Current Account

The Economics blog

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

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

By Kristian Niemietz Published 27 April 2012 14:42

A house being built near Bristol. Photograph: Getty Images

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.

Special Offer: Get 12 issues of New Statesman magazine for just £12

More from Kristian Niemietz

View the discussion thread.

31 comments

Wed, 2012-08-01 08:28 — RH47

A somewhat disingenuous analysis - how surprising that the IEA comes up with a report that favours more deregulation!

The partial analysis of the nature of population density and geography is very misleading; the dismissal of right-to-buy as a factor distorts history; the faith in the essential balance of the markets is touching (now there's something that needs courage - or blindness - to sustain!). And a good impartial analyst always remembers that correlation doesn't equal causation.

Planning regulations are not particularly restrictive in terms of house building, and there is a stock of unbuilt-on land with permission. There has been for some time - though you wouldn't know it, because of the free market propagandists - an effective presumption in favour of development (reasons have to be given for refusing a development, not for approval).

The one area that needs more flexibility is the sharp divide between green belt and urban land, but pinning causation simplistically on planning regulation as a diagnosis of a complex problem is naive - particularly so in an age when simple market solutions have failed so catastrophically. It's time to leave behind baby economics.

Wed, 2012-05-23 22:45 — Mrs.Josephine Hyde-Hartley (not verified)

The housing price level is so high because the rents are too damn high, notably in London.
The only way to redress the state of the economy in my view is to split it from top to bottom, down the middle -

This would set workers in any and every firm or so-called firm fully facing and focussed %100 on the job they have to do/person their supposed to be serving. Meanwhile in order to cover the backs of the same workers so to speak, truly holistic and flexible policies and proper practice should in effect remember each workers real position and integrity as wholly autonomous individuals, members of families public, communities.

Let people take early retirement because of ill-health or for whatever other reason, in the capacity as ordinary members of the public making a private choice. Thus saving the cost of many unnecessary and inappropriate burdens normally dumped on the weakest taxpayer in this Freudian black box / barrel of apples containing the work/life balance - it only takes one bad apple to spoil the bunch- as we all know.

Nationalise decent standards of Human resources management across all firms and going concerns and do the same with housing and other benefits transparently - working in partnership with appropriate local authorities. Shareholders and owners would probably be very relieved to let the more difficult nuts be cracked by somebody who knows what they're doing... like a big sister, perhaps.

Get rid of all inappropriate and divisive policies/contracts/ devices/technologies that set citizen against citizen and/or effectively chop up even one's integrity and rights to privacy, dignity and autonomy. Such cultural practices are spoiling the world.

Abolish all taxes and tax credits keep national insurance and universal child benefit but reinvent a tax on windows ie physical or IT devices, tangible.

Tue, 2012-05-22 15:23 — elrob

There is another reason.
I am sure some above have cited demand, but what does demand in economics mean? It does not mean how many houses people need - the vulgar understanding. It means how much money have people got to pay for those things (eg houses) they need or want.
That catapulted higher as lenders relaxed lending criteria and splashed the cash during a boom decade 1998-2007.

If you have £10k as a deposit, and £100k as a loan, you can bid £110k for a house. If you have £10k as a deposit, and £200k as a loan, you can bid £210k for a house. That is what happened in the boom.

Then as the article says, prices fell heavily in the US. But it is not true to say they didn't in the UK. US prices are down approx 35% from 2006 top. In the UK they are down 18% from 2007 top - on less than half volume sales of 2007.

But in the US, supply can rocket as people are allowed to hand in their keys, forfeit the property but not be left with the debt. The bank takes the debt as a hit. In the UK, people refuse to sell homes 'cos they either greedily and fondly remember bubble prices and demand them, or feel trapped by neg equity. We should change rules on lending to be more like Germany (min 20% deposit rule) or at least the US, and prices will ease.

According to the two main indices, prices are either down to January 2005 levels (nationwide), or June 2004 levels (halifax). They and the land registry put avg sale prices at approx £160K against around 194-5K in 2007. In real terms (inflation-adjusted), we are at 2003 price levels. They were bubble prices, so prices remain high, but not to the extent the article claims.

And the likelihood is with volumes below half 2007 levels because... a, people refuse highest offers, and ...b banks refuse to repossess for fear of their balance sheets, that prices will eventually fall further as sellers feel forced, banks become forced. The alternative is a zombie market until inflation sorts the problem out in 4-5 more years.

