Published in Yorkshire Post, 24 January 2007
WHAT makes a country rich? Reading British newspapers, the impression one could get is that ever-rising property prices contribute a great deal to our economic prosperity. House-price increases are usually reported as a good thing, but this is something that worries us a lot when they stagnate or even fall.
From the homeowners’ point of view, this is entirely understandable. The houses we own are often our single biggest asset. To most of us, the value of our houses, therefore, is a crucial factor for our personal wealth.
But what do high house prices, and indeed high land prices, mean for the economy as a whole?
Does it matter that land and property are much more expensive in the UK than in most other countries? And what is driving the growth in real estate prices?
Prices are always determined by two sides: demand and supply. As the famous economist, Alfred Marshall, once put it, both market forces act like a pair of scissors when cutting paper. Once the paper is cut, you cannot tell whether it was the upper blade or the lower blade that did it. This means that both demand and supply factors have to be understood to explain the development of land and house prices.
On the demand side, we have seen a growing population, economic growth, smaller household sizes and some inward migration. All of these factors have pushed us towards rising land and house prices.
Other countries, however, had similar pressures on the demand sides, yet they have not experienced a comparable rise in real estate prices. This means that it is likely that the main reason for land and house-price inflation can be found on the supply side of the market.
Indeed, the supply side of the market has been shaped by the planning system. Since the Town and Country Planning Act was introduced, in 1947, British cities were constrained in their spatial extent by a policy of limited land supply.
Where demand is growing and supply is restricted, prices have to go up, economic theory predicts, and this is precisely what has happened. A hectare of land without planning permission will sell for an average price of about £10,000 in England, but average residential land fetches a price of more than £2.6m – the result of an artificial scarcity.
But it is not only land for residential development that has become expensive. Companies also have to pay a high price if they want to build factories or offices.
And this is where the problems for the British economy begin. If it is more expensive to build a warehouse in Birmingham than in Barcelona, and if office space becomes more costly in Leeds than in Luxembourg, then this diminishes the UK’s economic competitiveness.
Only recently have we heard that Kraft Foods has decided to move its European headquarters from London to Zurich. One of the reasons cited was the cost of accommodation.
But our complex planning system has negative effects which go far beyond high house prices. It slows down the development of our economy.
If it takes more than a quarter of a century to complete vitally important national infrastructure projects, such as a new terminal building at Heathrow, then other countries are more than happy to offer themselves as alternatives.
Paris, Frankfurt and Amsterdam have all built extra capacities for their airports, while Dubai, Munich and Hong Kong have even built new mega-hubs for the world’s fast-growing airline industry. But Britain, with its long planning procedures, is falling behind.
It is telling that, with the exception of Birmingham, no British airport can claim to have a high-speed train connection – something that is common on the continent.
To make matters worse, it is not only business that suffers from the planning system. It is all of us who have to pay the price. It is our quality of life that is affected when cities and transport infrastructure become increasingly congested.
Our choice as consumers is limited when high land prices lead to high retail prices and only a few retail chains dominate the market.
Last but not least it is social mobility – the chance to climb up the social ladder – that is threatened by high land and house prices. Those who already own land or property benefit at the expense of others who do not. This way, the planning system has become a burden on society. It has favoured wealth over wealth creation, property over enterprise, old over young.
No wonder that in opinion polls a large proportion of young Britons now say they would consider emigrating to where the quality of life is higher and the cost of living is lower.
There are several things that urgently need to be done. To begin with, we need to encourage development, not hinder it.
There are several ways to do it, such as giving local councils fiscal incentives for new residential, commercial or industrial areas. We should also trust local planners to make their own decisions about their areas. Consequently, national policies, such as the green belt, should be abolished. And planning has to become less complex, so that it actually does what it was supposed to do: to co-ordinate development, not restrict it.
Dr Oliver Hartwich is a co-author of a report, The Best Laid Plans – How planning prevents economic growth, which is published today by the Policy Exchange.
