Don’t blame developers: Britain’s planning system pushes up prices

September 7, 2012

During recent planning rows, opponents of reform have argued that our lack of new homes was nothing to do with our 1940s planning system, but a case of greedy developers sitting on land with planning permission. Yesterday, the Local Government Association argued that the problem is big developers sitting on “land banks”. But big developers hold land because of the current failing planning system, as research we are publishing next week explains.

Firstly, house prices are nothing to do with housing costs. They’re actually about land values. Rising house prices are not bricks and mortar turning to gold, but represent the rising value of land with residential planning permission. In Oxford, a hectare of land for agricultural purposes costs £20,000 compared to £4m for residential use.

House prices remain close to the cost of construction, except where dire monetary mismanagement causes a rise in asset prices centred on housing, or planning restraint pushes them up. In the US, despite the Fed’s poor monetary policy from 2001 onward, booming cities like Dallas avoided a bubble because they built enough homes and released enough land. But planning restraint often causes both an undersupply of homes and a bubble on top, like in the UK now.

We don’t want to go as far as Texas. But a sensible planning system would mean higher house prices would trigger the release of more land. If this doesn’t happen, the prices of houses, and that of land with planning permission, steadily rise. Developers then hold a very valuable appreciating asset. Holding it for as long as possible can prove more profitable than a speedy development.

As the planning system won’t release enough land over the long term, developers feel protected from land prices falling. This is why the £10bn in loan guarantees for developers building new homes, announced by the government yesterday, showed a disastrous misunderstanding of the system. They mean that, if land prices rise, the developer wins anyway. But, if prices fall, the taxpayer is liable. Not sensible. Developers complain that there isn’t enough mortgage finance. But what they really mean is that there isn’t enough mortgage finance available to prop up existing land prices.

To release more land, we need a planning system that operates with the right principles. This isn’t as simple as just getting rid of planning. Yesterday’s loosening of restrictions on extensions could mean people’s gardens were heavily overshadowed, affecting their property rights and property’s value. While extension rules need an overhaul, this was poorly handled.

By contrast, a much bigger and more sensible measure – allowing commercial properties to convert into residential use without planning permission – was buried within the announcement. In this case, the change makes sense. No one is going to mind if an office becomes a home. If anything, this reduces local noise and traffic.

We need to systematically change the planning system so that it balances the private property rights of the owner with the rights of surrounding property owners. Our current planning system, designed as part of a Socialist utopia in the 1940s, has to be modernised for a twenty-first century economy. This means giving greater control to local people. With only 10 per cent of England developed, taking this to 12 per cent – with space for 8m spacious homes with gardens – could be sensible. But local people need quality control over what is designed and compensation for loss of green space. We don’t need huge numbers of new developments, just enough to build more than the feeble 100,000 or so homes we are on track to build this year. And we must trigger the release of land currently held in land banks. This is much more sensible and less costly than potentially ineffective government guarantees.

The government is succeeding in areas like education, where it has a clear narrative and rationale, and ministers focused on implementing it. It needs to extend this to planning, and not see planning as a lever to frantically try to stimulate growth. This can lead to measures which are counterproductive or make further reform politically difficult.

By reforming planning, we can both improve our quality of life and economy. But we need more haste and less speed from the coalition.

This article originally appeared on City A.M.’s website

Join our mailing list