Wednesday, March 14, 2018

Matt Ridley: Britain's housing crisis is caused by the wrong kind of regulation


Sajid Javid, the Housing (etc) secretary, is right – and brave -- to go on the warpath about Britain’s housing crisis in his new national planning framework, to be launched today. Britain’s housing costs are absurdly high by international standards: eight times average earnings in England, 15 in London. A mortgage deposit that took a few years to earn in the early 1990s can now take somebody decades to earn. Average rents in the UK are almost 50% higher than average rents in Germany, France and crowded Holland.

Britain really is an outlier in this respect. Knightsbridge has overtaken Monaco in rental levels. Wealthy, crowded Switzerland has falling house prices and lower rents than Britain. Over recent decades, most things people buy have become more affordable – food, clothing, communication – and the cost of building a house has come down too. Yet the price you pay for it in Britain, either as a buyer or a tenant, has gone up and up.

Speculation exacerbates the problem. British people, and foreign investors here, borrow money to invest in housing on the generally valid assumption that it will rise in value. This distorts our economy, diverting funds from more productive investments and exacerbating labour shortages in expensive places like London and Cambridge.

The fastest take-off in house prices relative to earnings has been in the last two decades, when cheap money has further fuelled the house-price spiral, rewarding the haves at the expense of the have-nots. The high cost of housing is by far the biggest contributor to inequality. The reason some people have to turn to food banks is not because of high food prices, but because of high housing costs. It is a rich irony that the Attlee government’s town and country planning act of 1947 is probably as responsible as anything for the continuing prosperity of most dukes.

But seeking out profiteers misses the point. At root of the problem is supply and demand. Britain restricts the supply of housing through its planning system far more tightly than other countries. That keeps prices going up, enabling developers, landlords and speculative buyers to make gains. We are building not much more than half as many houses each year as France, despite a faster population growth rate, and a quarter as many as Japan.

So why is British planning so restrictive? Until 1947 Britain regulated house building in most cities the same way other countries did: by telling people what they could build, rather than whether they could build. As Nicholas Boys Smith, director of Create Streets told a recent conference at the Legatum Institute, in the centuries following the Great Fire of 1666, “There was a series of pieces of legislation that set down very tight parameters: ratio of street width to street height, the fire treatment of windows etc. That is how most of Europe still manages planning. They have not taken away your right to build a building.”

Britain switched to deregulating what you could build, but nationalized whether you could build, by adopting a system of government planning, in which permission to build was determined by officials responding to their own estimate of “need”. This brought great uncertainty to the system, because planning permission now depended on the whims of planners, the actions of rivals and the representations of objectors. Today local plans are often years out of date if they exist at all, and are vast, unwieldy documents, opaque to ordinary citizens and subject to endless legal challenge and revision.

This makes Britain both far more subject to centralized command and control and far more dominated by big corporations than other countries. It is a good example of how socialism and crony capitalism go hand in hand. Barriers to entry erected by planning play into the hands of large companies and make it hard for small, innovative competitors to take them on. In turn, this leads developers to produce unimaginative, repetitive designs to get the best return on their huge investment in land and permission.

Getting planning permission to build houses in Britain requires you to spend big sums on consultants, lawyers, lobbyists and public relations experts, as you wear down the councils’ planning teams and their ever growing lists of questions over several years. Not that the two sides to such debates are really antagonists: it is more like a symbiosis, a dance in which both sides benefit, because the fees to be earned by everybody from ecologists to economists are rich. And that is because at the end of the process the reward can be huge: a 100-fold uplift or more in the value of a field that gets turned into housing.

As a property owner, I have experience of this system and, I freely admit, a vested interest in it. I should be arguing for it, rather than against. However frustrating planning authorities can be, the rewards they bring to property owners can be large, either through upward pressure on prices and rents by their restrictions on permissions, or through uplifts in the value of land zoned for development.

Our mostly centralised taxes make things worse. In Switzerland, cantons compete for the local taxes that residential property owners pay, encouraging them to agree promptly to building bids, whereas here development brings headaches for local councils in providing infrastructure and services, only partly redressed with “section 106” agreements that make developers pay for schools and roads.

The system also creates opportunities for nimbyism on a greater scale than elsewhere. Opposing new development because it blocks your view, increases congestion on the roads and crowds the doctor’s surgery and local school, is rational everywhere. But it is much easier to organize a protest when the decisions are taken by council officials and the permissions are for big projects, rather than where many small decisions to build are taken by many dispersed owners and builders.

If Sajid Javid is to succeed in revolutionizing Britain’s housing market, he must tackle the underlying causes. Rent control, help-to-buy, affordable housing mandates and bearing down on developers’ land banks mostly address the symptoms. Forcing councils to set higher targets for house building is a start, but if he were to succeed in unleashing a building boom across the country sufficient to bring down house prices he would create a debt crisis among those with negative equity. So it will not be easy to cure Britain’s addiction to property, but he must try.

Matt Ridley, a member of the British House of Lords, is an acclaimed author who blogs at www.rationaloptimist.com

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