To get the market moving, govt should (but won't) force banks to repossess where people haven't paid a cent of their mortgage for four months, and sell to highest bidding first-time buyer. It is a false argument from many on the Left that stopping repossessions is fair and progressive: it hurts the most vulnerable - the FTB that cannot afford and has so far refused to join the excessive debt party.

FTBs will become home-owners, prices will fall, B2L merchants will scream. What could be better?

Sun, 2012-05-20 23:02 — Matt Thompson (not verified)

Typical rhetoric from the urbanite intelligentsia. Still obsessed with Blairite politics and in denial of the damage it has done on this country.

Britain is a small country, just look at a map of Europe, especially at night. Our overcrowded country is terrifying. But still, lets just rub the rights noses in diversity, and chuck out easy credit to people who will never be able to pay it back despite the damage it will do to the fabric of our society.

Mon, 2012-05-14 16:11 — Luwila

Nobody seems to have mentioned the role of the private banking system on house prices. According to Positive Money, real house prices have more than doubled since the 50's because the private banks have control of where credit goes. When faced with the decision of where credit will go between investment in SME's or property, banks will virtually always favour property, as they will always reap a reward from this lending behaviour, apart from exceptional circumstances of negative equity. SME's are a riskier choice, and unlikely to be as profitable to the banks.

House prices remained at a reasonably stable equilibrium with real incomes until the mid-seventies. Deregulation of the banking system then started pumping up the property bubble to the size it is today. Who does this property price bubble benefit? It benefits wealthy landlords who can take advantage of the increasing number of people having to rent (which increases pressure on rental prices), and to some extent the banks who are able to profit from the amount of interest accumulated on larger mortgages.

Toby Lloyd from Shelter argues many interesting points and also suggests that planning laws have nothing to do with the size of this bubble. see http://www.youtube.com/watch?v=2n52BxjtBho&feature=player_embedded

The answer? Split the banking sector into high street banking and investment banking, remove the private banking system's ability to create credit out of nothing, and give all of the profits from creating money to the public rather than to bankers. See www.positivemoney.org.uk.

My personal opinion is that there should be no private landlords of domestic dwellings, which would reduce the flow of income from poor to rich, free up masses of money for investment in the productive economy, bring house prices down, bring rental prices down to an affordable and fair level, reduce poverty, eliminate housing benefit and sort out many other negatives that affect society as a whole. How do we do this? Well, it's very unlikely given our present political climate. We'd need to vote in a party who had this as one of its policies. When they were voted in, we could stand back and watch that massive pustule drain.

Mon, 2012-05-14 10:54 — scampy

What other country on the planet forces tax payers to house and pay unwanted uneducated immigrants to the scale that Tony the phony Blair and his labor stooges did in Britain?

Tue, 2012-05-01 15:01 — KN (not verified)

Steve Gould:
Artificially easy credit was to blame for the price peak, but not for the continuing high price plateau. Yes, interest rates are still too low, but demand has crashed nevertheless and house prices are still at a historical record high. That is the effect of planning, as much as you try to discuss it away.
As an Austrian-leaning economist, I would never defend a policy of easy credit. But easy credit, as bad as it is on many other grounds, is not responsible for the current level of housing costs. The precise effect of easy credit depend on the planning regime. In a liberal planning regime, it causes a construction boom with lots of empty properties later on. Bad enough, but at least, that means low property prices later on. In a restrictive planning regime, it just causes a cost escalation with no increase in building activities.

Tue, 2012-05-01 08:03 — Danny A (not verified)

I fear the author is confusing cause and effect. Sure planning restrictions have an impact on housing costs, however restricted planning started to become a political vote winner in the seventies when the proportion of owner-occupiers exceeded 50% and since then as the new homeowners have got older and more likely to vote the pressure to increase value through scarcity has increased. As others have pointed out the key driver of house prices is the availability of credit. Without sensible restrictions credit/debt expansion will always tend to outrun the productive economy. This gives the bankers in the financial sector carte-blanche to rake in interest (rents while they hold the property deeds) on a over-heated property market. Essentially I think the baby-boomer generation has been duped into thinking that everyone was getting richer with inflated house prices. It is a great pity that working for a living has gone out of fashion - far easier to seek rents. However it should be pretty clear now that it is a zero sum game, the big losers are the young without property and the big gainers are the bankers and the financial sector built on them.

