22nd October 2018
My non-prize entry for 2018 Richard Koch Breakthrough Prize on the housing supply problem of England
A few weeks ago I spent a few hours to propose an entry to the Breakthrough prize on the housing problem in the UK, hosted by the IEA.
I’m informed that 350 entries were received. Mine was not shortlisted, although I must say that I’m a bit surprised, given I don’t believe there is any better solution than the one I’ve suggested. But there is a problem: My paper involves the most stinging criticism possible of the town planning “profession” and anyone in the judging committee with even the remotest “training” in that discipline would have found my paper extremely confronting. Nevertheless, I remain open to learning new things from the prize winning entries which will be announced tomorrow in London.
I will provide my comment on the winning entries as soon as I come across them.
Btw, I’ve not changed a single word in this (download the original PDF entry here), although I know that there is at least one typo in the entry.
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The cats can do without the monkey, thank you!
| Executive Summary Real house prices in the UK are now roughly double the level they were in the decades preceding the year 2000. To economists the cause is clear: the fatal conceit of planners who second-guess markets. The planning system came inadvertently to its riches in 1948 as an arbitrator on the lines of the fabled monkey who mediated a dispute between two cats. Since then its erratic actions and grandiose visions have suffocated the people but the true impact of its conceit was not obvious till the late 1990s because cities were expanding outward. Since then, growth has turned inwards to the CBD and now the restrictions imposed by the planning system are blatantly visible – even to non-economists. The remedy is to get the planning monkey out of the way and use markets to resolves our differences. We can let immediate neighbours directly negotiate with developers and, to address concerns of the broader community, a charge can be imposed by local councils on developers to fund a local growth plan that addresses the key negative effects of densification. The planners can then focus on the few things they actually do well. |
Cities have one main function: economic access. They provide labour and retail markets to business and jobs to labour. Through the productivity they unleash, cities enable people to climb out of poverty. Cities are also great for the environment since they shrink man’s footprint on the planet despite a growing population. Any beauty, cultural values or amenity that remain are an interesting appendage, like a dog’s tail.
But over the past 20 years many Western cities, including in the UK, have failed to enable jobs and prosperity because the planners have used the tail to wag the dog. Planners have completely lost the plot about cities.
Over these past 20 years the rise of knowledge industries has increased the demand for housing in the inner city. But planners have imposed huge hurdles on development that have made house prices impossibly high in job-rich areas. Figure 1 shows that real house prices remained flat (kept pace with inflation) between 1975 and 2000, at an average real price of around £104,000. But after 2000, prices skyrocketed, with the average real house price of around £202,000 despite a sharp correction during the global financial crisis.
Figure 1: Real house prices in the UK remained flat till 2000 but then skyrocketed
Source: Nationwide Building Society[i]
As well, unjust economic inequality is rising, as the wealth of already well-to-do incumbents in inner city suburbs is shooting to the sky while the less fortunate are forced to stagnate on the city fringe. Intergenerational economic mobility is being dampened and long-term social disadvantage settling in. Further, ‘[s]ince 2010, home ownership has fallen to a 30-year low, rough sleeping has more than doubled, and the number of new homes being built still hasn’t recovered to pre-recession levels’[ii].
The cause of this grim situation is self-evident to economists who have, for a very long time now, been sceptical of the town planning system. But their concern was not shared widely since not many people understand the impossibility of central planning. Moreover, a unique coincidence of factors kept housing pressure out of the inner city and planners were not able to do too much harm till around 2000, when things changed and the planning system’s failings hit the fan. Today, hopefully, the cause of the situation is clear enough to everyone and society will be willing to authorise a root and branch reform of the planning system.
A short recap of how we got here
Planners in the UK received the power on 1 July 1948 to provide planning permission for most new developments. Unfortunately, no serious policy thinking had been done prior to this decision. No one knew the precise problem society wanted planners to remedy and whether doing so was even feasible. After all, prior to 1948, the markets and local governments had been perfectly competent to decide what would be built and where it would be built. There was no shortfall of creativity and beautiful buildings even as cities helped banish poverty.
