Recent weeks have seen a flurry of government activity focused on the housing market and how to build more affordable homes.
But ultimately, we will only build enough affordable housing if there is radical reform of the supply side.
The UK housing market desperately requires help to supply, not Help to Buy. The ultimate cause of our housing problem lies not with stamp duty, as Philip Hammond seemed to imply in Wednesday’s Budget, but with the planning system and the price of land.
The market is grotesquely distorted by government intervention through the planning system.
Agricultural land can sell for around £10,000 per acre, but that same acre can sell for up to £2m in the south east of England, if it has planning permission. A 200-fold differential in price is breathtaking in its economic stupidity.
The housing market supply curve is so steep that any increase in demand is more likely to result in higher prices than increased supply.
The end result is that we have the most expensive, densely concentrated, and smallest properties in Europe.
This is a system where any new property development will sell in a few months. Consequently, developers pay little attention to innovative design architecture. They don’t need to, when bog standard properties are easily sold off-plan.
Over the past 60 years, we’ve transformed land from being easily available to a very scarce resource.
The madness of this policy is difficult to overstate. The underlying problem is caused by government intervention (the planning system), which the government attempts to correct with another state intervention (Help to Buy).
The obvious counter to my argument is that the planning system fulfils a purpose and prevents our green and pleasant land from being concreted over. But I just don’t buy it – 90 per cent of the UK population lives on just nine per cent of the land.
Done sensibly, liberalising the planning system could have a transforming influence on house prices, because 30-40 per cent of the value of a new house is in the land it occupies.
There’s plenty of land. Research shows that only very modest building on the green belt would be required in order to provide enough land for housing for generations to come. Hammond was wrong not to commit to building on it as part of his Budget housing policy.
The green belt is not always a green – parts of it are even grotty. It really only provides value for those living within it. One wit described the green belt as “a very British form of discriminatory zoning, keeping the urban unwashed out of the Home Counties, and of course helping turn houses into investment assets instead of places to live.” All too true.
Finally, there’s the allegation that developers are sitting on large land banks that they need to start developing. But this misses a crucial point, namely that the planning system provides a huge incentive for developers to sit on land banks.
Given the limited supply of land, developers know they’re sitting on an appreciating asset. Also, there’s an element of precautionary behaviour, as developers make sure they will have enough land on which to build in the years ahead.
Whichever way you look at it, the problem is the planning system.