Dis02 Urban Land Market and Policy Failures[1]

8/14/2019 Dis02 Urban Land Market and Policy Failures[1]

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Urban Land Market and Policy FailuresPaul Cheshire

Emeritus Professor of Economic Geography, LondonSchool of Economics, oughton St, London

!C"# "#Ep$cheshire%lse$ac$uk

While the Government Office for Science commissioned this paper, the viewsare those of the author. They do not represent the views of the Governmentor of Foresight and do not constitute Government policy

1
mailto:[email protected]:[email protected]


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E&ecuti'e summary

This paper surveys the sources of market failure in urban land markets, and

the evidence of their uantitative significance. !t shows that land use planninggenerates benefits, but at significant cost. "olicies of containment anddensification limit the supply of land #and also space$, not %ust for housing butfor all non&agricultural land use in 'ritain. Our system of designated land usecategories and development control imposes considerable costs. Where a fullnet welfare evaluation has been possible ( for a tightly constrained urbanarea in South )ast )ngland ( it shows that the increased costs of space forhousing substantially e*ceed the value of planning amenities generated,imposing a net welfare loss euivalent to a ta* of +.- on incomes.)liminating that welfare loss by substantially rela*ing the constraint on landsupply policy was estimated to increase the urban land take by /-. Giventhat the total area of greenbelt land alone is 0.1 times the total urbanisedarea, even such a strong rela*ation of containment policy as this would leavevery substantial areas of greenbelt, and even if all additional urban land wastaken from e*isting greenbelt areas.

This evidence is now uite old. 'ut given what has happened to prices forhousing land relative to agricultural land over the intervening period, and theevidence that the valuation of greenbelt amenities has fallen rather than risen,it is almost certain that the net welfare cost today would e*ceed the earliervalue. There is also evidence that the planning system is imposing higher

costs on productive uses of land. The costs of regulation imposed on officespace in 'ritain substantially e*ceed those in 2ontinental )urope.

There seem to be three main policy changes that would preserve the role ofregulation in offsetting for problems of market failure while greatly relieving thecosts of policy&imposed supply restrictions. The first would be to impose a ta*#perhaps a modified 2ommunity !nfrastructure 3evy$ on new development sothat all the costs imposed on the community ( more congested infrastructure,public services etc. ( are covered. The second would be to change the fiscalincentives facing local planning authorities so that there is a net revenuebenefit to local communities if they allow development, instead of the present

situation in which a local community is in effect fined if development occurs.The third would be to introduce price information into land use planningdecisions. This could be done by using information on land pricediscontinuities. Where these e*ceeded the environmental or amenity value ofland in its e*isting designated use, there should be a presumption thatdevelopment should be permitted.

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( )'er'ie*+ sources of market failure in urban landmarkets

3eft unregulated, land markets in general, and urban land markets inparticular, suffer from endemic problems of 4market failure5. These problemsarise in part because of the locational specificity of any legally defined plot ofland, and the fact that the value that can be generated from that land and thewelfare or en%oyment associated with its occupation are strongly influenced bythe uses and characteristics of neighbouring plots of land. There are importantand systematic e*ternalities associated with land use, especially in the moredensely developed conte*t of cities. 6nderstanding the sources of suchmarket failures is not so hard. 'ut devising regulations and interventions tooffset their impact on market outcomes may sometimes be difficult.

7part from the unpriced influence of activities on neighbouring plots, there is afurther type of e*ternality that is more generalised and perhaps less easy tograsp. !n an e*isting city with a fi*ed infrastructure, the would&be purchaser ofan additional property would add to the costs of congestion e*perienced by alle*isting residents and agents in the city. 'ut this will be an e*ternal costwhich, in the absence of intervention, would not be reflected in the costs ofnew construction or the prices of additional homes. 7gainst this is ourincreasing understanding of the importance of agglomeration economies.8ecent estimates #8ice et al. 9//:, Graham 9//, Graham and ;im 9//


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" Separation of incompatible land uses

There are two main methods of valuing amenities empirically, by 4hedonic5models, and by stated preference analysis. The use of hedonic9models is in

principle preferable since it is based on clear theoretical foundations andobserves the actual behaviour of people. 7ny house consists of a comple*bundle of attributes, and because each parcel of land has a uniue location,its occupation determines access to a wide range of amenities,neighbourhood characteristics and local public goods. This implies that thevalue of these characteristics is reflected #or capitalised$ in house prices. Theprice of any house is in a sense the aggregate price of all its attributes,including the access it gives to local amenities and public goods. These non&structural attributes of houses typically account for the great ma%ority of thetotal value of a house. 7 fundamental locational attribute of houses is theaccess they give to %obs and other income&earning opportunities. !t is thisattribute, in isolation from all others, that drives the classical theory of urbanland rents and residential location as elaborated by 7lonso #0:/$, Buth#0:$, Bills #09$ or )vans #0+$.

