Restrictive planning laws have caused the UK’s housing cost explosion

No comparable country has built so few houses over the last 30 years.

Runaway housing costs have become one of the most pressing issues for low-income households in the UK. House prices are now two-and-a-half-times higher in real terms than they were in the mid-1970s, and rent levels have followed closely. What is more worrying than the level of prices or rents per se are measures of affordability, which look even bleaker. Historically, the ratio of average house prices to average incomes, both collected at the local level, has rarely exceeded a value of three. This meant that an average family could afford an average-priced house with three gross annual salaries. In a growing economy, we would expect this ratio to gradually fall over time, but the opposite occurred: It has risen to over five in most UK regions.

No other developed country except Australia has experienced such an extreme and sustained increase in housing costs. Spain, Ireland and the US have had their housing market bubbles, but they were transitory: Since 2008, real-term house prices there have almost returned to pre-bubble levels. Not so in the UK, where they have only fallen back to the levels recorded just before the peak.

High housing costs are not just decreasing living standards directly, but create numerous adverse knock-on effects. Most obviously, they raise the price of nearly every good or service that requires retail and/or office space, since the commercial rent is partially passed on to consumers. The cost of a standard food basket in the UK, for example, is 20 per cent higher than in France and 30 per cent higher than in Ireland. Another knock-on effect is the explosion in Housing Benefit (HB) payments. One in five households is now reliant on HB, which is not just a fiscal problem – the HB bill has doubled in real terms over the past two decades – but also erodes work incentives, due to the high withdrawal rate.

But the worst aspect is that the explosion in housing costs, and everything that flowed from it, was completely unnecessary. It could have been entirely avoided. The empirical evidence from around the world shows that temporary fluctuations aside, housing costs are largely determined by the severity of planning restrictions. This remains true even when controlling for a wide range of other factors, like population density, natural (as opposed to regulatory) obstacles, or the extent to which an area is built-up already.

The empirical literature merely confirms what common sense tells us. There are a variety of other alleged cost drivers that are frequently cited, but the problem with each of them is that the same factors are present in dozens of other countries, which have not experienced a housing cost explosion. Yes, the South East and the West Midlands are fairly densely populated, but no more so than a number of Swiss cantons, German Länder and Dutch provinces. Yes, the social housing stock has declined, but it still remains one of the largest in the developed world. Yes, there are empty and underused properties, but comparatively few by international standards. There is only one figure on which the UK really does stand out from its neighbours, and that is the number of newly completed dwellings (relative to population size) over the past thirty years. No comparable country has quelled housing development with such rigour for so long.

Housing development is not a threat to the attractive parts of the countryside, unless you assign that label to every muddy field and every stubbly patch of grass, as the anti-development Nimby lobby does. Only one tenth of the English surface area is developed at all, and within that tenth, the single biggest category is domestic gardens. There is plenty of room for development without sacrificing areas of natural beauty. It is a matter of confronting vested interests, which, unfortunately, the present coalition is not particularly good at.

Kristian is the author of Abundance of land, shortage of housing, a new report from the IEA.

A house being built near Bristol. Photograph: Getty Images

Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow.

Kristian is currently a PhD student in Public Policy at King's College London, where he also teaches economics. He is the author of the recent IEA Discussion Paper on planning reform, Abundance of Land, Shortage of Housing.

Show Hide image

An unmatched font of knowledge

Edinburgh’s global reputation as a knowledge economy is rooted in the performance and international outlook of its four universities.

As sociologist-turned US Senator Daniel Patrick Moynihan recognised when asked how to create a world-class city, a strong academic offering is pivotal to any forward-looking, ambitious city. “Build a university,” he said, “and wait 200 years.” He recognised the long-term return such an investment can deliver; how a renowned academic institution can help attract the world. However, in today’s increasingly globalised higher education sector, world-class universities no longer rely on the world coming to come to them – their outlook is increasingly international.

Boasting four world-class universities, Edinburgh not only attracts and retains students from around the world, but also increasingly exports its own distinctively Scottish brand of academic excellence. In fact, 53.9% of the city’s working age population is educated to degree level.

In the most recent QS World University Rankings, the University of Edinburgh was named as the 21st best university in the world, reflecting its reputation for research and teaching. It’s a fact reflected in the latest UK Research Exercise Framework (REF), conducted in 2014, which judged 96% of its academic departments to be producing world-leading research.