A lack of clarity about the basic purpose of planning is evident in the discipline’s textbooks which include virtually everything under the sun within their scope. The books also display a great pretence of knowledge about their ‘expertise’, which is largely the knowledge of self-created and pointless bureaucratic processes, and hoops and hurdles.
Arguably, town planning made some sense in the post-World War II era when it guided the rebuilding of war-torn cities and raised funds from developers for essential local infrastructure. Ronald Coase – who was awarded the Economics Nobel prize in 1991 – agreed in 1959 that the separation of industrial and residential uses by the planning system is an efficient way to deal with polluting and hazardous industries.[iii]
On the other hand, F.A. Hayek – who was awarded the Economics Nobel prize in 1974 – was not so sanguine. In a chapter devoted to housing and town planning in a 1960 book, he worried that planners have a ‘desire to dispense with the price mechanism and to replace it by central direction’[iv]. This was scathing criticism but it rolled off the backs of planners who did not understand what he was saying. Hayek was basically saying that planners were violating the entire learnings of two hundred years of economics. Town planners ignored Hayek and brashly went about their new business, churning out (what some would say were delusional) strategies, visions, objectives and processes.
The adverse impact of planning on house prices remained somewhat muted till around 2000. But that is only because in the post-World War II era, cities wanted to sprawl. Manufacturing was scattered in the regions and outer suburbs, the baby boomers wanted open homes in job-rich outer suburbs, and the car enabled workers to commute on relatively uncongested roads.
But the direction of city growth reversed with the onset of the IT revolution of the 1980s. Since the late 1990s manufacturing has moved from the West to Asia, particularly to China, and knowledge and information technology industries have taken its place. Knowledge industries depend critically on agglomeration effects and have a strong desire to locate close to the central areas of cities, often near the major universities where they can tap into a rich seam of labour. The advent of big data and artificial intelligence has accentuated this trend. In the meanwhile, jobs have dried up in rural areas with agricultural productivity having shot up across the world.
Today, all roads lead to the CBD. In some Western countries virtually half the high-value new jobs are being created in the CBD and immediate surrounds.
Completely ignorant about what is going on, planners have continued to extend urban boundaries even though that’s not what the markets are signalling, or they have imposed housing targets on councils without the slightest understanding of the incentives that force councils to oppose densification.
The town planning profession vigorously denies its culpability in causing this mess. It points its finger at interest rates and demand side factors to explain the problem of housing affordability. But its arguments don’t stack up. The cost of construction materials has been falling, and low interest rates should have boosted housing investment to meet any increase in demand. Many new houses have indeed been built – since people have no choice but to live somewhere – but many of these have been built in the wrong place: in places without access to jobs.
Planning must limit itself to matters of life and death
It was a huge mistake to hand over enormous power into the hands of people who do not understand what cities are and how the economy and markets works. Today, we have essentially two options: to limit the planning system to things it is capable of doing well or to disband it and start afresh.
In considering what we must do we can take Hayek’s prescient advice. In his 1960 book he suggested, in relation to town planning, that we consider ‘practical measures … to cause the (price) mechanism to operate more efficiently by making owners take into consideration all possible effects of their decisions’[v]. This advice holds the key.
We can begin by agreeing that planners should be allowed to continue doing a few things. There are genuine negative externalities from industrial pollution and hazards which bargaining may fail to address. For such cases an ad hoc line in the sand (regulation or tax) could potentially be helpful, although more efficient solutions might well exist in individual cases.
But it is on the matter of differences in taste and preferences and perceived conveniences or inconveniences, that planners must get out of the way. The view that there are ‘negative externalities’ from mere differences in perspective (preferences) is a category error that takes us down a public policy black hole. While some externalities are real and dangerous, others are merely a difference of opinion. One man’s meat is another man’s poison.