7lthough as an empirical techniue, the estimation of hedonic models goesway back to the 09/s #see Sheppard 0$, it was 8osen #0A$ whoprovided the theoretical framework and showed how the valuation of suchgoods may be estimated in hedonic models. 7 si=eable and ever growingliterature has followed his contribution.

Thurston and Ce=er #0A$ investigated the drivers of suburbanisation, in themost disaggregated study to that date, and tried to unpick the old pu==leDdoes suburbanisation of %obs drive decentralisation of peopleE Or is it thesuburbanisation of people that pulls %obs out of citiesE They were surprised tofind that growth in industrial employment within the central city was associatedwith more ( not less ( population suburbanisation in subseuent periods."erhaps at the back of their minds was a conventional wisdom whichassumed that %obs ( especially blue collar, industrial %obs ( were a community4good5 and would attract population. !n the wider urban region that might bethe case> but not locally. 3iving in close pro*imity to industry generatesnegative e*ternalities, which the land use planning system attempts to reduce

by separating residential from other land uses.

When Thurston and Ce=er published, hedonic studies of housing marketswere already showing that more industry in a neighbourhood was somethingpeople buying houses paid a premium to avoid. ouse prices inneighbourhoods in which less land was used for industry were ( all otherthings eual ( more e*pensive. 2heshire and Sheppard #01$ reported thatin 0


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land use in the neighbourhood was worth 99A ( or /.9+:- of the total houseprice. The sample mean house price was 10,/:: and A,/ in 0


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around each house that was used for either 4accessible5 or 4inaccessible5 openspace #as well as the share of land that was not in industrial use, asdiscussed above$. 7lthough confining the valuation to the supply of openspace within the kilometre suare containing each house in the sample mightseem restrictive, testing for alternative distances and areas suggested no

significant effects beyond 0 kilometre.

!n these studies 4accessible5 open space meant transparently accessible tothe public ( parks, recreation grounds, churchyards or common land. Thiswas mainly internal to the urban area. 4!naccessible5 open space was land notbuilt on and not accessible to the public e*cept in a restricted way by meansof 4rights of way5. This was mainly greenbelt land used for farming at the urbanfringe, but also included private woodland. Table 0, which employs the sameunits of measurement as used above to uantify the value of less industrialland, summarises the results for both 0


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2heshire and Sheppard #9//9$ showed that increasing the shares of bothtypes of open space yielded significant gross benefits e*pressed aseuivalent variations in incomes. The benefits associated with accessibleopen space considerably e*ceeded those from inaccessible open space, but

accessible open space was valued less at the margin in the town where landuse planning was more restrictive. !n a similar hedonic analysis of houseprices in three Hutch cities, 8ouwendal and Ian der Straaten #9//


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these methodological concerns remain #cf. 7rrow et al. 0+, Bc2onnell andWalls 9//1$. @evertheless, it may yield valuable insights that complementfindings relying on revealed preferences, and sometimes there is simply noalternative method available.

7s in their survey of hedonic studies, the Bc2onnell and Walls #9//1$ surveyof stated preference research finds substantial heterogeneity in the estimatedstated value of open space, and again its type and location appear to matter alot. @evertheless, for agricultural land, the stated value is in the same order ofmagnitude as in the !rwin #9//9$ study of e*&urban house prices discussedabove, suggesting that fears about missing wider benefits of agricultural landusing hedonic methods may be misplaced. 7lso consistently with !rwin5sresults, stated preference studies suggest that negative e*ternalities ofresidential development are an important motivation for the preservation ofopen space.

On the basis of a survey of stated preference research in the 6;, 'arker#9//+$ also reported that the value of open space depends strongly on itslocation and use #see Table 9, copied from 'arker 9//+, page +:$. Forinstance, publicly accessible open space in the urban core was estimated tobe valued much more than greenbelt land, and the landscape value ofintensively farmed land is particularly low. owever, the values in Table 9 arederived from various sources using a variety of methodologies and are notcomparable to those discussed above.

