Land prices, incentives and popularity - the economist's

perspective: orWhy we really need more

houses

Paul Cheshire: LSE & SERC28th Jan 2014

GARDEN CITIES: RESPONDING TO THE WOLFSON ECONOMICS PRIZE

Planning for a Housing CrisisPlanning - 1947 - product of a different era: For example: socio-economic conditions radically

changed since 1947/51Real incomes (Real GDP p c - BoE) - up x 3.1: Population - up x 1.4:Cars - up x 12.9

1947 Act still sets the fundamental framework

Development rights expropriated & urban containment enforced via Greenbelts;

Plus AONBs & National Parks Plus safeguard agricultural land [Scott Report 1942]

Policy intentionally restricting the supply of urban land& space for & in housing

Result of Restricting Space?

Residential land values up/lost agglomeration economies• Impedes city growth - so loses agglomeration

economies: & increases price of housing; & makes housing market more volatile (see OECD Report on UK, March 2011)

UK been densifyingsince 1947Result?Price of land representsforegone agglomeration economies!

Paul Cheshire,LSE August 2009

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Real Land & House Price Indices (1975 = 100)Land Price Index House Price Index Note: House and Land data for war years are interpolated.

32,500 ha ofGreenbelt withinGLA: enough to double construction rate for 80 years!

Source: The EconomistJan 10 2014

Policy plans to ‘contain’ but people choose to behave in unintended ways

Highly skilled re-locatebeyond the Greenbeltand commute from all over Southern England:Oxford, Cambridge act as high income ‘dormitories’.[London’s carbon footprint likely increased compared to Parisresearch!!!]Similar issue likely with plannedcreation of jobs+residential newsettlements

MYTH 1: Concreting over England

REALITY: Greenbelts cover 1.5 as much land as all urban areas; all urban less than 10%;

MYTH 2: Greenbelt land environmentally valuable

REALITY: biggest use - intensive arable e.g. Cambridge 74%

MYTH 3: intensive farmland is ‘green’

REALITY: No access & NET environmental cost per ha - compare parks & gardens![Nat. Ecosystem Evaluation, 2011]

Reform: Housing is central issue Housing demand strongly income elastic – especially for space inside and garden space As real incomes risen this bids up residential land prices Greenbelts subsidise ‘horsey culture’ and golf!

But this bids away cheap land for offices, start-ups, hotels & retail;

Central issue – how to find land for housing and make residential development acceptable?

Fundamental point: build on low amenity/environmental quality Greenbelt land –where the land is! Very little needed

Need to protect environmentally valuable land more effectively – case of Hoo Peninsula…

http://spatial-economics.blogspot.co.uk/2013_04_01_archive.html

Restrictions not just bidding up land prices: lead to price distortions almost at level of late USSR; but

Valuable price signals of where shortages worst

Use Information of Land Price Discontinuities

1. Prices are immensely efficient signals of complex information on both demand and supply.

2. Discontinuities in land prices at the boundary of one permitted use & another - markets are telling us that the higher priced land is in relatively short supply.

3. Invaluable guidance - not always to be obeyed – often social, environmental or amenity benefits from preventing a change of use.

4. Need (more effective) public policy to protect National or Urban Parks, recreation areas and Sites of Special Scientific Interest - good social & environmental reasons.

5. But as per Land Use Futures (2010) need to allocate land on the basis of its value – value including amenity & environmental value –Not on basis of arbitrary designation 60 years out of date (e.g. Greenbelt)

Shortfall of Housing Close to Catastrophic Shortfall of house building in England MAJOR problem

19 years 1969-1989 = 4,302,27019 years 1994-2012 = 2,687,040

Annual build ‘needed’ to stabilise affordability (NHPAU, 2009)

= 237,800 to 290,500 – say 260,000 So over 19 years = 4,940,000

Therefore shortfall 1994 to 2012 has been between 1,615,230 and 2,252,960 – almost certainly closer to 2,252,960

So reform desperately neededQuestion is not: will we reform it? but when will

we reform it & will that be before a catastrophic collapse?

Build Garden CitiesGarden Cities could be made acceptable- 1. Enough value uplift to provide both infrastructure

& incentive2. Make a substantial contribution to housing supply3. Demonstrate new building can be environmentally

positive4. Provide houses of type people want to buy in

locations they want to live (access to jobs) So could be a positive demonstration effect –

houses plus environmental improvement

Against this 3 new Garden Cities might get us at most 750,000 houses: and shortfall is rising by the month.

Garden Cities: Where and How?

Some general guiding principles using economic insight

1. Where residential land prices are high & environmental value low: for example near Oxford and/or Cambridge; in Home Counties; edge of GLA area;

2. Greenbelt designation not relevant: low environmental/amenity value relevant; but maybe include an area of threatened habitat or area of scenic beauty – focus & demonstration;

3. Choose location with access to jobs & low infrastructure costs;

4. Enforce an Impact Fee based on actual costs imposed;5. Use land price uplift to compensate original landowners &

home owners very generously;6. Ensure both original and incoming residents retain equity

interest in success;7. Environmental audit before and 10 years later; see the

gain!