Published in The Guardian (London), 24 January 2007

http://society.guardian.co.uk/communities/story/0,,1996944,00.html

By underpinning Britain’s soaring house price inflation, the planning system favours the interests of the middle class at the expense of the poor

The recent BBC documentary, What Makes Britain Rich?, began its investigation into the wealth of the nation by looking at the value of the houses we own. An understandable starting point, one might think, considering that the Halifax had just estimated that the UK’s total private housing stock was worth £3.8 trillion.

One can only begin to understand this staggering amount of money by putting it into perspective: it is a sum larger than the national economic output of the UK, France and Germany combined. Not only that, house prices went up by £410bn last year, which is more than the annual GDP of Australia.

Surely, then, rising house prices must be a good thing if they continue to make us all so much wealthier? But things are not that simple, and rising house prices are at least as much a curse as a blessing. In fact, they may be both simultaneously; it very much depends on who you ask.

The basic problem of high house prices is that they have reduced social mobility: the chance to climb up the property and, thereby, the social ladder. Those who already own land or property benefit at the expense of others who do not. At the root of this gross injustice is a system that is still regarded by many as rather benign regulation, the planning system.

Policy of containment

Planning was introduced to coordinate development while ensuring that people could live their lives in decent accommodation and in a pleasant environment. In operation, however, it has become a piece of policy machinery that, perversely, limits the spatial extent of cities, thus cramming more and more people into existing spaces. Land was to be saved from development, but this policy benefiting the rural few came at the expense of the urban many. So, eventually, the winners of this planning policy of containment were the property owners, the rich and the rural population. At the same time, people in the city with no property, first-time buyers and the younger generation lost out. It is in this way that the planning system has become a burden on society.

Still, for a nation that has developed a seemingly insatiable appetite for consumption and luxury, rising house prices have become not only a kind of steroid but also an addictive self-fulfilling prophecy. The more we grow accustomed to ever-rising house prices, the more increases we expect in the future. Since we believe that house prices can only go one way, those who can afford it are pumping more and more money into the housing market – often financed through borrowing against property they already own. As a result, house prices rise even further, benefiting those able to invest in property.

So for the owners of land and property, rising land and house prices are obviously a good thing. They are the real beneficiaries of our restrictive planning system. But what about the others? What about those who are struggling to make their first steps on the property ladder? What about those who, upon buying their first home, find themselves trapped in debt, with mortgages sometimes stretching over five decades at more than five times their salary? What about the younger generation, who can only dream of being able to afford the kind of home that their parents were able to purchase when they were their age?

Quite the opposite of having been made richer, these people are the losers of our culture – or perhaps one should say cult – of house price increases. For them, the property ladder has lost its bottom rungs. Not only that, they have not been able to join in the joys of increases in their personal wealth, but they are positively prevented from participating in any future house price increases.

Looking for the reasons behind rising house and land prices, it is impossible to overstate the role that the planning system has played. Since the Town and Country Planning Act was introduced in 1947, British cities have been constrained in their spatial extent by a policy of limited land supply. Where demand is growing and supply is restricted, economic theory predicts that prices have to go up, and this is precisely what has happened.

A hectare of land without planning permission will sell for an average price of around £10,000 in England, but residential land fetches a price, on average, of more than £2.6m per hectare – the result of planning-imposed artificial scarcity. This is an unnecessary condition, especially considering that, far from being an urbanised country, only 10% of the UK’s land mass is developed – far less than in countries of similar population density.

With all these problems becoming ever more apparent, it should be clear that our general smugness about our record of house and land price inflation is unjustified. Something has to be done if we do not want to risk losing our economic competitiveness and creating further divisions within society.

The key to reform has to be the supply side of the market. Only if we significantly increase the land available for development will we stop the rampant property inflation. If supply goes up, prices will fall. This means that planning must become less complex. Not only must we coordinate development, rather than hindering it, but we must also encourage development by giving local communities fiscal incentives.

Our report, The Best Laid Plans – How Planning Prevents Economic Growth, makes several recommendations that would ensure the planning system works faster and does not act as a brake on development, but would, rather, be a facilitator. We believe that it would make sense to introduce simplified planning zones as a measure to reduce delay and speed up the planning system. Planning generally should be much less complex and the level of detail that planners deal with must be reduced. The national green belt policy is a clumsy way to protect the countryside and we would like to see local communities making their own decisions about their environment.

Social tariff

Apart from these reforms within the planning system, we believe that it is necessary to positively incentivise communities, planners and politicians. In our report, we suggest the introduction of a tariff to compensate local communities for the social cost of development. This tariff would be worth a maximum of £500,000 a hectare, to be paid by developers, and it would go entirely to local councils.

All of these measures, whether they are simplifying the planning system or encouraging development through incentives, will have the effect of strengthening development. This way we will help to stabilise – and eventually, perhaps, even reduce – house prices.

It is time to change our attitude to high land and house prices. What we should strive for is price stability at the very least. This would strengthen our economic competitiveness, and future generations of first-time buyers will thank us – if national politicians ever have the courage to stop feeding the craving of the middle class for exponentially increasing house prices.

· Oliver Marc Hartwich is research director at the Policy Exchange thinktank. The Best Laid Plans – How Planning Prevents Economic Growth, by Hartwich and Alan W Evans, is published today by Policy Exchange,www.policyexchange.org.uk