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Rising house prices: Nothing to boast about

Published in Planning in London, No. 57 (April 2006)

Martin Wolf, economics editor of the Financial Times, recently commented that over the past ten years the value of his house had increased by the equivalent of five years of his post-tax salary. Now I do not know either Mr Wolf’s salary or his house, but I have no doubt that the increase in the value of his property will be substantial. Such price increases are usually reported by the media as ‘a good thing’. The word ‘crisis’ is seldom used when the newspapers report a rise in house prices. This is rather odd, because in all other markets we would call price increases what they are: inflation.

Despite his own gain, for Martin Wolf such ever-rising houses prices are not a reason to celebrate. On the contrary, they are the symbol of a real problem with the UK housing market. This is a strange crisis though, because it appears to bring benefits to those who own houses. And the bigger and better those homes, the bigger the benefits of the crisis seem to be. To everyone else, however, there is a problem. For those who cannot afford to buy, for those who do not wish to buy property but have to pay high rents, and for those who have bought a property but cannot afford a bigger place, high house prices are a curse not a blessing.

It is a strange feature of British news reporting that the same newspaper, sometimes even on the same day, can run two utterly contradicting stories. In the first story, the paper might express relief that after a period of only moderate increases in house prices, the market is finally ‘picking up again’, ‘gaining momentum’ or ‘getting stronger’. Effectively this means that house price inflation is getting worse, but the wording suggests that what is happening is actually something positive. In the second story we might then read about more and more people living in temporary accommodation, key workers unable to find affordable homes or children living in unfit dwellings.

But the seeming paradox is not a paradox at all but two sides of the same coin. In the long run, ever-rising house prices are never a positive phenomenon, not even for existing home owners. It is true that they may contribute to additional domestic demand in the short term via the practice of mortgage equity withdrawal. But it should not be too surprising that a sustainable economic growth path cannot be based on inflated prices. In addition, ever-rising house prices create serious social problems and, eventually, environmental problems too.

In a series of three publications for the independent think tank Policy Exchange, Alan W. Evans and I first analysed what is wrong in the British housing market. We then tried to identify things that could be learnt from other countries’ housing and planning experiences. Finally, we put these analyses together to come up with a proposal how to change the British planning system for the better. The result is our most recent report Better Homes, Greener Cities*.

We started with a description of the way British cities have developed over the past decades. Today about ninety per cent of the population live on ten per cent of the land. Put differently, this means that while the vast majority of the land is sparsely populated, the population of this country is forced to live together in ever denser and greyer cities.

When environmental campaigners keep telling us that we are living on an overcrowded island, they are missing the point. The island itself is not overcrowded, but the cities are. And they are overcrowded simply because people were led to believe that we cannot afford to build on any non-urban land in case England is ‘concreted over’.

But this is a myth. We calculated that if we only used a quarter of the non-urban land at densities commonly found in continental Europe, this area alone could accommodate more than 73 million people. In other words: It is completely absurd to assume that England would soon disappear under concrete. In fact, the Office of National Statistics suggests a population growth of 7.2 million for the whole of the UK until the year 2031. To house these people would thus need less than 2.5 per cent of the non-urban land of England. Any claim that we are actually running out of land is simply ludicrous.

Another paradox of the debate about saving land from urban development is that many arguments rest on the assumption that this is somehow better for the environment and the population. The environment, some campaigners assert, must be protected from ‘urban sprawl’ and the population should have places to escape to from the cities. But if one actually looks at the facts it turns out that the opposite is true. Giving cities a chance to grow on the outside, instead of cramming more and more people on the inside, actually helps the environment and the health of the urban population.

We know through biological research that plants and animals thrive in low density urban environments. They provide the gardens, parks and playing fields that plants and animals need. Where, however, densities are high or the land is used for industrial agriculture there is a massive drop in biodiversity. This explains, for example, why butterflies and moths are disappearing in England. It is not, as some environmental campaigners want to make us believe, the effect of climate change but simply because the habitat of these species has been concreted over – within the cities. If you really care about biodiversity and the environment you are best advised not to protect agricultural land, which often enough is a biological desert, but to build cities with lots of green spaces. If this consumes some formerly agricultural land, so be it.

Green cities are not only better for the environment; they help humans lead healthier lives. The health benefits of green cities are well documented. The World Health Organisation, for instance, found that there is a clear link between obesity and the level of greenery. It is not difficult to understand why. Where there are parks and gardens, people tend to be more physically active. The benefits do not end there. Urban trees provide oxygen and moisture, and effectively regulate the microclimate.

The pattern that emerged from our research is clear: Green cities, cities with lower densities and lots of space for gardens and parks, are desirable from every perspective. Plants and animals prefer the green, low-density cities over every other kind of settlement. And so do human beings, as opinion polls show. The majority of us want to live in houses that are spacious, have gardens, are situated in green suburbs, and which allow a sense of privacy. But with house prices rising excessively, government targets of densification and campaigns to stop urban development, these goals cannot be achieved for large parts of the population.

The current planning system is failing to provide the kind of settlement pattern that is good for humans and nature. Quite the opposite in fact – it has been captured by vociferous organisations like the Campaign to Protect Rural England (rightly relabelled by Martin Wolf as the Campaign to Incarcerate Urban England) to deny the majority of the population a decent standard of life in order to preserve that of the few inhabitants of rural areas.

In our report Better Homes, Greener Cities Alan Evans and I argue that we need to change the way in which development is planned. There are two obstacles to the delivery of better and affordable housing. The first is, unsurprisingly, the planning system itself. The second is the way local government is funded. We believe that it is vital that both these systems are changed at once to achieve better results.

For the planning system, it is important that a much higher degree of flexibility is achieved. This means abolishing plan-led development, which blocked desirable, but not previously anticipated, development in the past. In addition, we would like to see a genuine presumption of a right to develop. It should be for local communities to demonstrate why a new development is not desirable, not the other way around. Thirdly, the current system focuses too much on the social costs of development. We would put much greater emphasis on the economic benefits of development and give weight to them in the planning process. In addition to these major changes, some additional adjustments to the planning system could be made. For example, land buffers should be integrated into plans, switching between designated uses (residential, commercial etc.) should be simplified, and last, but certainly not least, the role of local governments should be strengthened in the planning process.

Our research in other countries has shown that planning works best where local communities are in charge of their own affairs. However, only putting communities in charge will not do. They must also have the right incentives to engage in pro-active planning. There are several ways in which this could be achieved. The most straightforward would probably be to give them a greater autonomy over taxation. Such a system works very well in Switzerland where it has kept both taxation levels and house prices low. However, under the current British system of local government finance such a seismic shift would be hard to achieve, and this is why we have also put forward a second-best solution: the Social Cost Tariff (SCT). An SCT of £500,000 per hectare could replace all existing charges such as section 106 agreements and provide extra incentives to encourage communities to develop. Instead, councils would only be given a minimum building target by central government. But if they built more than that, they would keep the receipts from the SCT. This would provide an incentive for local communities to plan for development and would compensate them for the costs of that development.

We believe that implementing both reforms – of the planning system and of local government finance – would make the supply of housing more flexible and deliver the kind of well-designed, spacious, affordable housing in green cities which the citizens of Germany or Switzerland take for granted. We hope that it is not too late to change a system that, to date, has nothing better to boast about than ever-rising house prices.

* Alan W. Evans and Oliver Marc Hartwich: Better Homes, Greener Cities, Policy Exchange, London, 2006, ISBN 0-9551909-1-6, £10, http://www.policyexchange.org.uk

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