A real housing crisis, but only fake solutions

Posted by Paul Cheshire, SERC and LSE

All the Party manifestos are published now. All agree there is a housing crisis. The most recent data for housing starts in England show a fall of 19% in the last quarter of 2014 compared to the post-2008 high or the 2^nd quarter of 2014; and completions and planning applications have been flat-lining since 2009. The latest English Housing Survey showed a continuing rise in age for first time buyers and that the proportion of 25 to 34 year olds who were owner occupiers had fallen from 59 to 36% over 10 years; and for the first time ever, more owner occupiers did not have mortgages than did. In other words all the evidence shows that house building is not significantly rising from what was a 100-year peacetime low in 2010, that the supply and affordability crisis continues – even gets worse – and the redistribution of housing wealth to the elderly continues. 

A CentrePiece article last year explained that there had been a shortfall of building during the past 20 years of between 1.6 to 2.3 million and far too many of the houses that had been built were in the wrong places or the wrong type to satisfy demand. But – even worse – that the crisis was self-inflicted by longstanding policies. 

Now we have Alice in Wonderland proposals: solutions that require us to believe six impossible things before breakfast and that words mean exactly what the manifestos say - not what they really mean. This will not build houses. Nor will promising to build 200,000 new houses a year (Labour), 230,000 starter homes (Conservative) or – any advance on 200,000? Yes, 300,000 a year (Lib Dem).

Targets and promises do not build houses. The experience of London demonstrates this. Since 2004 housing targets for London have risen from less than 20,000 to 42,000. There was a slight upturn in actual building in the boom conditions of 2004/05 to 24,000. Since then, as targets have risen, so building has fallen. In 2013/14 completions dipped to less than 18,000. To build houses one has to have land to put them on, a realistic diagnosis of the underlying causes and mechanisms for delivering them. Just raising targets or promising more houses simply means a larger shortfall between promise and delivery and an ever increasing unaffordability of housing.

Because the problem is the supply side. Urban containment boundaries were set in 1955 and the area of greenbelt has greatly expanded since then. London’s is now more than 3 times the area of the GLA (and 22% of the GLA is Green Belt); Oxford’s Green Belt is more than 7 times the area of Oxford. Oxford is now the least affordable city for housing in the UK and the City is surrounded by CPRE hotbeds telling them they cannot build here! It is very difficult to build upwards because of planning controls and every proposal to develop becomes an exhausting struggle because each decision is politicised by our mechanism of ‘development control’. Countries which do it more sensibly have plans and what the plan and building regulations permit, can be built. 

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Of the political manifestos perhaps the Tories’ is the most shameless. Senior Conservatives are not economically illiterate so they really know better. But what they are promising is more demand boosting: not only help to buy but extending the right to buy to houses no government owns; even major property agencies have condemned this proposal. Then the wheeze is to build 200,000 ‘Starter Homes’ to be sold to under-40 first time buyers at a 20% discount (from what?); and a London Land Commission to magically find tracts of Brownfield land that have presumably been hiding behind railway embankments for the past 15 years; and more powers to Local Authorities to resist building on the Green Belt. The Starter Homes, the small print reveals, will be either at the expense of ‘affordable’ housing built as part of planning deals or at the expense of ‘unviable’ commercial development. So not much net new construction there.

One can be entirely confident that the Conservative proposals will do nothing to increase the number of houses built net. This means their proposals will make housing even less affordable because they will subsidise demand but not increase supply. UKIP’s proposals are even less helpful. But then fair enough: one should expect less of UKIP in terms of sensible policies designed to tackle real problems. UKIP want to revise the 2012 National Planning Policy Framework (no evidence this has increased house building but it does offer some slight hope) to make it more difficult to build, increase the extent of Green Belts and extend the right to buy; but to British Nationals only.

Both the Lib Dems and Labour are, amongst other things proposing to build more houses. The trouble is neither really explains how it can be done nor sets out practical mechanisms to do it. So essentially they offer acts of faith. The Lib Dems propose 10 new Garden Cities on a revived Oxford-Cambridge rail link. But apart from some general statements about capturing land value uplift to pay for infrastructure, no mechanism is proposed for getting round the entrenched powers of opposition the current planning system provides anyone who opposes building.

