Tom Papworth is associate director, economic policy, at CentreForum, the liberal think tank.

PAPWORTH TomOne of the key battlegrounds in the run up to the 2015 general election looks like being the cost of living. Party conference season saw each party leader set out policies to address this issue. Yet while they offered savings of at most a few hundred pounds a year, none of them did anything to address an area of expenditure that consumes over a fifth of gross household income. The biggest cost facing households in Britain is housing; around 1.3 million households are spending over a third of their income on accommodation. In the 1940s, before government nationalised land-use planning, the average cost of housing was just one tenth of household income (despite there being far fewer duel-earner households).

This situation will only get worse. The number of households in England is projected to grow to grow by 2.2 million over the next decade, or 221,000 households a year. Yet the average number of new homes built over the last decade was 160,000 a year – even in the peak year of 2008 (during what proved to be an unsustainable credit boom) we only built 207,000. We need to increase housebuilding by 50 percent just to freeze the real cost; this would still leave the UK as one of the most expensive countries in the world to buy or rent a home.

We are therefore faced with three choices:

1.      We can allow the private sector to build a lot more homes

2.      We can look to the public sector to build more homes, leading to a return to the 1960s era when up to a third of households were council tenants;

3.      We can continue to build too few homes, creating an economic, social and human catastrophe that prevents people relocating to find work, causes rising levels of overcrowding and homelessness and saddles taxpayers with a rising Housing Benefit bill (at present, Housing Benefit costs the equivalent of 6p on the basic rate of income tax).

There is no magic to house prices: the price of housing strongly correlates with the price of land zoned for development. In the South East of England, housing land is worth a hundred times as much as arable land. This is a problem that has been endemic since the middle of the last century. It stems from the Town and Country Planning Act 1947 – one of the most resilient pillars of the post-war command-and-control state. Put simply, the “housing crisis” is in reality a planning crisis.

Development decisions are an all-or-nothing, winner-takes-all political process. If development rights are granted, landowners make a vast windfall – possibly worth over a million pounds per hectare – while piling social costs (in the form of loss of amenity) onto neighbours. If development rights are blocked, neighbours preserve their local amenity while piling social costs (in the form of more expensive housing) onto others. The process therefore becomes hugely political and has an inbuilt bias against housebuilding.

The solution is to create a planning regime that incentivises local communities to allow building: in the words of former CentreForum chief economist Tim Leunig, to turn the Nimby into an Imby. At the very least this should ensure that people who are adversely affected by a development are adequately compensated. Indeed, it is quite remarkable that planning law spares developers the need to compensate those who are adversely affected; generally, if one’s actions cause losses to another party, the law requires that one compensate them.

As the recently-deceased Nobel prize-winning economist Ronald Coase showed, markets ensure that property rights – in this case, the right to decide whether building goes ahead – will reside with the person who values the right most highly; the challenge is to create systems that make those markets work efficiently. A system whereby both developers and neighbours are forced to consider how much they really value (preventing) a scheme would encourage all parties to properly weigh the value of amenity verses development and enable mutually beneficial outcomes.

There are a number of ways that this could be achieved. Tim Leunig has proposed a system of Community Land Auctions, in which local authorities sell the rights to develop land in a two-stage auction. Firstly, landowners would be invited to offer their land for sale at a price of their choosing. The local authority would then consider which of those offers align with the local plan and are offered at a reasonable price (competition hopefully keeping prices reasonable). It would then auction the right to buy the land complete with planning permission. Thus landlords would be able to sell land at a good price while local authorities would make a huge sum from arbitrage, with which they could compensate local communities.

Community Land Auctions would be very easy to implement, but the benefits would accrue to the local authority, and the use of the money would become hugely politicised. An alternative strategy would be to take planning away from local authorities and give it to much smaller, resident-owned bodies. The size of existing local authorities is not pre-ordained: in Germany, there are 13,000 planning authorities. The new planning agencies I propose would be incorporated as private companies, owned collectively by the property owners in the area. The companies would sell development rights and use the resulting profits to compensate those who were adversely affected and pay local property owners dividends, thus providing a powerful incentive to permit development. Disputes could be settled by negotiation and arbitration, with the final recourse being to the courts.

Additional benefit would be

·        removing the situation where councillors make judgements on applications far removed from their wards;

·        ensuring that planning decisions were not shaped by non-planning related factors;

·        ensuring that the benefits of allowing development were directly captured by those most effected;

·        local communities would have the ultimate say on which local areas were worth preserving and which were worth trading for other needs.

One could also imagine that these locally-owned companies might stipulate further rules: for example, that people from the local community could buy one of the new homes at a discount. It is, after all, one of the great ironies that two of the biggest complaints one hears from voters – particularly in more rural areas – is that developers want to build on local greenspace, and that their children cannot afford to buy a home locally!

Britain remains a “green and pleasant land.” In fact, 90 percent of England is classed as Greenspace and Water. The next biggest category, making up four tenths of what is left, is domestic gardens. Just 1 per cent of England is housing, and half as much is non-domestic buildings. Even in the South East 87 percent is Greenspace and Water; in London the figure is 40 percent. The amount of land required to build all the new homes needed over the next decade (at equivalent spacial densities) would be just 0.1 percent of England.

Housing costs are higher in the UK than in most of the rest of the developed world. This cost is borne most heavily by the young and the working poor, but makes even middle class households substantially worse off through both higher prices and higher taxes. Planning reform has the potential to massively reduce the cost of living, enabling the party that introduces it to rightfully claim to be the real champions of struggling households. The question is which party will have the courage to take up the challenge.