Housing space in England is currently the most expensive and unaffordable in the world. Christian Hilber and Wouter Vermeulen identify three reasons for this problem: the regulatory constraints, the scarcity of suitable land, and the uneven topography, all make it difficult to build affordable homes.
House prices in the South East of England would have been roughly 25 percent lower in 2008 and perhaps 30 per cent lower in 2015 if the region had planning regulations of similar restrictiveness as the North East of England. This is one of the findings of our new research paper. Real house prices – but not real incomes – have grown faster in the UK over the last 40 years than in any other Organisation for Economic Co-operation and Development (OECD) country. Today housing space in England – particularly in London and the South East but also in other urban centres and large pockets of rural England – is among the most expensive and unaffordable in the world. Our study shows that this is in large part due to supply constraints imposed by the planning system.
According to the research, the problem is clearly that there is too little supply given the strong demand for housing in parts of the country. But why? The study explores three possible types of supply constraints:
- The first type is regulatory and dates back to the Town and Country Planning Act of 1947. The UK planning system since 1947 is extraordinarily rigid by world standards. Urban containment through ‘green belts’, strict controls on height, lack of fiscal incentives at the local level to develop and ‘not in my backyard’ (NIMBY) behaviour facilitated by the planning regime all make it very difficult to build new homes.
- The second type is physical. Local scarcity of brownfield or greenfield land makes residential development in desirable locations very costly.
- The third type is uneven topography. It is very difficult to build new homes in places with steep slopes.
So which of the three types is most important in the case of England? We use data from over 350 local authorities from 1974 to 2008 to explore this question. Our findings strongly suggest that regulatory constraints are the main culprit. In our estimates, house prices would have risen by about 100 percent less in real terms between 1974 and 2008 if, hypothetically, all regulatory constraints were removed. But removing all constraints is of course neither practicable nor desirable.
More pragmatically, if the South East – the most tightly regulated English region – had the regulatory restrictiveness of the North East of England – still highly regulated by world standards, house prices in the South East would have been roughly 25 percent lower in 2008 and perhaps 30 percent lower in 2015. In England, housing is being built where there are the fewest disincentives to permit development rather than where demand is greatest. This, over time, created a serious affordability crisis in the most desirable places of the country.
What about physical and topographical constraints? The effect of constraints due to scarcity of developable land is largely confined to highly urbanised areas. But in these areas – most pronounced in the Greater London Area – the effect is important. So house prices in London would still be fairly high by world standards if the planning system was reformed and various constraints relaxed. Topographical constraints matter too in a statistical sense, but they are not very important economically.
So who are the losers of the planning-induced affordability crisis? The obvious losers are young households. But although existing homeowners seemingly benefit from higher asset prices, most of them are also adversely affected. This is because they cannot realise the ‘gains’ unless they downsize their housing consumption, give up owner-occupation and rent or sell their house to move abroad. In the interim, they too have to live in increasingly cramped spaces.
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Note: This article was originaly published on LSE Buesiness Review and is based on the authors’ paper in the Economic Journal.
Christian Hilber is Associate Professor of Economic Geography at LSE. His research interests are in urban and real estate economics: location choice; home ownership; housing supply and land use regulations; house price capitalisation; social capital investment; education; and local public finance. He tweets at @ChrisALHilber
Wouter Vermeulen is Programme Manager in Decentralised Governments at Centraal Planbureau (CPB), Netherlands Bureau for Economic Policy Analysis. He is also an Associate of LSE’s Spatial Economics Research Centre (SERC).
Featured image credit: Christian Heilmann CC-BY-2.0
The rules and regulations such as the green belt and height restrictions etc. are not the cause of the housing crisis. These enforcements ensure that our cities are actually inhabitable, without them, London would no doubt be as chaotic as Mumbai or Bangkok.
‘Planning induced housing crisis’… Not the planning system, but the Government. Right to buy policies that eradicated and privatized social housing stock is to blame for the lack of housing. As its affordable housing that the country is in desperate need of, not luxury gated communities and citadels that are being built in abundance.
It has only been in recent years that the government has recognised the poor choices they made years ago with ridiculous policies. With the introduction of S106 agreements to ensure that a % of all developments are affordable units.
These policies seem like reasonable ones considering the amount of people that struggle to afford to rent or buy, but many developers can eradicate these obligations. Private companies now help developers produce financial viability tests on their development plans – usually with the result that affordable units are unviable for them to produce. And so, these developments are given permission, as the NPPF states, some housing is better than none at all.
Essentially, housing development is now driven by how much profit can be made by developers, rather than the need to house people. Housing is slowly becoming a luxury commodity, and not being seen as necessary infrastructure.
