Sunday, 11 August 2013

Economic myths: the planning system is responsible for high house prices

Ian Abley has a go at "the British Conservative Party’s favourite think tank", Policy Exchange, about peddling myths whilst purporting to be myth-busters. However, he's not shy of peddling a few old favourites himself:

Planning facilitated the New Labour expansion of the fund of mortgage lending up to 2008, so that even in 2012 there is £1,200,000,000,000 of live mortgage debt generating interest. This is a volume of lending made possible by, rather than causing, house price inflation. Inflation caused by the fact that the planning system explicitly prevents people from buying a field cheaply and building a house on it, with a rate of planned new house building lower than at any time since the First World War, not the Second.

The effect, by Morton’s own measure, is that in England a median priced home now costs seven times the median salary. Averages conceal other realities, but the general trend is clear. House price inflation, highest in the South and deflating unevenly in parts of the North, is inextricably linked to the planning law. Planning equals mortgage security in housing equity.

No, Mr Abley, house price inflation is not caused by the planning system.

What the planning system actually does is artificially lower land prices round towns and cities. Land that should be worth £400,000 an acre is being sold for £4,000 an acre, because it cannot be built on and realise its market value. Ireland is a case in point. Ireland didn't have the 1947 act, so planning controls there were much looser. This didn't stop huge house price inflation leading up to the 2008 crash (nor did huge oversupply of houses, viz previous economic myth), inflation that was only stopped by the bursting of the bubble.

Interesting to note that the 1947 Planning Act was not passed for reasons of bureaucratic control, or as a NIMBYs' charter, but was actually a misguided attempt at propping up house prices.


Anonymous said...

Ok. This interests me greatly. Is it your view, then, that it's the supply of money which raises the price and that even if planning/housing were plentiful, homes would command the same prices because.. well.. people will continue to spend every pound they can get their hands on on their homes.

Is there no benefit from increased competition between landowners selling building plots?

And/or does your interpretation stand even if we have gone beyond a level that people can reasonably afford (i.e. would genuinely liberalised planning rules at least ease prices back towards overpriced-but-sustainable.

And what does LVT do to this? When all else washes out, what does my monthly cashflow look like? Won't my landlord still sweep up every penny I have available?

Mark Wadsworth said...

TTG, this was Bayard's post so he can answer your questions, but there is an easy answer to this:

"what does LVT do to this? When all else washes out, what does my monthly cashflow look like? Won't my landlord still sweep up every penny I have available? "


And if rents increase under LVT, then that is an increase in pure monopoly ground rent, so the LVT will increase again and income tax will be reduced yet again etc, and in the end, the tenant will always end up ahead of the game.

If this were not so, then large landowners would be falling over themselves calling for income tax to be replaced with LVT, which they clearly aren't.

Anonymous said...

Thanks Mark.

I'm not coming at this through the 'landlords will pass it all on' window.. but, rather, the 'if people are willing to spend x% of their available cashflow on housing, why won't they continue to spend x% of their available cashflow on housing?'. Their available cashflow, of course, being a post-tax number.

I guess it links to whatever the answer is to my first question. If house prices/ rents are linked to the money we have available (therefore not to planning permissions) then what changes?

I guess... I can see how the whole thing becomes more equitable... but not, so much, how it changes the problem we have with the aggregate cost of housing.

Bayard said...

"Is there no benefit from increased competition between landowners selling building plots?"

You'd think so, wouldn't you, but all the evidence is that it has no effect.

Yes, under LVT, rents will go up, as tenants will have more money to spend on rents, but house prices will be dampened as the rising prices would be seen as a bad thing, like rising prices anywhere else are, because they would lead to rising tax bills. Thus politicians would no longer try and artificially boost house prices.

Anonymous said...

Thanks Bayard.. that makes sense.

Derek said...

Yup, the planning system is a side issue. High house prices are caused mainly by high rents and cheap credit.

If the government really wanted to reduce house prices there are two things it could do. The first is build more council houses and the second is to introduce a bank asset tax on mortgages (or other loans secured against land).

The first of these measures would reduce rents generally by reducing the demand for private rentals. This would then have a knock-on effect on BTL and thus on house prices generally.

The second measure would make mortgages more expensive. Thus people wouldn't be able to borrow so much. Hence house prices would come down. The point about making the measure land-specific is that it would have less effect on loans to industry. So the banks would be encouraged to make productive loans rather than mortgage-type loans.

Ben Jamin' said...

You can't really break the land monopoly where people want to live and do business.

That's the point that sails right over the heads of all media commentators on this matter, MW not included.

The upshot of this is, building more homes will only lower prices in marginal areas.

The fact more people will then be drawn into the SE, will push up GDP, which then feeds into higher rental values negates this.

It's GDP that is the main driver behind property inflation. Interest rates really just being a lever to assist/brake GDP.

The only measure that would really kill several housing issue birds with one stone is property tax.

But for some reason, no one, but no one in the media will even mention it.

Anonymous said...

TTG, see subsequent post for full reply.

D, agreed.

BJ, credit where it's due. I used to subscribe to the simplistic "more houses = lower prices" school of thought, it was Bayard who kept banging away saying that there is more to it than that.

Even though I'm stumped at coming up with a simple explanation why. just because you know something is true doesn't mean you can explain it in nice simple terms.

Bayard said...

"But for some reason, no one, but no one in the media will even mention it."

That's because it's every Englishman's dream to live off rents. Always has been, probably always will be.