their streets could do the same.

To sum up, there are popular ways of ending the housing crisis. It is easiest if you bring at least some homeowners with you. One goal of our campaign is to flag some of those ways, based on research by Elinor Ostrom and others around the world.

You can make existing homeowners happy by letting residents take back control, letting them share the benefits and creating better places and many more new homeowners at the same time. If you want to win votes and increase fairness for younger people, why not try that?

If you want to defend a free market to people, first you must make sure that you have one.

Click here to learn more about the London YIMBY Alliance.

John Myers is co-founder of the London YIMBY campaign. He previously worked in investment management at firms including Soros Fund Management and Och-Ziff. After degrees in law and mathematics he started his career as an English and New York lawyer specialising in competition law.

2 thoughts on “Our terrible planning system causes untold damage to labour mobility and productivity”

  1. Posted 12/10/2018 at 15:06 | Permalink

    Very thoughtful and article, thank you very much.

    Out of interest, how much could rents and prices be driven down to? Has any research been done on this?

    If property in nominal terms was back to where it was in the 90s, i.e 2-bed terraced houses in the midlands costing about £30 – 40 thousand, life would be so much easier.

  2. Posted 15/10/2018 at 01:05 | Permalink

    John Myers would be quite right to be concerned if planning were holding back labour mobility thus misallocating resources, but there is not a shred of evidence this is the case. Unemployment in London is the second highest in the UK, which we wouldn’t expect if there was such a problem.

    There is also a wealth of data confirming that the supply of housing has more than matched household formation in every part of the UK for decades, so planning does not appear to be at fault for that either.

    Of course planning needs to be re-active to shifting demands in the economy. The National Infrastructure Commission has set out its vision for the Oxford-Cambridge corridor, so existing policies are in place to cater for this area’s needs. All is as it should be.

    Puzzlingly, Myers seems to believe that planning permission is worth £3.7trn. But if planning permission for high rise apartments were granted to a plot in the middle of the Yorkshire moors it would be worthless. So its not the permissions that are worth that value but the locations buildings occupy.

    Land is by definition perfectly inelastic in supply, so only how and where it is consumed changes. As aggregated demand in the economy results from the networking and concentration of resources(agglomeration), when labour and capital are supplied to where they are most in demand, so does that part of demand for proximity to them. So we see a rise in aggregated land values, wages and capital. The results of urbanisation around the world confirm this.

    It is therefore quite strange to complain that the aggregated value of any factor of production, including land, is too high as this simply misunderstands the fundamentals that drive the economy.

    What is different about land vs labour and capital is that the returns to the latter are fairly distributed (taxes upon them notwithstanding). Whereas the returns to land are not. Those excluded from valuable land suffer a loss of opportunity, which if not compensated leads to a net transfer of incomes, baking in excessive inequalities and resource misallocation. This is the sole cause of housing issues.

    If people were fairly compensated, via 100% tax on land’s rental value, its selling price would always be zero or close to it. Given that, housing would not only be optimally allocated by the market, but would become as affordable as it could possibly get for those who find it unaffordable now.

    Perhaps even more importantly is how such a tax would effect the incentives of the state. As per the above, high aggregated land rents result from optimal resource allocation. That means getting the right balance of laws, rules and regulations that grow the economy while preserving/enhancing our shared environment, thereby shifting peoples spending choices for locational amenity. Any developer of a large plot of land, like the Georgians were able to do, know getting the balance of development right is key in order to maximise their returns.

    Any land tax is set as the opportunity cost of not putting it to its best use withing current planning regulations. If, as Myers says, it would be beneficial for more urban areas to be turned into townhouses, the government would simply change the planning regulations and set the tax accordingly.

    If you really wanted to see a building boom, and one that actually delivered affordable, beautiful and efficient urban environments we only need change our choice of taxes and thereby incentives of the state.

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