Innovation engine

Measured across the UK, annual Gross Value Added (GVA) by University of Edinburgh start-ups contributes more than £164m to the UK economy. In fact, of 262 companies to emerge from the university since the 1960s, 81% remain active today, employing more than 2,700 staff globally. That performance places the University of Edinburgh ahead of institutions such as MIT in terms of the number of start-ups it generates; an innovation hothouse that underlines why one in four graduates remain in Edinburgh and why blue chip brands such as Amazon, IBM and Microsoft all have R&D facilities in the city.

One such spin out making its mark is PureLiFi, founded by Professor Harald Haas to commercialise his groundbreaking research on data transmission using the visible light spectrum. With data transfer speeds 10,000 times faster than radio waves, LiFi not only enables bandwidths of 1 Gigabit/sec but is also far more secure.

Edinburgh’s universities play a pivotal role in the local economy. Through its core operations, knowledge transfer activities and world-class research the University generated £4.9bn in GVA and 44,500 jobs globally, when accounting for international alumni.

With £1.4bn earmarked for estate development over the next 10 years, the University of Edinburgh remains the city’s largest property developer. Its extensive programme of investment includes the soon-to-open Higgs Centre for Innovation. A partnership with the UK Astronomy Technology Centre, the new centre will open next year and will supply business incubation support for potential big data and space technology applications, enabling start-ups to realise the commercial potential of applied research in subjects such as particle physics.

It’s a story of innovation that is mirrored across Edinburgh’s academic landscape. Each university has carved its own areas of academic excellence and research expertise, such as the University of Edinburgh’s renowned School of Informatics, ranked among the world’s elite institutions for Computer Science. 

The future of energy

Research conducted into the economic impact of Heriot-Watt University demonstrated that it generates £278m in annual GVA for the Scottish economy and directly supports more than 6,000 jobs.

Set in 380-acres of picturesque parkland, Heriot-Watt University incorporates the Edinburgh Research Park, the first science park of its kind in the UK and now home to more than 40 companies.

Consistently ranked in the top 25% of UK universities, Heriot-Watt University enjoys an increasingly international reputation underpinned by a strong track record in research. 82% of the institution’s research is considered world-class (REF) – a fact reflected in a record breaking year for the university, attracting £40.6m in research funding in 2015. With an expanding campus in Dubai and last year’s opening of a £35m campus in Malaysia, Heriot-Watt is now among the UK’s top five universities in terms of international presence and numbers of international students.

"In 2015, Heriot-Watt University was ranked 34th overall in the QS ‘Top 50 under 50’ world rankings." 

Its established strengths in industry-related research will be further boosted with the imminent opening of the £20m Lyell Centre. It will become the Scottish headquarters of the British Geological Survey, and research will focus on global issues such as energy supply, environmental impact and climate change. As well as providing laboratory facilities, the new centre will feature a 50,000 litre climate change research aquarium, the UK Natural Environment Research Council Centre for Doctoral Training (CDT) in Oil and Gas, and the Shell Centre for Exploration Geoscience.

International appeal

An increasingly global outlook, supported by a bold international strategy, is helping to drive Edinburgh Napier University’s growth. The university now has more than 4,500 students studying its overseas programmes, through partnerships with institutions in Hong Kong, Singapore, China, Sri Lanka and India.

Edinburgh Napier has been present in Hong Kong for more than 20 years and its impact grows year-on-year. Already the UK’s largest higher education provider in the territory, more than 1,500 students graduated in 2015 alone.

In terms of world-leading research, Edinburgh Napier continues to make its mark, with the REF judging 54% of its research to be either world-class or internationally excellent in 2014. The assessment singled out particular strengths in Earth Systems and Environmental Sciences, where it was rated the top UK modern university for research impact. Taking into account research, knowledge exchange, as well as student and staff spending, Edinburgh Napier University generates in excess of £201.9m GVA and supports 2,897 jobs in the city economy.

On the south-east side of Edinburgh, Queen Margaret University is Scotland’s first university to have an on-campus Business Gateway, highlighting the emphasis placed on business creation and innovation.

QMU moved up 49 places overall in the 2014 REF, taking it to 80th place in The Times’ rankings for research excellence in the UK. The Framework scored 58% of Queen Margaret’s research as either world-leading or internationally excellent, especially in relation to Speech and Language Sciences, where the University is ranked 2nd in the UK.

In terms of its international appeal, one in five of Queen Margaret’s students now comes from outside the EU, and it is also expanding its overseas programme offer, which already sees courses delivered in Greece, India, Nepal, Saudi Arabia and Singapore.

With 820 years of collective academic excellence to export to the world, Edinburgh enjoys a truly privileged position in the evolving story of academic globalisation and the commercialisation of world-class research and innovation. If he were still around today, Senator Moynihan would no doubt agree – a world-class city indeed.

For further information www.investinedinburgh.com