-able "+ 0enefits from different land use in the U1

SourceD 'arker #9//+$

These values are, nevertheless, broadly consistent with those in 2heshire andSheppard #01$. Open space at the urban fringe, not accessible to thepublic, has a relatively low but still significant value. )*tensively farmed land (with higher amenity value and more likely to have public access ( is estimatedto be worth considerably more than 4fringe greenbelt5, much of which has nosignificant public access and is intensively farmed. The values reported in'arker are significantly higher than in most 6S studies that are surveyed byBc2onnell and Walls. "erhaps this is a parallel finding to that of 7ndersonand West #9//:$D open space is more valuable in more densely developedconte*ts and densities are greater in the 6; than in the 6S7. !n the 6; there

are also some access rights even to agricultural land by means of publicfootpaths or other 4rights of way5. So the amenity value of agricultural land in

3and type "resent benefit#per hectare per year, in 9//0K$

6rban core public space #city park$ 1A,///6rban fringe greenbelt


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the 6; ( even in )urope generally ( may be higher than in the 6S7 or othercountries which have no rights of public access to private land.

+.9 6rban design and densificationWhile this discussion of the benefits of land use regulation has so far focusedon the separation of incompatible land uses and the provision of open space,planning is about much more. !t is regarded as providing benefits to citi=ensthat markets would not offer. 'enefits which have received attention in so&called 45 initiatives in the 6S7, and their variants in )urope, are densedevelopment #4densification5$, mi*ing land uses, particularly to provide %obsnear to homes, access by public transit and the provision of infrastructure forpedestrians and bicycles. The valuation of such planning&induced features ofneighbourhoods may be estimated using hedonic techniues. This isobviously appropriate because any benefits of urban design in newdevelopments seem likely to be fully capitalised. 7n interesting e*ample isSong and ;naap #9//+, 9//A$, whose work was discussed above in theconte*t of valuing the separation of incompatible land uses. They find somesignificant effects for several new urbanism design features in a hedonicmodel of the "ortland, 6S7, housing market, but not all were valuedpositively.

They did find that better connectivity of local street networks, pedestrianaccessibility to commercial uses and pro*imity to light rail stations raisedhouse values. On the other hand they found that higher densities ofneighbourhoods and mi*ed land uses within a neighbourhood have a negative

impact on house prices. This is the complementary finding to that whichshows 4space5, both within houses and e*ternal to them in gardens, is a highlyvalued attribute of houses. There is also evidence that there is a strongincome elasticity of demand for private space #2heshire and Sheppard 0


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and preferences for different si=ed cities are likely to vary betweenhouseholds, there is no single 4optimum5 si=e for cities. 'ut for any given city,given its economic activities and the preferences of households living within it,there is likely to be a particular optimum si=e.

!n Figure 0, adapted from 2ombes et al. #9//1$, city si=e is measured as N,the number of workers within it. !n both the upper and lower halves of thefigure wages #w$ and costs #H( housing costs$ rise moving away from theorigin. 'oth wages ( because of agglomeration economies ( and housingcosts rise with city si=e. The reason for housing costs rising with si=e isconsistent with basic urban economic theory and competition for space andaccessibility to %obs.

Figure (a+ !ages and costs of li'ing *ith city si3e

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Figure (b+ 4)ptimal5 city si3e

!n Figure 0b we can seethe net real wage rising and then falling with city si=e,as labour productivity rises but rising 4gross5 wages are eventually offset byrising costs. The labour supply curve ( in the sense of the number of workerswanting to live in or move to the city ( also rises with city si=e. The point,however, is that the city is attractive to individual workers to the point wherethe labour supply curve crosses the net wage curve at a si=e of NL ( whichwill be the euilibrium si=e for the city. 'ut the 4social5 optimum from the pointof view of e*isting residents would be at NB,where the net wage isma*imised. The discrepancy between optimal and euilibrium si=e arisesbecause new migrants to the city are motivated by whether their net wagee*ceeds the supply price of their labour, but their arrival triggers a cost to alle*isting residents by driving up house prices. 7lthough the increase in costs isrepresented here only in the form of rising space costs, there will in fact beincreases in congestion and perhaps infrastructure costs too.

The above analysis suggests a case for planning to limit the si=e of citiesbelow that to which they would grow in an unregulated world. 'ut this marketfailure does not mean that current planning policy, with its goal of urbancontainment designed to limit the physical spread of cities, increase meandensities and limit their growth, has got it right. The evidence suggests almost

conclusively that it has got it wrong from a welfare and economic point ofview, and that policy is unduly constraining both the physical spread and thesi=e of 'ritish cities.

There are at least two issues. The first is how policy might transfer the cost oftheir decision to live in the city to marginal urban inhabitants. The second isthe welfare and price effects of current policies of urban containment andrestrictions on space availability. 3et us consider the first of these issues.

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2harges based on 'etterment, where they reuire the estimation of howmuch the community has increased land values by their action, have a longhistory of failure. istorically, attempts to impose such charges seem to haveled to a short to medium&run reduction in land supply because of e*pectationsof repeal. !mpact Fees create an incentive ( or at least remove an important

disincentive ( to local communities to allow development.