The only real solution is to switch the burden of taxation away from work and onto land (rents). Productive work needs to be encouraged and rent-seeking needs to be extinguished.

Mon, 2012-04-30 23:29 — Steve Gould (not verified)

Kristian,

No room to comment on artificially low interest rates and a Chancellor who was desperate for the economy to be inflated on debt and equity withdrawal from property to make people feel richer? He even helpfully made huge cuts in CGT.

In the summer of 2005, after the doubling of house prices in barely half a decade, and after some periods of 25% house price inflation, prices started to stabilise. "We'll have none of that! Gordon will be furious!" harrumphed the MPC, and down went interest rates another 0.25%. Guess what happened next? Yup, prices started going up again. I don't recall big changes in planning laws at that time.

But no, it was planning rules which were to blame!

Why no crash? Well, because both Labour and Tory governments - unlike many others - have been desperate to sacrifice savers and the have-nots in order to protect home-owners and the greedy, indebted, self-entitled generation.

I sense petty politics behind this article rather than intelligent analysis. Do you really expect us to believe your claims have nothing to do with recent Tory disquiet over the new planning policy? Because you certainly have ignored all the relevant data.

Mon, 2012-04-30 15:44 — KN (not verified)

On Privet's points:

"only 10% of land is built on, but we have a densely populated island"
-Bit of a contradiction, isn't it?

It's irrelevant whether population density is a bit higher or a bit lower than in this country or that country. The point remains that there is more than enough land left to build on, and without sacrificing forests and meadows.

And what's wrong with importing food? We import a lot of things, because autarky isn't very smart. How about division of labour, comparative advantage and that kind of thing?

By what measure should 30-40m be the 'optimum population'? How do you know? I guess what you mean is that given the present housing stock, the population is too large. But I think in that case, increasing the housing stock is a slightly more obvious and commonsensical response than trying to decrease the population (HOW, by the way?) When kids grow out of their clothes, which response makes more sense: Buy them bigger sizes, or feed them hormones to suppress the growth process?

Sun, 2012-05-20 22:44 — Matt Thompson (not verified)

If a brain tumour was 10% of the total brain mass you would be very worried indeed.

Your conclusion is fantasy. Britain could not even feed itself with 45m people. Your underlying issue is that you want immigration at its current rate to continue for left wing reasons.

Mon, 2012-04-30 13:49 — James555 (not verified)

How convenient for the author to not mention BTL at all.

Don't you think over 4 million properties taken out of the market in under ten years has had an effect on prices? And that's without factoring in the investment distortion element - i.e. investors willing to pay more and more (and over the odds) for an asset because they believed the hype that prices would never go down.

There is a direct corrolation between the rise in prices and the rise in BTL loans. It also explains why rents have not gone up anywhere near as much as prices. I can find no correlation between the rise in prices and planning law changes.

Mon, 2012-04-30 23:17 — Steve Gould (not verified)

EXACTLY. We have an under-supply of houses to buy because millions have been snatched by the middle- and working-class leeches who want to steal from their children to fund comfortable retirements.

Time to crash the market. This generation caused this crisis so it can suffer its consequences instead of pass them on to the next generation. As one poster said on another site:

"You can have your legs broken now in revenge for your misdeed, or you can have the legs of all your children broken later. Your preference tells me everything I need to know about you."

Great quote.

Incidentally, most MPs have BTL investments. No wonder the government and parliament - as well as the BoE and the FSA - are desperate to keep the house price bubble well and truly inflated.

Thu, 2012-05-03 11:18 — Bill23 (not verified)

This country only has two assets; housing and banking. If we were brave enough to shoot the right people it could be made to work.
Check out landofthefree.co.uk, and ask yourself why planning is not in the hands of the Royal Institute of Town Planning? The planning inspectorate is a joke and goes along with anything the council says, without this the scams and backhanders would stop.

Sun, 2012-04-29 16:35 — privet (not verified)

Some interesting points, but you dont take in the whole picture which is required to make an informed decision.
Yes only 10% of land is built on, but we have a densely populated island in comparison to the rest of the world populations, well above average in Europe & the rst of the world.
Also we are a net importer of food, you need a certain amount of acres (meters squared) to feed people and with 60 Million people we are exceeding our ability to feed ourselves.
If we are buying food from poorer countries as we cant feed our own population that has a knock effect on poorer supply countries who may take our grain money & leave their own population starving.

