Published in Planning in London, April 2007, pp. 53-54

Thinking about the planning system, the first thing that comes to mind is planning for housing. Over the past years, especially after the publication of the Barker Review of Housing Supply in 2004, there has been a debate about the effects of the planning system on the availability and the affordability of housing. It is not surprising that planning discussions tend to focus on housing as roughly 90 per cent of the built up area in England is currently used for domestic buildings. In contrast, land for non-domestic buildings accounts for little more than half a per cent of all English land (or about ten per cent of the built up area). It is clear, therefore, that planning’s major and most visible effects can be found in residential housing. In a series of publications for Policy Exchange, Alan W. Evans and I have dealt with this issue. Our main conclusion in these reports is that a policy of limiting the spatial extent of our cities has pushed up land prices which then translates into high house prices, smaller dwellings sizes and an over-aged dwellings stock.

However, the planning system has repercussions that are felt far beyond the housing market. Higher land prices affect every area of life which requires land or has a factor of production which is linked to land, whether it is residential housing, industry, commerce or services. Wherever land is needed, high land prices matter. This was the motivation behind our most recent Policy Exchange report on planning that Alan W. Evans and I have written. In ‘The Best Laid Plans – How planning prevents economic growth’ we analyse how the planning system has turned into a brake on development and on the UK’s economic competitiveness.

At this point it is worth reminding ourselves that historically the planning system was not meant to be an anti-development tool. Introduced under the post-war Attlee government in 1947, it was a part of Labour’s attempt to plan the economy for a better Britain, to build “the new Jerusalem”. Although the means to achieve these goals turned out to be largely inadequate, they were still indicative of a spirit of optimism and progress. In these circumstances, planning was supposed to steer and co-ordinate development, but certainly not to prevent it.

Yet the early focus of the planning system gradually disappeared and was replaced with a policy aimed more and more at limiting the growth of cities. The countryside was to be saved from urban development, and thus the spatial extent of cities had to be restricted. So when London and other major cities grew their populations and when this increased demand was further accentuated by shrinking household sizes, the only way to satisfy this demand was within existing settlement areas. Previously developed areas (the so-called brownfields) had to be used first, density targets were issued and green space within the cities disappeared while green spaces outside the city remained largely untouched.

The consequences of this policy have been rising land prices, and with these land prices house prices have risen as well. From the early 1970s until the early years of the new millennium house prices increased in value by a rate that was on average 3.9 points higher than inflation. This development made housing less affordable, thus forcing people into smaller homes. This coincided with the wish of planners to increase densities, and the result of both is the fact that newly built dwellings in England are now ten per cent smaller than the average of the existing stock. In other words, land is used more intensively to cope with the shortage of land that has been artificially induced by planning.

But this kind of intensification of use was not restricted to housing. It actually happened in many other areas, too. The occupancy costs for commerce and industry are nowhere higher than in British cities. CB/Richard Ellis showed that London’s West End had office rents that were almost three times those in Paris’s modern La Défense quarter, almost four times higher than midtown Manhattan and roughly five times the rents in Sydney. Industrial space shows a similar picture. British cities are more expensive than international cities of comparable sizes. Thus industrial space is more expensive in Birmingham than in Barcelona, in Manchester than in Munich, while London again tops the list of the most costly places. This makes England, and particularly London, a less attractive location for business than it could be. 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.

High land prices are a problem 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, BMW, Daimler, VW, Audi, Porsche, Ford and General Motors are still 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 pro-development 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.

So how is business dealing with high land prices? Actually very much in the same way that home owners do, namely by using land more intensively. Restaurants and hotels are good examples. In many London restaurants it is now common to serve more customers by having two or even three sittings in one evening. This is just another result of a more intensive use of land in order to be able to pay the high rents for land. With hotels such over-booking is, obviously, not a possibility. But there are other ways to make more intense use of land, for example to reduce the sizes of hotel rooms. In both cases, hotels and restaurants, there is also another way to cope with the high cost of land, and that is to increase prices. And this is precisely what has happened and what recent surveys have shown. When Swiss Bank UBS compared the cost of spending a weekend in several big cities around the globe, they added the cost of a typical incurred during a typical leisure trip: hotels, restaurants, taxi rides, etc. London turned out the most expensive city in the world – more expensive than Tokyo, New York, Paris or Zurich.

High land prices leave a mark on retail prices as well. 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 for this. 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 sixty per cent 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.

The economic effects of land and house price inflation, however, do go even further. For example, to keep a check on house price inflation, Bank of England interest rates have consistently been above Euroland interest rates, on average 1.8 percentage points since 1999. But interest rates kept high to control house price inflation are highly regressive. They favour property-owners and disadvantage others struggling to pay off their mortgages; and, of course, they make it more expensive to borrow for investment, which slows down economic growth.

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 are not going to risk losing 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, all other things being constant, supply goes up, prices will fall. This means that planning must become less complex. Not only must we go back to coordinating development, rather than hindering it, but we must also encourage development by giving local communities fiscal incentives. 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 – land and house prices.

Alan W. Evans and Oliver Marc Hartwich have published the following reports on housing and planning with Policy Exchange: Unaffordable Housing – Fables and Myths (2005), Bigger Better Faster More: Why some countries plan better than others (2005), Better Homes, Greener Cities (2006) and The Best Laid Plans – How planning prevents economic growth (2007).