The level of !mpact Fees should be set in relation to national formulaecalculated to reflect estimates of actual community development costs indifferent locations, and the revenue from !mpact Fees should be hypothecatedto the purposes which gave rise to them, so infrastructure is constructedwhere it is most needed.

The level of !mpact Fees would vary from place to place according mainly tothe e*tent to which e*isting infrastructure was congested, and would becalculated on the basis of formulae designed to reflect the costs of new

development. )stimating the increase in land price uniuely associated withgranting planning permission is fraught with difficulty and has to be done on acase by case basis. ere the term infrastructure is shorthand for all costsimposed on the community. These might include open space provision,schools and other educational establishments, medical facilities, utilities suchas water supply, libraries and transport capital spending among others.

With respect to natural %ustice, one of the problems of 4'etterment5 is that mostof the uplift in value associated with granting planning permission at presentcomes not from the e*penditure of effort and resources by the community, butfrom the constraint on supply imposed by e*isting planning regimes. !fdevelopment imposes e*tra costs on the community it is hard to argue thatthese should not be paid for by the developer and ultimately by the landowner.Boreover, there is the danger that any ta* #including Section 0/: 7greements$based on value uplift could create a perverse incentive for planning authoritiesto keep land even scarcer to increase net revenues from permissions. With!mpact Fees, revenues only accrue if development goes ahead, and theirvalue depends not on land values #which can be kept high by keeping land inshort supply$ but on the costs of the necessary complementary infrastructure.!t has been shown in the 6S7 that, where they are applied, !mpact Feesreduce planning restrictiveness #'urge and !hlanfeldt 9//:$.

!mpact Fees would reduce the incentive for local communities to be @!B'Cistand would help finance and focus new infrastructure investment where therewas most congestion. !f !mpact Fees were calculated on the basis of formulaedesigned to reflect local and regional infrastructure congestion, and therevenues were used to relieve that congestion, a ma%or source of the negativeincentive for planning authorities to grant planning permissions, particularly forcommercial development, would be removed. 7t the moment, a negativeincentive arises because local governments and planning authorities have tospend money to service any development but get no revenues from them #see2heshire and ilber 9//


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infrastructure congestion as a result of development but instead would getbetter, more modern, facilities.

The 2ommunity !nfrastructure 3evy #2!3$ is a form of !mpact Fee, although itsbasis of calculation should be revisited so that the charge reflects all aspects

of 4congestion5 imposed by new development. !f a more active 2!3 or !mpactFee were introduced, it would seem essential not to reform Section 0/:7greements but to eliminate them. One further advantage of !mpact Fees isthat they would apply to all development on a common and transparent scale.Section 0/:s are highly variable and opaue and, because of transactioncosts, apply only to larger developments. One parado* is that our planningsystem is generating smaller and smaller developments because ofdensification and smaller site si=es, so presumably a falling proportion ofdevelopments are actually incurring Section 0/: 7greements.

9 Sustainability and carbon emissions

!t is often claimed that land use planning is a weapon with which to combatmarket failure leading to global warming. The idea of 4sustainability5 is relatedto this, as is the policy of 4densification5.

While patterns of urban development may influence energy use in the verylong run, it is important to note thatD 'ecause new construction is such a small proportion of the stock of

buildings, the regulation of new construction can only significantly

influence energy use in the very long run. To get results over a periodcorresponding to that needed effectively to meet emission targets reuiresaction to reduce energy use in e*isting buildings>

"olicies of containment, town centre first and greenbelts, may in factincrease energy use because they separate residents #who aredecentralising$ from retail outlets, and as commuters move out beyond thegreenbelt commuting %ourneys are likely to lengthen>

The relationship between density and energy use is at best weak. Theearly reported findings of @ewman and ;enworthy #0

Bost importantly, if there is a market failure because the market for energydoes not reflect the e*ternal cost of global warming, the solution is not totackle the failure by regulating land markets but by regulating or ta*ingenergy markets appropriately.

While as a complementary policy land use regulations may attempt toencourage more energy&efficient buildings and patterns of development, theunderlying market failure is not in the land market so e*cess energyconsumption provides no grounds for significant planning policies. Boreover,since newly constructed buildings tend to be more energy efficient than olderones, it is important to frame any regulation in ways which increase the rate ofbuilding rather than restraining it, since this will lead to the more rapidreplacement of older, less energy efficient buildings. !ndeed, if regulations

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governing energy use in buildings are too ambitious and so impose unduecosts on developers, this could in principle slow the rate of improvement inenergy use of the total stock of buildings by reducing the rate of new building.