We have planning to preserve a balance, if we want house prices to decrease which I do, why dont we try to reduce the population and in turn demand instead?

The optimum for our country is 30-40 million, we have simply got too many

Sun, 2012-04-29 14:35 — KN (not verified)

When trying to establish whether or not any particular factor has a major impact on house prices, it is always worth asking a simple question beforehand: Could one say the same thing about dozens of other countries, or is this something that is unique to, or at least especially pronounced, in the UK? Because remember, in its magnitude, the British house price explosion is an extreme outlier.
If we don't do this, there is a danger that we will end up saying 'X drives up housing costs' when what we really mean is 'I don't like X, and want to ascribe negative consequences to it'. That is the problem with points made by Cheshire, Soldier Schweik, Commenter and Rodney Dawkins. The UK is not the only place in the world which experiences immigration, which does not impose rent caps, or where credit was too loose. But elsewhere, these things have not caused a comparable explosion of housing costs, or at least not a lasting one. Figures and sources are in the paper, I don't want to bore you here.
Regarding Herbert's point, hoarding of land with planning permission only makes sense when the developer has a very good reason to expect that the price of the land will climb even further, and that only happens when supply is largely fixed. Thus, hoarding is itself a symptom of overrestrictive planning. I've written about this here: http://www.iea.org.uk/blog/abundance-of-land-shortage-of-housing-a-rejoi...

Sun, 2012-04-29 13:23 — commenter (not verified)

Along with bill23, I do think that there is rampant corruption in the planning system, which is vulnerable to backhanders being delivered through old-style English cliques. The landlord of a house that I used to rent went through considerable trouble over a tree that needed to be cut down, but nearby in the middle of a field in the green belt someone who was an old member of the local establishment somehow got permission to put up a garage. (Neighbours checked the restrictions and it seemed to break them, but noone wanted to start a local argument in a small community.)

Sun, 2012-04-29 11:00 — Bill23 (not verified)

Local councillors and planners will manipulate the system, they have been getting away with this for years and won't stop unless criminal charges are brought against them. The way the thing works is to redraw the development boundary, the council will then allow building if you know them.
To give a few - of many - examples from Lyme Regis, W******** D*** was outside the boundary and built on marshy land, but got permission and the approval of the planning inspectorate, and was only stopped by locals who were waiting for a disaster. Another house in R**** Rd was sold to developers who could be sure of getting permission, despite it being in a green corridor. When the buyer knows they will get permission, they can buy it at any price, and in this case six houses stand where previously there was one (the green corridor was used as a reason to stop others building by the way).
The councillor responsible was found guilty by the Standards Board on another matter, but didn't let that stop him as used to be a police constable. He now has has a property portfolio which includes foreign property. A very nice present I think!
The property held by councillors and our unelected representatives in council offices should be available on line. Then the patterns would become very clear even if individual corruption could not be proved.

Tue, 2012-05-15 13:26 — Bill23 (not verified)

And in the Express over the weekend in an article about Tom Conti and Thierry Henry's planning dispute, sombody posted the statement saying "In the UK they are all at it. The chief constable of Dorset is part of planning corruption in Lyme Regis!".

Sun, 2012-04-29 07:48 — Herbert (not verified)

How much and with planning permission already granted to build housing do developers currently hold? Permission already exists for 330,000 homes on brownfield sites able to accommodate three million people. I wonder why that hasn't been mentioned?

Sat, 2012-04-28 17:22 — rodney dawkins (not verified)

The most plausible reason for house price inflation is FSA turning its back on irresponsible lenders, like Northern Rock offering 9x wages. Or 120% mortgages. As we have seen with university tuition fees - if you give out cheap credit to all and sundry, academic or not to study at university, the price rises. The same would happen in the car market - if you made car finance available, prices would double. It is such a shame that both parties seem so inept at state-craft. They are motivated by power, and once they get there, they start yanking levers, and creating artificial divisions in society. The 'progressives' are by far the most guilty.

Sat, 2012-04-28 15:07 — Laura Fox

Thank you for this excellent article.

And your report at the IEA is essential reading for anyone interested in rescuing the quality of life for most of the UK population. ( http://www.iea.org.uk/publications/research/abundance-of-land-shortage-o... )

Well done.

