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Our proposal to end the housing crisis by replacing the current planning system with a new flexible zoning approach has attracted lots of attention and debate. One of the most common responses though has been the idea that the planning system is not connected to the housing shortage – instead the problem is “landbanking” by developers.
The logic of this argument is that the housing crisis is caused by housebuilders who are given planning permissions for their sites by planners, but do not then actually build new homes. Supposedly, a million homes remain unbuilt since 2010 because of this speculative behaviour. Furthermore, even when developers do actually build new homes, they slowly build homes to an “absorption rate” that allows them to drip-feed new homes onto the market at high prices.
Unfortunately, this is not the whole story. The reason developers behave this way is the planning system forces them. Landbanking is an artefact of the planning system, and another reason why the current system needs to change.
To see why this is, consider the scenario in which the landbanking argument is true. There is nothing at fault with the planning system’s institutional design. Developers landbank simply because they are greedy.
In this world, one implication is that the planning system cannot be a bottleneck on the supply of land for development. Acquiring a planning permission is easy and entails minimal or no risk for landowners.
So, small developers and self-builders have straightforward access to land for development. Furthermore, as large developers are landbanking and slowly building to an absorption rate, self-builders – who build their own houses and have no incentive to landbank – should account for a considerable share of new supply.
However, this is not the case. Figure 1 shows that the UK has one of the lowest rates of self-build in the developed world. While only 7 per cent of new homes are self-built or self-commissioned, half are in Australia and Japan, and up to 70 per cent are in Austria.
One of the major reasons self-build is unusually uncommon in the UK is that the discretionary planning systems rations development in an unpredictable way. One in 10 planning applications are rejected, many of which will be applications made in the belief they complied with the local plan.
For potential homeowners this “planning risk” discourages self-building, but developers are forced to pursue a strategic response to manage the uncertainty – land banking.
Firms behave in this way when an input they need (land which can be developed) to produce outputs (homes) is rationed by an unpredictable planning system.
Developers in this environment cannot simply buy more land if they need or want to build extra homes. They must acquire a planning permission to undertake lawful development. But getting such a permit is uncertain in our system. The discretion built into the planning system means that proposals can reach an advanced stage before being junked or radically altered by planners or a planning committee.
The solution for firms to minimise this “planning risk” is therefore to apply for more planning permissions than they can actually use. By doing this, they build up a safety buffer which they can dip into if one of their applications for planning permission goes pear-shaped. This landbank (either through existing ownership of the land or option to buy it) means given their equipment and workforce they will always have sites they can be working on.
It is the planning system’s design here which is forcing firms to demand more land they need. If firms could just buy land, get a guaranteed permit, and then start building, they would not need to buy more land than they can actually use. There would be no planning risk which requires a safety buffer.
The same applies to the critique in the Government’s Letwin Review that builders build slowly at an “absorption rate” to make sure local prices do not fall. But this too is a response to uncertainty in the system.
The rational strategy for developers is to build at a slow rate which maintains high prices for their product and avoids swamping the local market with new supply. Crucially, this behaviour is possible because every other competitor faces the same bottleneck on accessing land for development. They are not able to swoop in, buy another piece of land, and quickly build and sell homes for a cheaper price.
It is no coincidence that the only part of the UK economy which sees landbanking and absorption rate behaviour from firms is also the only part of the economy where production is controlled by a discretionary planning system. The planning system produces and requires this behaviour from developers.
If a new flexible zoning system were introduced those behaviours would disappear. Not only would it be easier for self-builders, but it would also change the incentives for developers. The rational, profit-maximizing strategy for firms in a system with much greater and more certain access to land is to build as high a quantity of homes as possible, to as high a quality as possible, for as low a price as possible, in places where people want to live. A new flexible zoning system is just the kind of system needed to end landbanking and the housing crisis for good.
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