: Correcting market failure contrasted *ithrestricting supply

!t is possible to have a powerful system of land use regulation or planningwithout restricting the overall supply of space or buildings. For e*ample, therecould be strong coordination of development with infrastructure and adirection of new development to planned areas without restricting supply.

!n reality, almost any system of land use planning is likely to have somerestricting effect on supply. The uestion in practice is to what e*tent supply is

restricted and whether this restriction causes significant price distortions orwelfare effects. For many years the Hutch system of land use planning #see@eedham 09$ appeared to provide strong direction for development and toprevent urbanisation in large areas #the Groene art, or Green eart,separating the four cities of the 8andstad, which acted very much as a largeurban park with much public access$ without restricting the overall supply ofland for urban development. This appeared to reflect the historicaldevelopment of planning in the @etherlands out of the legal reuirements onlocal authorities to drain land and supply sufficient land for communitypurposes. This gave not only a cultural tradition of providing land fordevelopment but a significant fiscal incentive to local communities, which

profited from selling prepared land on to commercial developers. !n recentyears, however, political pressure for urban containment has increased in the@etherlands.

There may be reasons associated with market failure, as discussed in SectionA above, for regulation to limit the e*tent of urban growth if the negativee*ternalities of additional residents more than offset the gain in agglomerationeconomies that such residents might generate. 7s we shall see below,however, the evidence from the 6; suggests strongly that policy in 'ritainrestricts urban growth to an e*tent which leads to substantial welfare losses,higher costs for economic agents and serious price distortions in landmarketsD in other words a situation of policy failure rather than one of marketfailure.

!n offsetting for any of the land market failures identified above, planning willrestrict supply to some e*tent. The provision of open space benefits can onlybe achieved by preventing building on protected land1. 'y definition, when

1This does not mean that an unregulated market will never provide optimal uantities ofpublic goods such as open space or separating incompatible uses. Where a tract of landowned by one developer is large enough, such benefits can be 4internalised5 and captured bythe developer. This is the e*act complement of using hedonic analysis to measure the price

paid for such benefits or their value in welfare terms. Their value is capitalised into the pricepaid for houses. !t is often claimed that the development pattern of West 3ondon, with largerlandowners participating in residential development, led to its typical pattern of 4garden

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open space is provided e*ternal to the built&up area via 4containment5 policiesdesigned to protect 4greenbelts5, urban land supply is restricted. )ually,height controls or other controls restricting the area of buildings relative to sitesi=e #freuently a binding constraint for office development$, or conservationmeasures reuiring the preservation of the e*ternal appearance of buildings,

are effectively restrictions on the supply of land or space in buildings.

)ven with such policies, the uestion which has to be asked is what e*actlythe regulatory system restricts the supply of. Hifferent systems andinstruments of land use planning may restrict the supply of different attributesof the built environment. For e*ample, the planning system in the 6; e*plicitlyrestricts the supply of land for urban development by imposing containmentboundaries and greenbelts. There are also stringent restrictions on the heightof buildings and on preservation:. 'ut 'ritish planning policies do not imposemuch restriction on the subdivision of e*isting developed sites where they arenot sub%ect to conservation policies. !n the 6S7, by contrast, there are strong

restrictions on converting e*isting houses to multiple occupation or tosubdividing already built lots. "ortland, Oregon, is famous for its 4growthboundary5 ( an instrument of containment analogous to the urban envelopeboundary in 'ritain. 'ut the system in "ortland still restricts the numbers oflots available for development rather than the area of land directly. Banycommunities in the 6S7 also impose minimum lot si=es which to )uropeaneyes can be oppressively large.

; E'idence on the effects of land use regulation


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!n several )uropean countries recent rises in aggregate house prices havealso been related to land use regulation. This has been a particular issue in'ritain, where there has not only been a long&run upward trend in real houseprices #increasing in real terms by a factor of +.1 between 011 and 9//9 (

see 2heshire and Sheppard 9//A$, but also increasing volatility in the housingmarket. The argument here is that if the supply becomes less responsive toprice changes because of regulatory restrictions, any short&run changes indemand translate more directly into price changes. !n a series of reports to theTreasury and the Office of the Heputy "rime Binister, 'arker #9//+, 9//A$identified both the falling affordability of housing and a reducedresponsiveness of supply to demand. She argued that the 'ritish planningsystem was the main cause of these problems. Furthermore, the 'arkerreports contain a thorough discussion of the conseuences of such housingand land market institutions for the wider economy and for aggregate welfare.8eal house prices have also risen substantially over the past decades in the

@etherlands #increasing by a factor of three in real terms since the early0/s$, which may be attributed at least in part to a lack of supplyresponsiveness. Iermeulen and 8ouwendal #9//$ find that Hutch housingsupply had become almost totally price&inelastic as a conseuence ofgovernment interventions in land and housing markets.

