Thursday 1 October 2020

Planning for the Future: some solutions for our housing crisis at last?

By Paul Cheshire

The white paper, Planning for the future, published in early August 2020 represents the first serious attempt to reform our dysfunctional land use planning system since its inception. Although the Barker report’s diagnosis of how our planning system caused our housing shortage were well researched, the recommendations for change did no more than paint some steely surfaces over the crumbling fabric of planning. They were fixes for an unfixable system. This white paper promises more.

Its recommendations tackle two of the four policy-created barriers to building enough houses of the type, and in the places, people want to live in (adding extra uncertainty and risk to development; restricting land to build on; just saying you can’t; and giving communities no incentive to accept development: see my article for NIESR). If implemented cleanly and transparently the proposals would greatly reduce the risks and uncertainty our present system imposes on builders, while providing some incentive to local communities to accept new development and funds for the infrastructure that new developments require. At the same time, rather than destroying planning and undermining democracy as claimed by its critics, the proposals  would strengthen planning and retain full democratic local control ensuring standards of environmental protection were maintained while improving the quality of new development.

Central to our planning system, since its creation in 1947, is its discretionary and piecemeal decision making. This is really the antithesis of “planning”: every decision about significant development is a one-off made by local politicians. Decisions do not necessarily reflect the “plan”. This is not just because only about half of local authorities (LAs) have a valid local plan: even when they do have a plan, planning committees’ decisions often do not follow it.

Moreover, since there is no standard set of definitions nor format for storing or accessing local plans, it requires detailed local knowledge to understand what “the plan” says. This means it is also impossible to evaluate the system as a whole since there is no comprehensive database on plans (where there are plans). Researchers at LSE and Knight Frank spent a total of 18 months trying to generate comparable data on how much land LAs were allocating for housing. Even this effort was only able to produce data for 107 LAs and careful inspection showed that data from a total of only 73 were credible and could be adjusted so they were comparable.

So government may have elaborate, even sensible guidelines, as to how much land LAs should be allocating for housing but there is absolutely no way of evaluating the effect of such guidelines. The oldest of these guidelines is that LAs should supply land to accommodate expected population growth. This may be a very bad principle since it gives no weight to local affordability but the evidence from the 73 LAs – as far as it went – was that LAs did the opposite. On average the faster the local population had grown in the previous five years, the less land was supplied

So this gives us two reasons why our planning system adds risk and uncertainty to the development process: we do not know what “planning” is doing and we cannot anticipate whether any particular development proposal will be permitted. The white paper proposes to:

  • require LAs to make plans in a standard format, using a common GIS template (making the results transparent): and
  • move away from the current political decision on every significant proposal – effectively randomised decision-making – to a rule-based system. This would mean any new development consistent with the local plan and local design rules would almost automatically go ahead. As is the case in most Continental European countries now.

LAs would have to have plans which identified land according to three categories: i) Growth Areas where outline permission will be given subject to agreement on details; ii) Renewal Areas suitable for some new development or redevelopment; and iii) Protected Areas in which there is a presumption no development will be permitted. Planning would still be democratic and local. LAs will develop their own plans which may include enforceable design guides, and these plans will then be voted on and adopted or amended. But once adopted, they then will determine decisions so the current lottery of permission will disappear.

The problem of having so much uncertainty in our current decision-making – apart from the fact it means there is in effect no systematic planning – is that the uncertainty creates a substantial cost to developers. They need to build in a risk premium for any proposal to be viable, so far fewer are. Take away the uncertainty as to the decision and many more proposals will be viable: more houses will be built.

The second excellent proposal in the white paper is to abolish Section 106 Agreements and the Community Infrastructure Levy (CIL) and replace them as I suggested in this Planning piece (paywall) with a simple Infrastructure Levy (IL) fixed as a proportion of the sales price of the developments. The revenue from such an IL – as explained in the report Homes on the Right Tracks would be very substantial and more than sufficient to pay not just for proper new infrastructure to support new development but produce a much more generous flow of revenues for much needed social housing. A further interesting twist to the IL proposal is that 25% of the revenues should be spent in the neighbourhood of the development. One can see the attraction of this since one of the underlying supports of NIMBYism is the reality that if local communities permit new development they are, in effect, fined. There is a statutory duty to provide new services for the additional residents, schools, health care etc, but no guaranteed flow of revenues to pay for it. Local infrastructure is liable to become more congested and service quality get worse. Having 25% of the IL revenues go to the local community would offset for this.