Sat, 2012-04-28 11:17 — Russell Duke (not verified)

I'm afraid Kristian that even with your superior brain washed education than me you are wrong. So are your readers. Its nothing to do with planning policies or the like. Your peddling false information as have your tutors, successive government ministers, land owners, building companies, home owners, pension funds, land lords, buy to let gangsters which all come under one vested umbrella - FREE HOLDERS!!! Are you one yourself? Are your readers too? Is Mr Cameron? And his ministers? Prince Charles? Duke Of Westminster? You have to go back in history and read the facts, go back to what Oliver Cromwell did with the FREEHOLD LAND. He gave to the Lords, oh that bunch again! Since then Free Hold Land has fragmented in to the haves and have nots, the winners and losers. The winners suck the life out of the loosers! How? Through taxation!!
There is only one solution Mr Niemietz. Tax Free Hold Land, not wagers and savings. Teach that in your universities.

Sat, 2012-04-28 10:53 — commenter (not verified)

Niemetz writes of cost drivers solely in terms of property. I guess a large part of the price expansion is driven by the availability of credit and cultural attitudes towards credit (in turn and in part driven by the availability of rental housing).

Relevant section from article.
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,

Sat, 2012-04-28 10:41 — Soldier Schweik (not verified)

Nodbod is entirely correct and Cheshyre another sadly misguided racist who would be better spending his time on the DT blogs where he would find many soul mates. Immigration plays barely any part in this problem and greed a much bigger one. The fact that those who have houses are able to dispossess the next generation is nothing short of criminal and there will be a huge price to pay for this short-sighted beggar-thy-children attitude. Rent Caps are what is needed and a Fair Rent Officer to control this generation's Rachmann's who are being ably bolstered by politicians of ALL parties who, unfortunately for the young, also have their fat noses in the rough. 50% of MPs have Buy To Let properties and this is why we will not see a rent cap or a meaningful change to the lax laws on second home ownership and property tax any time soon. They would rather engage in the cleansing of the poor from their London playground than see justice for all in the shape of a decent home, which is. incidentally, a basic human need. You exploit human needs at your peril.

Mon, 2012-04-30 13:55 — James555 (not verified)

Rent controls are nowehere near enough. You also need stamp duty charged on sales not purchases, massive tax penalties (at least 25%) on residential properties sold to companies, and the BTL investors to register with HMRC so it no longer continues to be the corrupt, tax evading game it is.

Mon, 2012-04-30 23:32 — Steve Gould (not verified)

You also need German-style rights for tenants, instead of the current system where most rules and laws protect the landlord who can throw families on the street for no reason with only a few weeks' notice.

Despicable country.

Sat, 2012-04-28 13:24 — Cheshyre (not verified)

Number of entitled indigenous residents - 50m
Number of unwelcome, unwanted, race replacing immigrants and their descendants forced on us by a hostile elite - 5m officially, likely nearer 6m.

If we sent the 5m or 6m unwelcome, unwanted, race replacing immigrants and their descendants forced on us by a hostile elite where they belong, that would immediately solve the housing shortage wouldn't it?

Not to mention the innumerable other benefits.

Fri, 2012-04-27 22:59 — Cheshyre (not verified)

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

Right. Nothing to do with millions of unwelcome, unwanted, race replacing immigrants forced on us by a hostile elite then?

Fri, 2012-04-27 17:59 — Nodbod (not verified)

Where I live in the south of England, a recent survey showed that the "average" house price is 9.5 times the "average" salary in the area. Your argument is well reasoned but there are just too many vested interests. Many people's wealth is all tied up in their property so they are against any meaningful building program; it would diminish their wealth. However there is an entire generation growing up that will not be able to have their own property until their parents die!
One in five households existing on HB is obscene. it should be made clear to all landlords that this will be phased out. I do not mean this as a punishment to those on lower earnings but as an incentive to lower rents. If it was phased out then rents would have to be reduced or the properties would stand empty. Better yet would be direct government action but the current bunch are highly unlikely to do anything against "the market" (except prop it up for owners of property) and Labour lacks the courage to do so. HB is a punishment to every tax payer!
We also need a structured, well-ordered and committed approach to housebuilding. Again, if there were enough properties then prices would fall and become a realistic goal for all. Unfortunately, a private sector that was used to massive profits in the good years is unwilling and governments never follow through on their promises.
The system does not need reform, it just needs a kick, in the right place, to get it all moving.