Untangling the complex web of the UK housing market
So what is driving these dysfunctionalities?
Our empirical analysis found a per-capita decline in housebuilding since the 1970s, reinforced by a “lack of supply responsiveness” identified in the Barker Review in 2004.
Between the years 1967 and 1991, the UK built approximately 5.7 million new-build dwellings during which the population increased by 4.5% (2.5 million people). Yet for the 1991-2016 period, the UK built just over 3.5 million dwellings with population growth of 14.3% (8.2 million people). Considering factors like densification, this implies a shortfall of at least three million housing units in addition to the ongoing deficit between housing starts and population growth.
Looking at factors of production, land has increased in price from 50% to 200% of GDP. This is clearly driving the lack of affordability.
But to identify the appropriate policy response, it is worth identifying the driver of land price inflation for residential development. It is clear, even from a cursory look, that our planning system is one culprit. The policy of urban containment established by the Town and Country Planning Act – and enforced through local plans, greenbelt designations, recursive height and density restrictions, protected views schemes and other policies – is a problem. But by far the greatest obstacle to housebuilding is the unpredictability of local planning authority decisions, as we can see from the positive correlation between rejection rates and the acuteness of housing need in a local area.
This is why, yes, we need “planning reform”, and our essay recommends a pilot scheme of Simplified Planning Zones (“SPZs”), which would eliminate the worst effects of the planning system in areas with the worst affordability ratios. In an SPZ, developers would submit shortened planning applications that, provided they met conditions around density and quality, would be given the presumption of development. This would reduce the risk premium (which currently favours large construction companies that build in bulk) and restore competition and certainty for house-builders, who would no longer have to amend plans due to NIMBY complaints, or deal with damaging obligations like Section 106 of the Town and Country Planning Act.
It would initially be piloted in areas with the highest affordability ratios, before a refined policy would be implemented nationwide. This policy is necessary – but on its own will be insufficient.
To achieve the volume of housebuilding required, we also need to adjust incentives at local level to boost housebuilding under the development control framework as well. To stimulate development outside of SPZs, our essay recommends aligning local government funding, per capita, to residential development. This would incentivise local planning authorities not only to approve more good planning applications but also encourage them and improve them. In nearly all cases in the UK, no such incentives exist for councillors to do that.
The only local tax, Council tax, is based on (outdated) property value, and it is for all intents and purposes irrelevant to UK tax revenue. In 2011, the Mirrlees Review rightly recommended that it ought to have more weight.
This could be implemented in a revenue-neutral way either by adjusting the formulae for awarding central government grants, by introducing a residential development precept on new-builds, or by introducing a value added tax on housing consumption. This would give councils full control over their council tax revenues and prevent central government from offsetting medium-term revenue from tax base growth against the funding given to councils by grant. This scheme could be run alongside the initiative proposed by Bosetti and Sims to train councillors to confidently guide developers towards high-quality development.
The UK requires a programme of housebuilding as ambitious as the New Town Corporations or the London Docklands Development Corporation. The current target of 300,000 new dwellings per year should be increased. In the longer-term, we must have a conversation about the Green Belt and the damage it does by preventing development on land that is easiest to integrate with current transport links. In the short term, more popular policies – such as the Right to Buy and Help to Buy – should be reviewed for effectiveness, cost and net welfare.
For now, however, the planning system remains the key cause of distortion and price inflation in the market. Recent estimates suggest that UK house prices would be 35% lower without the intersection of planning and local incentives. To us, that seems like the perfect place to start if you want to improve housing affordability and homeownership.
Charles Shaw and Daniel Pycock were shortlisted and ‘Highly Commended’ in the 2018 Richard Koch Breakthrough Prize, an essay competition seeking free-market solutions to the housing crisis. Read their submission in full here.
 For the uninitiated, Section 106 requires housebuilders to negotiate with local planning authorities to mitigate perceived negative effects from development. In many cases, they are used to secure a percentage of “affordable” housing. The obligations decided upon however are only known very late in the process, and constitute a massive barrier to the acquisition of working capital and the accurate pricing of land.