Section 106 Agreements are individual one-off agreements negotiated by LAs with developers setting conditions for granting permission. They most commonly oblige the developers to provide a proportion of the new homes as so-called “affordable housing”. However, as I explain below, if one was trying to come up with the least efficient method possible of making housing more affordable then S106 Agreements would be a strong contender. Planners and politicians like them because there are no visible costs to public funds and it gives a sense of fulfilment to planners. Big developers like them because S106 Agreements are a huge drag on smaller developers; so they reduce competition and speed the monopolisation of the development industry.

The substantial transactions cost – to both developers and LAs of negotiating them – is only the tip of the iceberg of their costs, however. The real resource cost is hidden and comes in the form of yet a third source of extra risk and financing costs in development. The financial returns from any development depend on the form and details of the S106 Agreement but those are not known in advance. Bigger developers are better placed to manage this risk because they have both access to capital and to local planning officers and politicians as well as their own experts paid to double guess the system. Like the randomised decision making embodied in our use of “development control/management” the use of S106 Agreements, therefore, adds yet more risk to the development process requiring yet higher risk premia, so fewer projects are viable and fewer houses are built. Add to this the extra squeeze it puts on small developers and the resulting reduction in competition further reduces total building. Of course building fewer houses over time increases their price so reduces housing affordability in aggregate.

Yet a further positive proposal in the white paper is to require LAs to decide how much land to allocate to either Growth or Renewal Areas explicitly to take account of local housing affordability (as originally suggested in The introduction of price signals into land use planning decision-making : a proposal) as a “binding requirement”. The details will matter but at least if the standardised format for local plans is up and running, it will be possible to see how much land each LA is allocating for housing so the “binding requirement” will be potentially enforceable. As things are at present since there is no central record, and in many cases no record, of how much land is being allocated for development - any rules supposed to be used to guide the process are effectively useless.

The white paper also contains traps and unresolved issues, some of which are subject to consultations. Perhaps the most dangerous trap is the proposal to enhance design quality by having an accelerated approval process to ‘fast-track’ beauty (Proposal 14). While better quality design and place-making is an admirable goal the danger of this particular proposal is that is difficult to see how it could work without reintroducing by the back door, a whole new process of local piecemeal and no doubt partial and contentious “development control” under a new guise. Much better to have good design guidelines and some rewards for high-quality development such as a partial remission ex-post of the liability for paying the IL.

Another danger is that the IL may degenerate into a form of CIL, controlled by the whim of LAs (indeed, as with local plans, only about half of LAs bother to charge CIL at all and of those that do, many manipulate rates to act as a second line of development control). For it to work to improve the planning system and land value capture for the community’s benefit it is imperative that:

  1. its revenues are spent only on items nationally identified – basically supporting local infrastructure and social housing;
  2. revenues are ring-fenced from Treasury depredations. No point in providing an incentive to encourage local communities to accept new development if the Treasury may take it away next year in its block grant determinations; and
  3. the same rate is applied in all local authorities. The reason for this last is, of course, to provide an incentive that varies according to local housing shortages. Where housing is more expensive a uniform rate of  say 20% on sales value – will generate more revenue. If there is concern that this would be unfair, damaging the “levelling-up agenda”, than, much better than having rates determined locally, would be to have a fixed proportion of revenues paid into some central “levelling-up fund” which would be used to provide differential support for the poorest communities or regions.

There are still important issues related to the present planning system and its crippling effects on housing supply that are unaddressed in the white paper but it seems more constructive to welcome the positives. If the proposals in the white paper are implemented in a clean and transparent way many more houses will get built, homes will become more affordable and many jobs will be created.

Friday 17 April 2020

COVID-19: Crashing the Economy so what will it do for the Housing Market?

By Paul Cheshire and Christian Hilber

To speculate usefully about the effects of the COVID-19 pandemic on Britain’s housing markets one needs a clear analytical understanding of how our housing markets work and what forces cause them to change. Given the extreme uncertainty about the impact and evolution of the COVID-19 pandemic, anything in this blog is in some sense speculation, but we hope informed speculation. A recent academic paper analysing the impacts on house prices and rents of historic epidemics in Amsterdam and Paris found only relatively short lived and localised reductions in house prices and smaller effects on rents than on prices. While useful, we are cautious about trying to draw direct lessons from such historic examples: not least because the extent of lockdown and economic disruption now is an order of magnitude greater. COVID-19 is a true pandemic, affecting the whole interdependent world economy at the same time: it is not localised to Amsterdam, New York or Wuhan. Moreover, beyond its intrinsically lower fatality rate, modern medical understanding about the spread of disease and societal emphasis on saving lives are likely to mean much lower death rates from COVID-19 than from the Black Death or the cholera epidemic in 19th Century Paris: but disproportionately greater economic impact.