3ong&term trends in real house prices in the 6; and the @etherlands contraststarkly with, for instance, the German e*perience, where the real price ofhouses fell in both the decades of the 0


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'urge #'urge and !hlanfeldt 9//:$ he had already shown that communitieswhich used !mpact Fees and therefore had a greater fiscal incentive to permitdevelopment were indeed less restrictive.

6S researchers have only become sensitised to the role of land use

regulation in increasing real house prices and market volatility uite recently.Few if any studies there pre&date 9///. Bany )uropean countries havetended to have stronger and more restrictive land use policies for muchlonger. The basic framework and aims of current 'ritish policy wereestablished by the Town and 2ountry "lanning 7ct of 0A, so urban landtake and space have been restricted for two generations.

The most obvious ways in which these restraints manifest themselves are inprice distortions in land markets. !n South )ast )ngland or the west of the@etherlands, for instance, 4grotesue5 #Buellbauer 9//1$ discontinuities e*istbetween the price of land in agricultural use and ad%acent land that is =oned

for residential development. 2heshire and Sheppard #9//1$ report anincrease of price from ,1// to +,///,/// per hectare at the urbanboundary in 8eading.

Figure "a+ Prices of de'elopable cleared land in South East England

Hata for 9// ( see Figures 9a and 9b ( shows several locations where the

value of agricultural land if it were re=oned to permit residential developmentis well over :,///,/// per hectare. This means that permission to change

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use from agricultural to residential increases the price of land some //&fold.The highest&priced locations are in South )ast )ngland, as would bee*pected since pressures for urban growth are strongest there, but there area number of areas in the South West, West Bidlands, @orth West and @orthwith housing land prices estimated to e*ceed +,///,/// per hectare. Some

of these, such as parts of 2umbria and @orthumberland, are in @ational"arks, but most are not. 7gainst the background of such direct evidence onthe planning&induced segmentation of land markets, the uestion of whetherland use regulation raises prices seems somewhat pedantic.

Figure "b+ Price of land de'elopable for housing+ England


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Since the costs and benefits of changing the planning system both operatethrough the residential land market, the authors can use this model toestimate the trade&offs involved in producing a little more or less of the4planning amenities5 and a little more or less of private space for residentialoccupation. From this it is possible to estimate the net welfare effects of

rela*ing the planning system5s constraints on land supply in various ways.Since the underlying model assumes euilibrium in urban land markets ( anassumption which seems reasonable given the results of hedonic researchover the past 9/ years or so ( it simulates long&run static euilibriumoutcomes. The area of open space amenities and housing densities ad%ustfully to changing prices


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the benefits themselves. !t forced residents to substitute open land, mainlygreenbelt land #since containment was by far the most severe constraint onurban land supply$ to most of which there was only limited access for privateopen space in the form of gardens. "eople5s observed consumption behaviourimplied they valued more garden space #and cheaper housing$ more than

they valued the loss of planning&produced open space.

!n the same study, 2heshire and Sheppard consider the distributional effectsof land use regulation. This was possible because their sample included theprecise location of the houses #and so the 4value5 of their consumption ofplanning&produced amenities$ and the income of the households. With respectto the gross benefits, they report that the provision of inaccessible open space( greenbelt land ( tended to increase ineuality. The benefits were even moreineuitably distributed than were the incomes of owner&occupiers. Theseparation of industrial from residential land was broadly neutral indistributional terms compared to the incomes of owner&occupiers, while the

provision of accessible open space tended to reduce ineuality. 'ut adding allthree amenities together, the net welfare effect was almost distributionallyneutral, again relative to the distribution of the incomes of owner&occupiers.This suggests that richer households benefit more from planning&inducedamenities, but that they also pay a higher price for them through the housingmarket.

7 more recent study for the @etherlands by 8ouwendal and Ian der Straaten#9//


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and spending. !t also did not evaluate the welfare impact of the growthboundary itself. !t simply asked the uestionD if this is the total urban area thatsociety wants, what is the least costly way in welfare terms of achieving itEThey also took no account of other possible benefits associated with fuelta*es.