Our likes and dislikes must not be the business of government. Our act of living is not toxic. Our kitchens do not spew plumes of toxic smoke. And once public sewage systems are installed, our homes do not constitute a public health menace.
Not everyone cares if they get sunshine in their bedroom or even if they have a window. Some people would happily sleep in a bedroom without a window since they work in the CBD at night and want to come home to sleep in darkness and peace. And not everyone wants a big bedroom or an attached toilet. They may be on a minimum wage job in the CBD and are happy enough to climb the ladder of opportunity by living in a tiny room in the CBD. Likewise, some people can sleep through noise and may choose to pay the lower rents in apartments built in crowded, noisy streets.
Planners must not tell us what we can or cannot like or how we manage our money. Their interference in matters of preference is a direct attack on human liberty.
Instead, we must facilitate people to engage in commercial exchange to resolve their preferences.
Consider the following interested parties in the residential housing market:
- the developer or proponent;
- the land owner (sometimes the same as the developer);
- the immediate neighbours (generally five) who may experience a direct reduction in their property value from densification; and
- the broader community, which needs compensatory infrastructure to mitigate any significant negative effects from densification.
Notice that planners are conspicuously absent from this list, and for a very good reason: their preferences matter stuff all.
The first three parties in the above list are capable of resolving their issues through private bargains. The costs of doing so may be high but are not insurmountable. The fourth group in the above list can be dealt with by the councils charging a fee from developers. The resulting solution would mimic the market. In any event, there is no scope in this entire business of housing approvals for planners to weasel in their preferences and ‘visions’. The mental gyrations of our servants, the planners, must not be seen or heard during this entire process.
We don’t need planners’ glossy documents (paid by our taxes) to tell us what we should want. Presumably we should worry ourselves about sustainability, future proofing, community, amenity and other jargon – most of which even two planners can’t agree on. The plain and simple fact is that we the people (markets) are perfectly competent and capable of considering all these fancy factors and many more, in the blink of an eye. Markets make unbelievably complex calculations that balance an infinite variety of preferences, budget constraints and expectations.
Hayek had warned the West repeatedly about the slippery slope. In the case of planning, the bottom of the slope was reached quickly. Today we live in a full-fledged mad hatter world. No one can predict what will happen with a planning application. Sometimes the NIMBYs will win, sometimes the developers. But this we can guarantee – that the society will always lose. And that the mad hatters will get paid big bucks from our taxes regardless of the outcome.
It is not just one level of government we are talking about. The various levels of government squabble with each other at our expense. This is what Housing secretary Sajid Javid said in March to local governments – that he would be ‘breathing down your neck every day and night’ to ensure home-building targets were met[vi]. Really? Will Javid’s bad breath fix the housing problem?
Planners must limit themselves to matters of life and death and leave the rest to the people. We do need a method, though, to show the cats how to bargain with each other without involving a monkey.
But the NIMBY problem!
NIMBYs are said to be evil people. They first banish potential new residents to the outskirts. That’s not all, for living on the outskirts would be fine if high speed rail came into the CBD. But NIMBYs don’t like overhead rail lines and insist on pushing them underground at ten times the cost. The NIMBYs are perfect dogs in the manger.
But NIMBYs are not imagining things. They do have real property rights in their neighbourhood. After all, property is what the market thinks is property, not what some law dictates. Markets value the location and ambience of a property, and therefore, the entire package is property.
Some NIMBYs lose a lot from densification and it feels to them that their property rights are being confiscated. As a property-owning democracy, we must defend NIMBYs’ property rights.
The most important point about NIMBYs, however, is something quite different. This, only economists understand. But once this is more widely understood, it leads us to the light at the end of the tunnel.
There is no representative NIMBYs. They are all different. Some are so wedded to their lifestyle that no amount of monetary compensation would budge them, or at least that’s what they claim. Others can, however, be easily appeased by the provision of additional public parking facilities and a new public garden, and possibly a bit of money handed over to them outside the public gaze. Still others might be quite indifferent. There are old houses belonging to children of recently deceased residents who simply want to maximise the value of the land and divide the proceeds amongst themselves. And there are yet others (the YIMBYs) in the same area who want densification. After all, man is a social animal. Living closer together yields many benefits including better retail centres, restaurants and cultural avenues, more job opportunities, more baby sitters and nannies, more marriage partners, and more eyes to watch and hence greater safety.
