Published in House Builder Magazine, March 2007, www.house-builder.co.uk

The current planning system is an outdated straitjacket on economic growth, contends Dr Oliver Marc Hartwich of Policy Exchange

This year marks the 60th anniversary of the Town and Country Planning Act. Passed in 1947, it came into effect the following year and has been the foundation of modern town planning in the UK. Its influence on planning policies can today be felt in countries as far away as Australia and New Zealand where the British example has been closely observed and often copied. Over the first three or four decades of its existence, the planning system created by the Act had been a subject of debate mainly among those most directly involved in shaping the built environment: developers, architect, homeowners, politicians and, of course, planners themselves. But for some time now, the planning system has come under the scrutiny of another profession: economists.

They have slowly come to understand that the way in which we plan our towns, cities and countryside has an effect on our country’s economic performance. This should not be too surprising, really, but for many years economists have preferred to deal with the hard facts of business when examining the development of the British economy. The usual suspects for slow growth were obstructive trade unions, inferior management, lack of investment, inadequate training and education, failure to follow up innovations, perverse macroeconomic policies, and so on. However, this focus of the profession turned out to be too narrow to realise that one of the main obstacles to growth has always been the planning system. It should be mentioned that when the planning system was introduced more than half a century ago, there were good intentions involved.

The development of British cities during the first half of the century was regarded as chaotic. Planning was meant to straighten things out and co-ordinate development. The main purpose, at least in the beginning, was not so much the restriction of building activity – after all this was the post-war period with a strong focus on economic development and social improvement. Planning was thus meant to achieve an “orderly development” but, to be sure, it was not meant to be anti-development.

artificial restrictions

In the course of its history, though, the planning system has changed its character. What was primarily meant as a tool to co-ordinate development became a system mainly concerned with restricting the spatial extent of our cities to preserve the countryside. And this is where the economic problems begin. Artificial restrictions in the supply of any good or commodity have implications for their prices. In this case, the good which was made scarcer than it should have been was land for development. So the predictable consequence of this policy was a rise in land prices over time. That there is a huge distortion in the land market today can be exemplified by the fact that land with planning permission often fetches a price several thousand per cent higher than an adjacent plot of land without planning permission.

In a market without a building land shortage, these prices should not differ that much. While high land prices are a well known phenomenon, not all of their economic implications are easily recognised. Most obviously, of course, high land prices mean high house prices. If a hectare of residential land in London is worth more £7.6 million on average, then even a small plot of 1/16 acre of land has a price of almost £200,000 – and this is just the land price of the land without bricks or mortar on it. So it is only natural that home buyers have to pay a high price for their houses, which reflects the high price of the land. But the effects of high land prices go far beyond the obvious house price inflation. High land prices combined with an often lengthy, complex and unpredictable planning process affect the development of other sectors of the economy. Land is an input factor for many goods and services the economy produces.

When we are staying at a hotel or dining at a restaurant, we are not only using their facilities or enjoying the food they prepare, but we are effectively renting some space from them for a limited time. And as space is expensive, there are at least two effects most of us will be familiar with. First, land is used more intensively which means that business owners will try to squeeze in more customers on the same space. Small hotel rooms or two or three restaurant sittings in one evening are examples of this practice. Second, high land prices will be passed on to customers. No wonder that in a Swiss Bank UBS international survey London restaurants and hotels turned out to be among the most expensive in the world’s top cities, second only to Tokyo.

Unfortunately, high land prices also leave a mark on other prices. Take the retail sector, for example. Selling goods needs land if you want to display and stock them. But again the price of the land required for this is passed on in their prices. The difference that land prices make can be shown when you compare identical, imported goods in different countries. Ikea is the perfect example. Much of its furniture is now produced in Asia, so in cost terms it should not make much difference whether you sell it in France, Germany or in the UK. Yet a comparison of catalogue prices reveals that Ikea is nowhere more expensive than in Britain. Some items like the Tidaholm kitchen cost over 60% more in Britain than in Germany. An Ikea spokesperson recently confirmed in The Times that planning, availability and the cost of land were contributory factors – and consumers have to pay the price. Not surprisingly, therefore, in the UBS living cost index, which included the prices for 120 goods and services plus housing costs, London turned out to be the most expensive city on the planet.

discouraging business

While high prices for goods and services make life harder for consumers, high land prices are also a problem for business, especially for companies that need a lot of land. It is, therefore, hardly surprising that manufacturing has declined much more rapidly in the UK than in other European countries. Why is it that there is hardly any car manufacturing left in the UK when in Germany, for example, there are still BMW, Daimler, VW, Audi, Porsche, Ford and GM producing large quantities of cars? While it is of course possible that other factors such as a potential lack of skills contributed to this, it is reasonable to expect that high land prices have much to do with this phenomenon. In Germany, the average price of building land (residential and industrial) is about £400,000 per hectare – far below English land prices.

For a company that considers building a new large factory, such huge differences in land prices may be an important factor to consider. Apart from the mere land price difference, the attitude of planners and local communities is different. As they can feel the effects of a successful prodevelopment policy in their pockets through a higher degree of local taxation, they are much more likely to support companies wishing to locate in their areas. It should have become clear that planning is not only something that determines how our towns and cities look, but what chances we give our economy to develop and prosper. Planning was introduced in 1947 as an attempt to co-ordinate, but also to promote development. Over time, however, its focus shifted to urban containment and it has become a brake on economic growth. It is high time to radically simplify the planning system to unleash the true development potential of the British economy.