Apart from applying basic analytical tools it is also probably useful to look at the impacts in terms of three time horizons: the short term – over the next 6 to 9 months; the medium term -up to about 2024; and the long term – over the next ten-plus years. And, a warning, the further ahead one looks the more uncertainty attaches to one’s predictions. But we will do our best.

Britons have become conditioned to expect rising house prices in real terms. After all they have increased fivefold since the 1950s, faster than in any other OECD country. This rise has been driven mainly by rising real incomes - over that period they increased threefold - and an increasingly fixed supply of housing in large parts of the country, especially where people want to live, within reach of good jobs. The supply of new houses is so inflexible because our planning system is dysfunctional and our system of local government finance provides virtually no incentives for local authorities to permit development (see here, here or here). It is rising real incomes that fuel the demand for ‘housing services’ (reflected in rents) but part of what fuels the demand for housing as an asset is rising house prices relative to the price of other assets. And this, in turn, given the nearly fixed supply of houses, may fuel further price rises.

So this is the first pointer to what the COVID-19 crisis will do to the British housing market. In the very short term, it will produce stasis: buying and selling will all but stop. Indeed, they already have – Zoopla reports a 40% drop in enquiries for late March. Even when the lockdown is over and the market ‘unfreezes’, the transaction volume is likely to fall substantially. In part this will be because households are loss averse and not likely to want to realise a loss; but also because of the probable ongoing economic disruption discussed below. As WHO spokesman David Nabarro claimed on April 12, the ‘virus will stalk us for years to come, changing behaviour for the foreseeable future’. So prices will tend to fall, especially as incomes disappear for large numbers of people, triggering, in some cases, real financial distress and near forced sales.

While construction of new houses will be severely restricted, because new build homes are such a small fraction of the total stock, this will make little difference to total supply, so will do little to offset the fall in house prices. Moreover, the vast majority of COVID-19 induced deaths - which could be anywhere in the region of 20,000 and 170,000 over the next few years, but is likely to be towards the upper end of that range[1] - will be of elderly people, freeing up some existing stock and thus reinforcing, slightly, the temporary downward trend in house prices. Overall, the supply side effect of COVID-19 on house prices may be rather muted as the two effects (on construction and freed stock) may largely offset each other.

Thus, in the short term three things mainly matter:
1. How far will lenders be willing – even be able - to flex to minimise the number of forced sales? Forced sales quickly translate into falling house prices as we saw in 1991;
2. How catastrophically will borrowers’ incomes be hit and for how long?
3. How much and for how long will real incomes fall?

We are not medical experts so can offer no professional forecast as to how long the epidemic will last, nor the length of the severest disruption of normal economic activity resulting from the lockdown. We can offer two depressing thoughts, however: despite reassuring noises about renewed activity in China by the end of April, the Chinese, with far stronger controls and draconian powers of enforcement, started the lockdown in Wuhan on 23 January. In Britain, a far less effective lockdown started two months later. The Chinese began a gradual easing of their lockdown from 8 April. So maybe the UK lockdown will continue till early June, two months after the start of the easing in China. But even then the easing will be gradual and the resumption of normal economic activity will take probably months. Moreover, if the Spanish flu-pandemic that lasted from January 1918 to December 1920 is any indication (see here and here), it is likely there will be a (deadlier) second and possibly even third wave, depending on how quickly a vaccine can be developed and made available.

The second depressing thought is that the longer the lockdown lasts, the slower the recovery will be. The economy appears to be in freefall. Official data is hardly yet available but there was an ingenious review of current indicators in the Financial Times on 8 April: car sales down 44% in March; restaurant bookings on Open Table – a sort of forward indicator – dropped to zero two days before the official lockdown. The OBR 14th April report was gloomy and emphasised that recovery from the initial near catastrophic hit was dependent on businesses being able to re-set. But it looks increasingly likely that many businesses will not survive: think of all those empty restaurants, bars or theatres; consider all those empty planes or hairdressers’ salons, think about how many small construction businesses, car dealers or gyms are at a standstill. The physical fabric will survive, but the government’s initiative to provide emergency finance seems plagued by delay and, while loans do not come, more and more businesses will go under. Recovery will be much slower if the businesses themselves have to be re-invented and established anew. Demand may be there and so may the workers but there have to be businesses to organise the process of production and employment.

