Planning reform and levelling up sit at the forefront of the Government’s policy agenda with goals of solving the housing crisis and regional inequality. As Anthony Breach explains, although treated as separate initiatives, they are in fact intertwined.
Planning reform and ‘levelling up’ are two of the most important parts of the Government’s policy agenda this year, with a new planning bill and a ‘levelling up white paper’ both around the corner. With planning reform, the Government is aiming to solve the housing crisis by improving affordability and homeownership through an increase in supply. Although levelling up remains more vaguely defined, the broad goal is clearly a reduction in regional inequality without making prosperous places poorer.
Although usually treated as separate initiatives, they are actually connected. If housing in expensive cities became cheaper thanks to planning reform and a local increase in new homes, this would boost local disposable incomes. With more money to spend, their demand for goods produced by firms in the rest of the UK would rise.
If done boldly and well, such reform will aid levelling up as it will support the private sector in the North and Midlands, while reducing inequality and improving living standards within the South. Northern production and Southern consumption will both rise if planning reform makes it easier to supply more homes where they are in high demand.
Britain’s unusually bad housing crisis and its unusually bad regional inequality are two sides of the same coin. Expensive cities (mostly in the Greater South East of England) are unaffordable as housing supply has been disconnected by the planning system from high demand in these places from workers and firms. Cities in the North and Midlands are much more affordable because to demand to locate in these labour markets is much lower, due to economic underperformance. Expensive cities need more homes, and struggling cities need to become more productive.
The key to levelling-up underperforming cities outside the South East is not therefore more homes in the North, as some Conservative MPs have suggested, but rather in supporting “exporting” firms in their cities. In urban economic theory, there are two kinds of private sector firm – “local services” such as cafes, restaurants, barbers, or solicitors, which sell their production to nearby consumers as their market, and “exporters” such as manufacturers, software and tech companies, and graphic design and publishers, which sell their production mostly to customers in other parts of the country and other countries as their market.
Exporting firms are particularly important for local prosperity as their sales to other places bring money into their local economy. Their productivity varies much more across the country than local services, and is strongly associated with their wider local economies’ performance. Accordingly, cities in the Greater South East have much more productive exporting firms than those in the rest of England and Wales, bringing more money into Southern local economies and ensuring local incomes are high before housing costs. Achieving levelling up and closing this economic divide therefore requires stronger exporters in the North and Midlands’ private sector.
Yet, a barrier to the success of Northern firms is that expensive housing in the Greater South East reduces consumer spending in their export markets. Although incomes are higher in the Greater South East, high housing costs arising from local shortages of homes severely reduce local disposable incomes that could be spent on goods and services produced by Northern firms.
The scale of this suppressed consumption and its geography can be seen at the neighbourhood level. Figure 1 shows average housing costs by neighbourhood across England and Wales in 2018 – the difference in incomes before and after housing costs. While most of the North and Midlands outside certain city centres has average housing costs of between £0 – £5,000 a year, in almost all of London and large parts of the surrounding Home Counties, disposable income is reduced by £5,000 – £10,000 a year due to expensive housing. In large parts of Inner London, consumption is reduced by £10,000 – £25,000 per household because housing is so expensive.
Source: ONS 2020, Income Estimates for Small Areas; House of Commons Library 2021, Non-Contiguous Hexagon-based Cartograms for England and Wales. Contains Parliamentary information licensed under the Open Parliament Licence v3.0.
Centre for Cities has not used this type of map before, which was originally developed by the House of Commons Library, and it uses a different geography to our usual Primary Urban Area definition. The advantage of it here is that it shows the geography of the housing crisis is driven by the success of urban economies, but it is not limited to them – London’s housing shortage and the pressure it puts on incomes spills over into the neighbouring Home Counties. Building more homes in the North will do little to tackle these trends, as they arise due to local shortages of homes caused by the planning system in high-demand places.
Even this map understates the problem, as it takes the average of all housing costs within these neighbourhoods. A household who owns a typical home outright in a ‘purple’ neighbourhood in London will face minimal housing costs aside from maintenance, council tax and bills, while renters in ‘green’ neighbourhoods close to London will be paying extremely high rents. Landlords enjoy a comfortable revenue stream from those rents, while households priced out of expensive areas are forced to move away.
As richer households have a higher savings rate and consume less of their income than the average household, that so much of the Greater South East’s earnings flows straight to landlords and landowners means the local economy cannot consume all it produces, and some of its output must be sold elsewhere as exports. This in turn means that the North and Midlands is currently absorbing a disproportionate share of the South’s production, in part because of inequality in the South of England caused by its housing crisis.
In effect, it is a similar dynamic to that at play within the Eurozone – inequality in countries like Germany reduces German consumption and forces other countries like Italy and Greece to absorb German exports, reducing Italian and Greek production. Reducing inequality within England’s Greater South East by reducing local housing costs so it can consume and import more is essential for boosting demand for firms based in the rest of the country, just as reducing inequality to increase consumption, net imports, and living standards in Germany will help Italian and Greek firms.
Planning reform is the only thing that can solve this housing shortage in the Greater South East, as the local undersupply of housing is caused by how the current system rations and restricts development. Removing the current system’s case-by-case granting of planning permissions so that development can proceed automatically if it follows the rules is essential if we want to increase housing supply and disposable income in expensive places. Centre for Cities has previously set out how the planning reforms proposed by the Government in their White Paper last year should be pursued to achieve this.
This is not to say that levelling up can be accomplished by planning reform alone. Cities in the North and Midlands will also require greater political devolution and investment in skills, commercial property, and in certain places, transport too. But fixing the planning system and building more homes in expensive areas goes with the grain of the levelling up agenda, not against it. It will help close regional divides by strengthening the North and Midlands’ private sector rather than through public subsidy. Incomes before housing costs in the North and incomes after housing costs in the South can both increase.
It is not a betrayal of the levelling up agenda to recognise that different places have different policy priorities. But in and near expensive cities, the policy priority is planning reform to get more homes built and improve affordability. The bolder planning reforms are the better the outcomes will be, and not just for those residents of expensive cities feeling the brunt of the housing crisis, but people up and down the country too.
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