Our recent Capital Cities housing report sparked a debate among commentators. Here’s our response to some of the points raised
It’s been a month since our report on housing wealth inequality and the planning system, Capital Cities, was published, and it started a vigorous debate. We had a number of thoughtful critiques from researchers and professionals in planning and housing. To continue the conversation, we’ve decided to publish some of their arguments and our reflections on them.
One of the key recommendations in our report is that policy should shift towards a zoning system in which most housing is built by-right, as in Japan and parts of the US such as Houston. London Yimby has made the point though that many cities abroad with zoning systems face similar housing affordability pressures to our expensive cities in the UK.
It is clear that the details of any such system would be incredibly important. A bad zoning system would be one which relies heavily on discretionary granting of permits and arbitrary reviews, and would essentially repeat the mistakes of our current planning regime. Such a zoning code which heavily restricts development, like that in New York City where 40 per cent of buildings in Manhattan would be illegal to build today, would be a disaster.
We’ve previously mentioned Japanese zoning as a model, as it allows lots of builders to supply many new homes in growing cities like Tokyo and Nagoya, keeping housing inexpensive. Key to its success is that, provided a proposed home complies with how the land has been zoned and national building regulations, it cannot be blocked. This idea, where once a local plan is in place, the planning system should allow people to build new homes unless the local authority explicitly says ‘no’, rather than forbidding any development until the local authority grants consent, should inform any attempts at planning reform.
One response to our critique of the planning system, made well by the RTPI’s Richard Blyth, was that because the planning system has historically built more homes than today, it should not be presumed that it has a systematic problem.
Under this view, it is not necessary to radically change our current system from one where development only occurs if the council grants permission into one where most development is legal without any need for planning permissions. Though supporters of the current system say there may still be potential for some reform.
Factors such as local government’s lack of tax-raising powers, the diminished capacity of cash-strapped planning departments, and their flawed boundaries no doubt make the job of planners much harder.
But our assessment is that aligning the structure of the planning system we have to the outcomes we need to reduce inequality is a daunting task that may not be possible. The use of individual planning permissions to supply land for new homes means planners face a difficult calculation problem. Rather than other markets, where firms and consumers decide how much mayonnaise, concrete, or shampoo is produced, policymakers need to decide how many houses of different types are needed in each city, relative to need and prices in every other city.
This calculation problem is incredibly complicated, and finding a complete solution which provides the correct number of permissions for every city is impossible. Government estimates of housing need inevitably produce results that don’t make sense, such as the prediction that Cambridge will see zero population growth through to 2028.
Strengthening our current planning system, rather than changing it, will continue to require such target setting. But it is the local mismatch between supply and demand this system produces which is at the root of our cities’ affordability problems.
Another argument made by several people, including by Cllr Sean Fitzsimmons of Croydon Council, is that the wealth inequality that results from housing shortages can be addressed by building more social housing.
Social housing has a clear role to play in providing housing for people outside the labour market, including non-homeowning pensioners without savings, and those in work on the lowest incomes or in the greatest need. The welfare state can and should provide new high-quality housing in expensive cities through building by councils and housing associations.
However, more social housing will not address the underlying inequalities and issues outlined in the report. Even if many more social houses were built, the supply problems in private sector housing in expensive cities would remain. Unless all land is nationalised, there will always be a private housing sector which will require distinct policy solutions. This private sector needs to be able to operate well to reduce pressure on social housing, not the other way around.
Another consideration, from Daniel Bentley at Civitas and addressed by the Letwin Review, is the role of “land banks” held by developers. In this argument, shortages are not caused by the planning system, but by developers buying land and then building new homes as slowly as possible to maximise their profits.
Our thinking on this is that land banking is probably a reaction to structural conditions of shortage in land for development, rather than a cause of shortages itself.
Most firms try to minimize their inputs (e.g. eggs and oil) and maximise their output (e.g. mayonnaise) relative to those inputs. Large builders don’t do this. Instead, both through buying land and by using ‘options’, they hoard large amounts of their input (land). Their output (houses) is then supplied at a rate which is low enough to avoid swamping the market in houses and decreasing prices, but fast enough to maximise profits.
This is rational behaviour only if the supply of the input is unpredictable. Firms in this situation need to stockpile their input so that they can still sustain production in the periods when the supply of inputs temporarily dries up. Knowing that every other firm using the same input is in the same situation, they can then drip-feed their output onto the market confident other firms cannot and will not produce enough to decrease prices.
If this is true, then the land-banking behaviour of housebuilders is not a cause of housing shortages, but a strategic response to the planning system’s rationing of land. The unpredictable granting of planning permissions requires this behaviour from firms if they are to be successful. Conversely, in a flexible zoning system, where land can be developed as soon as it is purchased without planning permission, land-banking would disappear.
A common argument, made for instance by Guy Shrubsole at Friends of the Earth, is that our housing problems are not caused by a shortage of homes, but by under-taxation of land. Whether through mechanisms such as development charges, land value capture, or a land value tax, this position states that inequality could be reduced through the taxation of expensive land. These revenues can then be spent on social housing or other kinds of redistribution.
Heavy development taxes were an original feature of our planning system as first designed in the 1940s. By allowing local authorities to capture the increase in value from development, local authorities were encouraged to grant planning consents to raise revenue for services. There is a consistent logic to such a system with individual planning permissions and heavy taxation of development, and a similar arrangement characterises modern China’s planning system and funding model for local government.
In Britain however, the heavy taxation of development resulted in landowners withdrawing from the market and waiting for a subsequent government to reduce the taxation of development. Although we continue to have smaller development charges today such as s106 and the Community Infrastructure Levy these are much smaller. The reduction of the original development taxes a decade after they were introduced essentially broke the link between local government’s control of planning permissions and its ability to raise large amounts of revenue with them. Arguments to recreate such a planning and revenue regime need to be able to explain how the abolition of any new taxes on development will be avoided in our democratic political system.
An additional concern that is expressed is that building more houses in expensive cities, instead of expanding supply in cheaper ones, could worsen inequality between richer and poorer places, driving the North-South divide.
The differences in house prices and rents across the country suggest there is no shortage of homes in many Northern cities. So building more homes in Burnley would not address the issues they face, while not addressing the shortages in Brighton. Failing to build enough homes in the South such that house prices fail to stabilize means that homeowners in the south will become even wealthier, widening this aspect of the North-South divide.
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“Why we need planning reform to reduce wealth inequality” No we don’t and here’s why. The selling price of land is the capitalised net transfer of incomes between groups in society. From those that own little/no land by value, relative to taxes paid, to those whom the opposite is true. A 100% tax on land’s rental value drops its selling price to zero by ending that net transfer. In doing so it also reduces any inequalities resulting from it’s mere ownership to zero as well. Thus solving excessive inequality/housing issues instantly and permanently.
The supply of housing and planning should only concern issues regarding economic growth and welfare. In a civilised society they should not concern affordabilty or inequality whatsoever.
The implementation of a tax that captures the overwhelming majority of site only values (85%-95%) can easily be achieved by changes to Council Tax formulation. The gains going from that to a tax that attempts to capture 100% of lands rental value, 100% of the time are marginal and can be left to those in the future. Plenty of low hanging fruit regarding tax choices and how they can solve housing issues right now.
I have some ideas to discuss under the title ‘labyrinthine suburban’. Awkward name, householders initiatives, communal aims.