Blaming the plannersPosted: November 11, 2013 Filed under: Housebuilding, Housing market, Mortgages, Planning 1 Comment
Fix planning and you fix supply, fix supply and you fix the housing crisis. That’s the seductive argument that seems to be gaining ground.
My problem with it is not that it’s wrong. There is a dire shortage of new homes: completions are running at around half what’s needed to meet demand. Problems with the planning system can make supply too slow to respond to demand, constrain growth and make the crisis worse. It would be ridiculous to say otherwise.
It’s more that it’s too simple. It takes a kernel of truth and claims that it is the only truth. In its crudest form the argument is that all we have to do is sweep away ‘socialist’ planning and leave it to the market: in the 1930s there was no planning, private housebuilders were building over 250,000 homes a year and homes were affordable; the post-war Labour government required planning permission for new homes and prices have risen steadily higher ever since because the private sector has been unable to build enough homes.
With varying degrees of sophistication you can find it made by Kristian Niemietz of the Institute of Economic Affairs, Alex Morton of Policy Exchange, Allister Heath in City AM and the Telegraph and Daniel Knowles of The Economist in a brilliantly readable post on Buzzfeed last month.
So what’s wrong with it? For starters, it’s a funny kind of socialism that enriches private landowners and it would be a funny kind of advanced democracy that didn’t have planning. You can see planning (optimistically?) as a way of making decisions about land use in a democracy or (more realistically?) as an expression of where power really lies in that democracy but any attempt to (for example) expand the boundaries of London to cope with an increased population surely requires planning of some kind. The choice seems to me to be not so much between planning and no planning as between good planning and bad planning.
Housing and markets
As an explanation of how markets work in housing it also seems too simple. What do we really mean by ‘supply’? Important though they are, new homes make up only a small part (around 10 per cent) of the total supply of homes on the market at any one time. The price of existing homes determines the price of new ones, not the other way around. Under the residual land value model, housebuilders set the prices they pay for land, and the prices they charge for the homes they build on it, according to the prices of existing homes in the vicinity.
The Barker review of 2004 was the original source of the proposition that we need to build up to 250,000 new homes a year in England. However, this was seen as a way to control house price inflation, not bring prices down. Completions were running at around 170,000 in the UK at the time and the review said that ‘to bring the real price trend in line with the EU average of 1.1 per cent an extra 120,000 houses each year might be required’.
And what do we really mean by ‘the market’? All kinds of market influence the price of a home, not just the one in those that are for sale: the land market, where prices tend to be even more volatile; the rental market, accentuated by buy to let, where landlords compete with would-be home owners; the labour market, security of employment and the distribution of income; and, most fundamentally of all, the lending market and supply and demand for mortgages. These markets complement and sometimes compete with each other and influence and are influenced by the social and economic conditions in which they operate. So when we ‘leave it to the market’ what are we actually talking about?
Back to the 1930s
The cry of ‘back to the 30s’ also seems to misunderstand and mispresent what actually happened then. I’ll follow up this point in more detail in another post but here are some things to bear in mind:
- If the planning system is really the problem, why was Winston Churchill famously railing against the ‘unearned increment’ enjoyed by landowners and land prices as a cause of poverty in 1909, long before it existed? The circumstances he describes of a city that wants to expand but cannot do so because landowners on the periphery hold it to ransom still seem relevant a century later – as does his powerful call for a land value tax. Is land the real issue – not planning?
- It’s true that there was a building boom in the 1930s but the consequences of that – ribbon development, sprawl, jerry building – are what created the demand for tighter planning legislation. Controls on ribbon development and the first (rather ineffective) green belts appeared during the 30s. And we saw the establishment of what is now the National House Building Council to control the quality of homes built.
- The absence of planning was only one factor in a wider boom in home ownership. The supply of mortgages boomed thanks to a surge in deposits with and lending by building societies. Interest rates were cut and mortgage terms were extended, making home ownership still more affordable. A collapse in agricultural product prices (such as corn) meant builders could buy farmland cheaply. The cost of building homes fell thanks to new construction techniques and a fall in the cost of labour. Rent control meant that private landlords were desperate to sell, often to sitting tenants. Above all, from the mid-1920s onwards, house prices were affordable and they stayed that way. Accurate stats are hard to come but by the late 1930s semi-detached houses were selling for £400-£600 in Greater London and £300-£500 elsewhere. These were within reach of skilled workers such as printers and engine drivers earning £200 a year.
The story since the Second World War, with house prices rising to ever more unaffordable levels, is also about far more than just planning. For most of the 1950s, 60s and 70s, England was building more than 250,000 homes a year, but most of them were council houses.
The biggest factor in the house price inflation seen over the last 40 years was arguably not planning but lending: the relaxation of strict mortgage conditions by building societies in the 1970s and the rise of dual-earner households; the big bang and the entry of the banks into the market in the 1980s and 1990s; the creation of buy to let mortgages in the 1990s and expansion in the 2000s; and the boom in mortgage-backed securities that contributed to the global financial crisis and recession from 2007.
Any repeat of the 1930s building boom now would be happening with prices at completely the opposite end of the affordability spectrum. Median house prices were 6.74 times average earnings in 2012, down only slightly from the peak of 7.23 in 2007 and up from 3.54 in 1997. This is not just the London problem that ministers like to make out: I live in Cornwall, just about as far from the capital as it is possible to be and still be in England, and median prices are currently 8.99 times median earnings.
Thanks to record low interest rates, affordability is dramatically better than in 2007 when seen in terms of mortgage costs. The average mortgage rate has fallen from 5.9 per cent at the time of the credit crunch to 3.3 per cent now. With outstanding mortgage debt of £1.2 trillion, that means existing home owners have gained around £30 billion a year. Arguably, this has been a key factor in propping up prices at unaffordable levels.
However, let’s ignore all of that and assume that planning could be swept away tomorrow. There would still be competition for sites nearest to the most desirable locations and (as Churchill found) landowners would still make their ‘unearned increment’. If developers suddenly engaged in a free-for-all of land buying and housebuilding, they might well trigger first a boom in land and house prices and then a bust. But would they really do that given how close they came to collapse after the credit crunch?
And is a planning free-for-all remotely politically feasible? Nick Boles has done his best as planning minister to liberalise the system but has met ferocious resistance from the countryside lobby at every step. The politics involved in a major expansion of housebuilding into marginal seats in the South East could make that look mild by comparison. And there are surely too many people with a vested interest in keeping prices high to allow a building programme big enough told cause them to fall.
So instead we’re left with a housing policy based on Help to Buy. Ironically, this has parallels with the 1930s too, except that mortgage guarantees then were paid for by housebuilders rather than the state. Will it send prices even higher by boosting demand rather than supply, or will it have a limited impact because prices are already too high? Either way, nothing much will change and homes will still be unaffordable.
These are the problems I have with the fix planning = fix supply = fix housing argument. It is not completely wrong but it is over-simplistic. And perhaps that it not a coincidence: if you really believe that, you can ignore all the other questions that surely need to be answered before we can really fix the housing crisis.
You hit the nail on the head with the hunt for the simple solution – there isn’t one unfortunately. The powers that be rushing to point the finger at other departments only leads to ill-thought out policies that rarely work (Help to Buy, Mates/Shared Mortgages etc).
It appears most departments are prepared to work together to some extent – the only area that seems to avoid it though is lending regulation. Ever since the rules changed for building societies in the ’70’s to fix the then financial crisis of the time and allow mainstream banks into the mortgage market it all appears to have gone downhill: http://www.ipinglobal.com/ipin-live/406867/the-house-price-paradox-challenge-whose-fault-is-it-anyway