Their other proposals either boost demand without adding to supply (Help to Rent) or have an old fashioned whiff of anti-landlordism and anti-speculator mindsets. They propose giving even more power to local communities to determine development. Without radical complementary changes to taxation, a new system to guarantee new houses come with additional infrastructure and losses are properly compensated this will strengthen the power of NIMBYism even more. A problem of just local decision making is that it empowers those who bear the costs of development (real – noise and dirt during construction, loss of views and more congestion – in the absence of new infrastructure – after the new houses are built) but disenfranchises those who stand to benefit – would–be residents or owners. The Lib Dem proposal to pilot land value taxation is potentially helpful but another proposal - to make planning decisions even more complex by inventing conditions requiring occupation after construction - is not. How on earth could that be imposed? Suppose the market turns down unexpectedly or the developer just gets the local market wrong? It will add yet more risk to the development process so cause otherwise viable projects to slip from viability.

Labour did have the foresight to commission the Lyons Review of Housing but their manifesto conveys the impression they almost wish they had not. They promise to increase house building to 200,000 a year by 2020 but there is no mention of how to increase land supply or funding renewed public sector house building. Instead there is coverage of what seems like an ill-thought out proposal to re-channel finance from Help to Buy ISAs; how to stop ‘land banking’ and ‘speculation’ by introducing ‘use it or lose’ planning permission and double taxation on empty homes. Then there is a proposal to tighten controls on landlords by mandating 3-year tenancies and a national register of private landlords. The most explicit proposal on the supply side is to ‘start to build a new generation of garden cities’. But while Lyons was explicit with details and delivery mechanisms, the manifesto is not. Similarly the Lyons Review had an informed analysis of the underlying problem – our self-imposed shortage of development land; the difficulty of getting across boundary agreements (see the Oxford case) and how over simplistic is the idea of relying on Brownfield land. There is no mention of these serious points in the Labour manifesto.

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Overall, the manifestos confirm that all parties are unwilling to face up to the political problems they perceive would follow if they advocated solutions that might effectively address the crisis of housing supply. The illness is real but all that is on offer is snake oil; displacement activities treating some symptoms but not the underlying causes and – paradoxically - having the net effect of making the crisis worse. Perhaps that is just a little harsh on Labour but I did just hear their spokesperson offering the party’s solutions and the whole emphasis was on how the ‘market was not working so the planning system needed to be tougher’. Not so: the problem IS the planning system. It needs root and branch reform but that would take serious political courage. Fake solutions will not work: in the case of many of those on offer, including discouraging landlords, making an already mind-boggling planning system yet tougher and more complex or boosting demand when the problem is supply, the crisis will get worse. Indeed the housing crisis will get worse anyway without radical reform of the planning system, and local taxes and property taxes; and incentives.

This post originally appeared on the LSE British Politics and Policy blog. 

What is good architecture worth?

Posted by Gabriel Ahlfeldt & Paul Cheshire, SERC and LSE

Economists, unlike cynics, do not know the price of everything – not by a long way. Certainly we do not know the price of good architecture. Apart from anything else identifying ‘good architecture’ is highly subjective. So to measure its price you have to make some brave assumptions about what it is and where to find it. And from an economic perspective the price is not the interesting issue. The interesting issue is: left to their own devices, would markets under or over provide ‘good architecture’? In the jargon, is there a problem of market failure?  

For sure, public policy in this area implicitly assumes that there is market failure, and that markets alone will not provide enough good architecture. For example, policymakers intervene to control the design of new buildings, and to stop private owners from altering or replacing existing ones. But this has costs: both directly in administration and compliance, and indirectly through impacts on energy costs, on usable space in cities and on economic outcomes. A series of papers from SERC researchers explores these economic effects in detail.

Regulation for good design may lead to rent-seeking behaviour: Cheshire and Derricks find evidence that developers use ‘Trophy Architects’ to game the planning system, as a way to get more space on a given site. This study – like some others – identifies ‘good architecture’ by classifying buildings as high quality if they are designed by architects who had already won a major lifetime achievement award: ‘Trophy Architects’ or ‘Starchitects’.  Such awards go back a long way, so there are 19^th Century buildings in London which qualify.

Cheshire and Derricks find that for commercial buildings, a Trophy Architect (TA) adds no premium at all to the price of buildings. But it does add to both the design and construction costs: with TA design, the cost per m2 for a 25-floor building is 10 to 17.5% higher. TA design also seems to make buildings slower to let out, which suggests there could be a rental premium, even though there is no increase in a building’s selling price.