Now the way to break the NIMBY cartel should be obvious. We should avoid taking the extremist NIMBYs head on, and work, instead, with other residents.
Proposed market-based remedy
As a first step, a local council would need to do some homework. It would need to decide upon an area, let’s call it a growth zone, within which higher density would be permitted if the council receives money to build compensatory infrastructure. The council would then prepare something like a precinct structure plan that includes a full suite of noise mitigation measures, additional parking and parks, better sewage and storm water to fully mitigate the effects of densification on the average resident of the community. The council would consult with the community during this process.
Let’s assume that £10 million will fund the required compensatory infrastructure to accommodate 1000 additional medium to high density dwellings. A ‘bond’ would then cost £10,000 per dwelling.
The council would then impose the following two requirements on developers.
Requirement 1: Approval from immediate neighbours: Developers would need to provide written consent from the immediate neighbours of the property they want to develop. Any monetary or other bargains must occur behind the scene. A more sophisticated version of this process could involve the government creating a platform for two-sided auctions (including combinatorial auctions) in which developers and residents can express their preferences anonymously. Developers will then be able to prioritise development in lots where the immediate neighbours are happy with less compensation.
Requirement 2: Purchase of bonds: Planning applicants would be required to attach the requisite number of bonds to their application. Obviously, the total amount that developers would be willing to pay the immediate neighbours would be limited by this requirement to compensate the broader community, but since developers would know the bond price in advance, they would construct their negotiations accordingly.
Once these two requirements are fulfilled, planners would dutifully approve the planning permission. Everyone could then live happily ever after. The end.
There are, of course, many details that need to be added to this proposal and many questions that need to addressed, but this summary should provide assurance that a market-based system can indeed work.
Conclusion
The current planning system is not fit for purpose. It is arbitrary and whimsical. It either attacks NIMBYs’ property rights or the economic and physical liberty of new residents who want to live closer to where the jobs are. Its central planning approach is fundamentally impossible and imposes a huge cost on society.
The proposed market-based remedy involves low cost bargaining with immediate neighbours and funding compensatory infrastructure for the affected community. Almost everyone can live with its outcomes. The consequent economic boom in the UK should take everyone by surprise.
Is this remedy politically possible? This can be sure that developers will love it for it opens up huge development opportunities and eliminates planning uncertainties. More importantly, most residents in NIMBY-infected areas will love it. Only a few recalcitrant NIMBYs and ‘visionary’ planners will object. Both of them can be safely ignored.
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[Word count including title and executive summary but excluding the entry number/ name/ address, footnotes and this sentence: 2,992]
Endnotes
[i] Nationwide Building Society. Data available at: https://www.nationwide.co.uk/~/media/MainSite/documents/about/house-price-index/downloads/uk-house-prices-adjusted-for-inflation.xls. [Accessed 12 September 2018].
[ii] Press Association. (4 March 2018). ‘Nimby’ councils failing to build enough homes will lose planning powers, says Javid. The Guardian. Available at:
https://www.theguardian.com/politics/2018/mar/04/nimby-councils-homes-lose-planning-powers-sajid-javid [Accessed on 12 September 2018].
[iii] Coase, R. (1959). The Federal Communications Commission. The Journal of Law & Economics, 2, pp.1-40.
[iv] Hayek, F. A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press.
[v] Hayek, F. A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press.
[vi] Press Association. (4 March 2018). ‘Nimby’ councils failing to build enough homes will lose planning powers, says Javid. The Guardian. Available at:
https://www.theguardian.com/politics/2018/mar/04/nimby-councils-homes-lose-planning-powers-sajid-javid [Accessed on 12 September 2018].