What about the notion that UK developers have over a five year land supply with permission at this point in time? I feel historically development has been inhibited by the planning system, but since the introduction of the NPPF, you cant really argue that there are too many regulations as there’s considerably less now than the days of PPG. I think much of the problem stems back to the evisceration of the council housing stock resulting from the right to buy scheme of the 1980s. Additionally i feel that currently many developers are bottle necking the supply of homes to maximise profits and blaming the planning system.
There will be more properties becoming available because if you own your own home and become unemployed the chances are that because of a clause in the UC regulations you would have to sell your home to get any benefits following which you would have to much money to get UC so the government gets to save a fortune and you lose your home.
Another, smaller, point re topography. Here in NZ it is easy to find a lot of houses built on steep slopes, even unstable slopes. You can build anything anywhere, it’s only a matter of money. These houses, built on very large piles sunk deep into the ground, have at least a 20% premium. Not to mention that the kind of topography we are talking about is highly desirable, high amenity land, and developed at low densities.
Suburbs/sprawl. The experience in Auckland is that the cry for opening up more land is not affecting housing costs in a more affordable direction. Housing that is being built in suburbs is expensive housing because – supply and demand – buyers like living out there. Builders will ask what the market will bear, regardless of what their basis is in the land.
Finally. I think there are a lot of people making a lot of money on housing.
You have missed the point on both scores. There is a decent supply of developable land available out there for the short term. See DCLG & RTPI data. It is not the case that the state is the monopoly supplier of subsidy. Consider the structure of RSL balance sheets and their use of cross – subsidy within schemes.
More importantly, if my suggestion that hosuebuilding is a risky business why is it that:
a) Major housebuilders are currently capping their programmes due to current shortages of labour and concerns about softening prices and:
b) Major players in bringing forward strategic land for developmenrt such as St Modwen have seen their share price fall heavily over the past 6 months.
c) Housebuilders currently use almost no debt. If the business was that safe- surely they would gear up a bit.
On this score I think you are confusing the way the world is with the way that economics sometimes predicts or wishes that it should be.
Price of land, power of landowners and almost zero support from the state for housing are the reasons for the housing problem.
(Affordable housing is a typical muddy phrase in the English language. Who else but a complete idiot would ever build an unaffordable house for sale?)
Mick – the public sector operates under the same land use constraints as the private sector. The only reason housing it owns is “affordable” is because the state subsidises the use of those houses by its tenants. If the public second built more two effects would occur. First, it would be competing against private capital for the same building opportunities allowed by planning. Second, those subsidies would increase (albeit offset by reductions in housing benefit payments to the private sector).
Your comment on the financial system is nonsensical. In fact house building is not risky at all in the current environment given the big gap between demand and supply of houses. House prices have steadily risen over the past 30 years despite several reccessions in the rest of the economy.
Best wishes.
This is an extraordinarily hyperbolic claim of a ‘planning induced housing crisis’. It is hard without data exemplars (why are they not in the article?) to see what the empirical support for this is, but there are so many other primary factors to consider. Population growth in the South East, immigration, QE and lazy lending policies fueling buy-to-rent, longevity etc etc. Therefore any academically thorough contribution will need to have a multivariate approach to discount these factors before quantifying the impact of planning restriction. No evidence of that being done here. On the question of NE restrictions being less aggressive than those of the ‘nimby’ South East, surely the difference in housing density is a major factor here. Parts of the SE have some of the highest densities in Europe, and planning restrictions echo that relative density.
This article probably started with its conclusion then worked backwards for evidence. The number of ‘planner-bashing’ articles seems to be an example of the neo-liberal bias in academia. Unsatisfactory on many levels.
These whines against the planning system haven’t changed since I did my Master’s in Planning at the Bartlett in the 1970s. They were ideology then and they are now.
It seems to me the authors miss at least two other important components of the housing market namely 1) the building industry’s capacity and indeed willingness to deliver. My impression is that they are sitting on and are continuing to buy up far more land than they can conceivably develop within a reasonable time frame. 2) The population of the UK has been increasing rapidly in recent years and is continuing to increase especially in the South East which puts pressure on the housing market as well as other sectors.
As any expert on the economy will tell you it is all about supply and demand, the demand has risen for quicker than the supply, not least due to the massive uncontrolled influx of people from the eu, so until we start to control the population house prices will continue to rise exponentially.
Quite right, Mick, as far as you go.
The planning system delivers what owner-occupiers want, and will continue to do so as long as there are more of them than people in housing need or even merely househunting, It’s called democracy.
Nothing new in what you suggest but you are only using one eye. ….
What about the effect on housing supply of the almost complete withdrawal of public scetor support for affordable housing?
And what about the effect of a financial system that is almost uniqoely geared to creating ‘boom & bust’ cycles and which, among other things, makes housebuilding a far more risky business than in needs to be.