There is a puzzle here. TA design adds nothing to a building’s selling price, implying no productivity benefit from starchitecture. So why do developers pay a premium for construction? The answer appears to be that using a Trophy Architect helps game the regulatory system. Controlling for other factors, in London such buildings were an astonishing 19 floors higher than buildings on similar sites designed by ordinary architects. 

An economist would say that the developers were using design to generate ‘rents’. In a city with tight planning rules and development controls, the extra rentable space in these big buildings implies a 130% increase in the value of a typical site on which there was a possibility of building tall. The problem is that these rents become a deadweight loss as the extra cost of using a trophy architect, the extra time through the planning system, and the extra risk of eventually not being successful absorb potential gains. 

In London, some 25% of skyscrapers are TA designed compared to only 3% in Chicago – a city which is not just less regulated than London (so office space is cheaper) but regulation is less gameable because Chicago is a rule-based zoning system, rather than the more political development control process we use in Britain.

The deadweight loss associated with this way of gaming the planning system may be fully or partially offset because ‘Trophy Architecture’ generates welfare for residents and tourists; or even for the occupants of other commercial buildings. In both London and Berlin, for example, this kind of architecture generates a lot more visual interest, asmeasured by photos shared on sites like Flickr and Picasia. The effects are even larger for contemporary buildings like the Gherkin than for historic signature buildings. So the benefits of good modern design may go some way to offset the calculated use of design by developers to build bigger buildings.

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For houses the story seems somewhat more straightforward.  People do pay for better design, so good architecture seems to provide direct utility – otherwise the best known architects would not be able to charge a premium for their services. This is a private benefit and wouldn’t seem to raise issues of market failure or a case for subsidising design.

However, there is quite persuasive evidence, from a series of SERC studies, that there are external economic benefits from high quality or historic residential buildings. Property prices inside conservation areas are about 5% higher than just outside conservation areas. Given that conservation area boundaries can be quite arbitrary, and regulatory constraints inside conservation areas are costly, this effect is likely attributable to the special design character in these areas. This jump in prices at the boundary is particularly large where residents report the architectural quality of the area is large relative to nearby areas. On a four-step scale (from ‘not at all distinctive’ to ‘very distinctive’), a one-step increase is associated with an increase in prices of up to 25%.

Interestingly, this research also finds a positive price effect for conservation area properties that have modern (post-WWII) design, and even for properties outside conservation areas with a view onto buildings inside a conservation area. This is consistent with otherSERC research showing price increases in nearby areas after a conservation area has been designated. 

So we can see positive house price effects from all kinds of ‘good architecture’. For example, residential buildings designed by Frank Lloyd Wright – sometimes referred to as the Greatest American Architect of all time - have a positive spillovereffect of up to 8% in Chicago’s Oak Park. The redevelopment of the Wembley stadium – designed by trophy architects Fosters and Partners – was followed by increases in propertyprices by up to 15% in nearby areas with a view. 

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Let’s sum up. Policymakers intervene in property markets to protect historic buildings, and to promote ‘good’ modern architecture and design quality. From an efficiency point of view, the justification for these policies is that markets may undervalue good architecture, because such features of buildings and neighbourhoods represent external benefits or a form of public good.

In the UK, regulations for historic districts or Listed Buildings can be very tight and costly: they may control the colour of paintwork and protect internal details of layout and design making it difficult to adapt such buildings for modern use or improve energy efficiency to modern standards. Even where less extreme, the cost of redevelopment behind facades is very high.

So far the evidence suggests that there are external benefits associated with high quality residential buildings and neighbourhoods: but the evidence is much weaker when it comes to commercial buildings, especially given the peculiar British practice of using expensive TAs to game the system to get more space on a given site. So where does this leave policy?

On balance the most plausible position is that there is a welfare economics case for public policy to support some good design and heritage neighbourhoods, and that this case is stronger in the context of residential than commercial buildings. But as with any policy and regulation there are costs, here in the form of restricted supply and affordability and rent-seeking behaviour. Most notably, these costs are particularly high in a context where a planning system – as in Britain – makes living and working space notoriously scarce and leaves many planning decisions the outcome of a quasi-political and bargaining approach. If there was sufficient space for development, the external cost of preserving relatively low density heritage areas would be less. And if decision making was rule-governed there would be far less incentive to employ Trophy Architects just to game the system to get more space on a given site – as opposed to improving design quality.