< Cost on economic users of commercial space7ll the above evidence has related to the impacts of land use planning onprices and welfare through the residential sector. 'y far the largest proportionof a city5s occupied land is in residential use. 'ut planning restrictions canalso have impacts on prices and welfare in other land uses. There is very littleevidence, but again in principle there are likely to be benefits and costs, andto observe price increases is not necessarily to infer a welfare loss. !f thesupply of, say, commercial space is restricted, then there will be bothdistributional effects and output and efficiency impacts. Owners of propertywho are allowed to #fully$ develop will gain, while owners of property unable todevelop will lose. The costs of commercial space will be increased and sincesuch space is an input into production, output prices will increase and totaloutput and employment will fall. !t is the difference between the value of anyamenities generated and the loss of output which reflects the net welfare cost.'ut without information on the nature of trade&offs in the production functionbetween space and other inputs it is not possible to estimate the change inoutput which higher space costs produce.

7s has already been noted, )uropean governments seem less wary of

regulating markets than is the case in the 6S7. Boreover, since revenuesfrom property ta*es accrue to the local community in the 6S7, the 6S fiscalsystem provides a very strong incentive for local communities to encouragecommercial development, and to use minimum =oning regulations to price outpoorer households which are perceived as demanding more locally financedservices than they contribute in property ta*es. 'usiness property ta*es are aparticularly important source of net revenues to local governments. !n the6S7, business property creates more ta* revenues than it costs localcommunities to service. 7gain these conditions are not often found in )urope,where in some countries, notably the 6;, business property ta*es are anational ta* providing no direct revenues to local communities at all despite

the legal obligation which local communities have to provide services forbusinesses. Thus, in effect, the fiscal incentive is reversed and localcommunities in 'ritain are 4fined5 for allowing any development at all.

The revealed behaviour of firms suggests space is not perfectly substitutable for otherfactors and that, therefore, there is some output or efficiency loss. We can infer this becausein locations where space is cheaper, the same firm uses more space per employee ( industryestimates are that space per employee is about twice the level in @ew Cork as it is in similarfirms in 3ondon. 7 comparison between space use in 'ritish supermarkets compared to the

6S also reveals that where retail space is cheaper the optimal use of it is greater per unit ofsales. Since space still costs something ( even in the cheapest locations ( firms would notuse more of it if that did not produce a productivity gain.

24


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-able 2+ /eading urban land prices+ (>>5s per acreCurrent

=>>>5s per acre">>" prices

)ffice use

?one 0 ,:A(0+,9A00

01,A


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generate comparable estimates for eight 2ontinental )uropean locations andBanhattan for shorter periods.

The key idea of the 8T approach is simple. !n a world with competition amongproperty developers and free market entry and e*it, the price of developed

space will eual its minimum average cost since this includes 4normal5 profit. !tseems reasonable to argue that competition between developers and freeentry are reasonable assumptions, both because of the low costs of entry tosmall&scale development #such as converting a single building to office use$and the international nature of the development industry. !n 'ritain the bestknown e*ample of international entry might be Olympia N Cork, the 2anadiandevelopers of 2anary Wharf, but most provincial office locations havee*amples of buildings developed by apanese, German, Hutch or Swedishdevelopers.

Barginal construction costs rise with building height, so in the absence of

restrictions on heights, buildings should rise to a point where the marginalcost of adding an additional floor euals its market price. !f building higher isless profitable per suare metre than building over a greater area, we stillshould e*pect the marginal cost of an e*tra floor to be eual to price.'uildings would be lower and the urban land take would be greater. 'ertaudand 'rueckner #9//1$ demonstrate the formal euivalence of heightrestrictions compared to land supply restrictions. 7ny gap between theobserved market price and the marginal construction cost can be interpreted,therefore, as a 4regulatory ta*.5 This is the additional cost of space resulting (in aggregate ( from the system of regulation in that particular market. !f thesales price of an additional floor of office space e*ceeded the marginal cost ofbuilding this additional floor, then developers would have an arbitrageopportunity. The difference between the price of floor space and its cost ofconstruction must be due to some form of regulation.

The 8T is an aggregate measure of the gross cost of regulatory constraintslimiting the height and floor area of buildings and ( more indirectly ( thesupply of land for the use in uestion. So it reflects the costs of restrictions onland supply, space by plot ratios or height restrictions, or common forms ofconservation designation. !t does not, however, capture costs imposed bycompliance comple*ity or delays in decision&making. !n addition, it only gives

a 4cost,5 not a net welfare or net impact on output measure. 7s discussedabove, there are measurable benefits from some aspects of regulation and,since space is substitutable to a degree in both production and consumption,the effects on output or welfare can only be estimated if both the benefits andthe e*tent of substitutability are known. So the 8T estimates are a lowerbound estimate of a gross cost of land use regulation in any location.

Bean values of the 8T as estimated by 2heshire and ilber #9//


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Banhattan is effectively =ero. That is consistent with the observation madeabove about how the 6S fiscal system generates a substantial incentive toallow commercial development.