Turning to the medium term, we first note that the longer the lockdown and the more businesses go under, the slower the bounce-back may be. The slower the economic bounce back, the slower the recovery in the demand for housing – driven by earnings – will be. And even when earnings start to recover, the savings of many will have been depleted. Would-be buyers will find much of what they had set aside for deposits will have gone on essential supplies to keep the household afloat while incomes were down. Buying a home will have to be postponed again even if prices appear to be more affordable. It took till 1945 for real house prices to get back to their 1931 levels: it took till late 2001 to get back to 1989 real values. House prices may have increased nearly fivefold since 1955 but there have been prolonged troughs along the way. We would not be surprised to find real house prices in 2024 well below present-day real values. The economic downturn triggered by COVID-19 may even equal that of the Great Depression of the 1930s. However, construction of social housing may have a bit of a revival.

Lower house prices will not improve affordability in the medium term, however, since the cause would be lower incomes and depleted savings.

So what of the long term? To 2030 and beyond. Here we get even more speculative but we will assume that the pandemic dies away and the economy eventually recovers. The pandemic could even trigger an innovation boost e.g. in communication technology (which might damage the recovery of airlines and ground transport) or medicine. And, although we have long argued for radical reforms to those policies impeding building more houses where people want to live (such as releasing Green Belt land around commuter stations or reforming the tax system to incentivise local authorities to permit development), we will reluctantly assume there are none, at least no meaningful ones. One of the downsides of our expected prolonged depression in real house prices is that it may take the pressure off politicians to reform our dysfunctional housing supply.

If this is true, construction will stay well below the level needed to satisfy demand, so prices will take off when incomes finally recover. However, the structure of demand may change. Already there is talk of how we will not go back to what we were doing before COVID-19 struck. People may adjust to more home-working, including commuting to a central office but far less frequently. This would have two implications (apart from those it would have for the demand for office space): the first would be that people would demand more space in their houses; the second is that commuting costs might become less important. These would suggest a movement outwards to find cheaper land and space, and accept the longer commute that implied. In fact before COVID-19 struck there was already evidence of people jumping the Green Belt so this would be a continuation of an existing trend.

Although not strictly following (maybe we should have another blog to explain the reasons) a further related trend might be for higher-paid jobs to concentrate even more strongly in the first-order cities, notably London, Manchester, Edinburgh, even Leeds, at the expense of second-tier cities like Stoke-on-Trent, Derby or Coventry; and demand for housing to relatively increase in smaller but well connected high-amenity cities like Cambridge, Canterbury, Exeter, Harrogate, Hexham or Norwich, further increasing house price pressures in these locations.

While there is huge uncertainty surrounding the COVID-19 crisis - not just its impact on the real economy, the financial markets and the rate of recovery but also longer-term political consequences or the impact on globalisation - one thing is clear: COVID-19 is likely to have lasting effects on both Britain’s housing markets and housing policies. Real house prices (and rents) may fall in the short- and medium-term without making housing less unaffordable. It will remain particularly unaffordable for the young and those on lower incomes, especially in London and the South East, and for those hardest-hit by COVID-19. When it comes to housing policies, Britain’s policy makers (of all colours) would be well-advised not to jump on the populist band-wagon. There needs to be a policy reaction reflecting the true causes rather than the symptoms of the affordability crisis and the longer-term reforms that are the only way of truly resolving our housing problems. We need to learn from Germany, not just in terms of effective testing for COVID-19, but also from their housing and planning policies.

[1] Britain’s Chief Scientific Advisor mentioned a death toll of 20,000 as “a good outcome”. If 25% of Britain’s population were to eventually catch COVID-19 and 1% die, this would amount to a death toll of nearly 170,000. If half the population were to catch COVID-19, the death toll could in theory exceed 330,000. This however seems highly unlikely, not least because a vaccine is likely to become available prior to half of the population having been infected. Moreover, new medicine may lower the death rate to well below 1%.