!t is not surprising to find a higher cost in 3ondon5s West )nd or the 2ity of

"aris than in the 2ity of 3ondon, 3ondon5s Hocklands or 3a HPfense. 7menityvalues are higher and conservation regulations are stronger in such locations.@evertheless, it is not clear why much lower levels of restriction are %ustifiedby local amenities in 7msterdam or 'russels #'elgium is well known forhaving very fle*ible planning controls by )uropean standards$ than in 3ondonHocklands or even 'irmingham. The gross costs for most 'ritish officelocations strongly suggest that the degree of restriction on office space goesfar beyond the value of any amenities generated. !t is not clear what amenitiescould possibly %ustify office space in 'irmingham costing nearly 1/- morethan in Banhattan.

-able 6+ Estimated /egulatory -a& for U1 and selected European officemarkets$ -he /- is e&pressed as a percentage of marginal constructioncosts

2ity )stimated 8egulatory 8a* rate #8T$

UK MarketsQ 0 9//17verage0(9//1

3ondon West )nd 0<


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United States#based on Glaeser etal'9//1$

0:#cycle bottom$

9///#cycle peak$

Banhattan #@ew Cork 2ity$ / 1/SourceD For details of how these values were calculated see 2heshire andilber #9//


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above, this causes very serious distortions in land markets. uge pricediscontinuities are observed at the boundary separating one designated usefrom another. Boving a metre or so in many parts of South )ast )ngland,from within the urban boundary to identical land beyond it, could see landprices drop from perhaps :,///,/// per hectare to 0/,///. Obtaining

permission to convert industrial land to retail use might increase land valuestenfold.

These price discontinuities contain important information about relativescarcity. They also respond very fle*ibly to local conditions. They should andcould be used to inform planning decisions. Obviously there may be goodreasons for preserving a park or a beautiful area of high amenity countrysidefrom being developed, especially if there is public access to it. )ually, manyhistoric townscapes and habitats have high environmental or amenity valueand should be conserved. owever, as the evidence of both Table 0 and Table9 demonstrates, much greenbelt land, and most intensively farmed land, has

very little environmental or amenity value. The market does not fail, and themarket price of this land more or less represents the value its e*isting usecontributes to the economy and to society. There may be an argument forrestricting urban growth if congestion and the other costs of urban growthe*ceed agglomeration economies, but that concern can be handled asdiscussed below.

This suggests that where the premium for land in some other use such ashousing compared to its e*isting use, say agriculture or industry, is sufficient,then that should generate a presumption in favour of development unless itcan be shown that the amenity or environmental value generated by the landstaying in its e*isting use e*ceeds the observed premium. !f there is a general%udgement that, on balance, the costs associated with urban growth e*ceedthe agglomeration economies, then there could be added to this rule thereuirement that the premium e*ceed some minimal threshold. !n effect thiswould impose a specific ta* on the transfer of land from agricultural to urbanuse and, as was discussed in Section


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damage to either the environment or to amenities. Such a system would guideall development to land with the lowest environmental uality and, if coupledwith the application of a modified 2ommunity !nfrastructure 3evy designed tovary according to the actual costs development imposed on the community,would ensure that the costs of urban development internalised most of the

e*ternalities identified above as leading to market failure in land markets.

Such a proposal would have the additional advantage ( rather like making the'ank of )ngland independent in setting monetary policy ( of distancingdecisions from the political process, reducing both planning delays andpolitical difficulties.

/eferences

7lonso, W. 0:/. 7 Theory of the 6rban 3and Barket. (apers and(roceedin)s o& the *e)ional Science +ssociation, :, 0A(01.

7nderson, S.T. and West, S.). 9//:. Open space, residential property values,and spatial conte*t. *e)ional Science and Uran Econo,ics, +:, +(


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2heshire, ".2. 0. Trends in Si=es and Structures of 6rban 7reas. !nHandook o& *e)ional and Uran Econo,ics 4ol' 000: +pplied UranEcono,ics#ed. ".2. 2heshire and ).S. Bills$, chapter +1, pp. 0++(0++.7msterdamD )lsevier, @orth olland.

2heshire, ".2. and ilber, 2.7.3. 9//


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Buth, 8. 0:. Cities and Housin). 2hicagoD 2hicago 6niversity "ress.

@eedham, '. 09. 7 Theory of 3and "rices when 3and is Supplied "ubliclyDthe case of the @etherlands. Uran Studies, 9 #1$, ::(:


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Iermeulen, W. and 8ouwendal, . 9//

Dis02 Urban Land Market and Policy Failures[1]

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