The UK Spatial Economics Research Centre (SERC), which is in my opinion one of the world’s leading authorities on planning economics, recently released a Policy Paper entitled What we Know (and Don’t Know) About the Links between Planning and Economic Performance (provided below).
The Policy Paper summarises the impact of the UK’s land-use planning on economic performance, with the explicit aim of providing evidence to better inform discussions of the National Planning Policy Framework – part of the UK Government’s program of reforming the planning system.
Given that Australia’s planning system is based, in part, on the UK system, the SERC Policy Paper provides valuable insights for Australia. Below are some extracts of the main costs of planning identified by SERC, which support many of the arguments put forward on this blog. Readers interested in this issue are encouraged to read the SERC paper for themselves.
Housing markets and house prices:
SERC research suggests that planning restrictions substantially raise house prices, especially in popular areas. House prices react much more strongly to increased demand in communities where supply is more restricted. Specifically, SERC’s analysis suggests that an area moving from an average level of restrictiveness to having the lowest level of housing restrictiveness would see house prices fall by around 30%…
Of course, physical constraints on land availability – scarcity of land, the presence of steep slopes or flood plains – have an effect on house prices, but in England the effect is generally very small…
SERC research also shows that planning restrictions increase housing market volatility. At least until the recession, average house price volatility in the UK was higher than the most volatile single market in the US (Los Angeles). When house prices fall, supply is fixed in both the UK and US (unless you destroy houses). However when, as in the UK, housing supply is very unresponsive to increased demand, booms drive up prices rather than leading to more building. That means the UK sees more volatility on the up-side of the market and this leads to more volatility overall…
For added context, below is a long-run chart of UK house prices (taken from here) illustrating the extreme volatility of the UK housing market. Tight planning restrictions have been in place since the passage of the Town and Country Planning Act 1947. Partly reflecting this fact, the UK has experienced four booms and busts since 1970, with the first two preceding the era of ‘easy credit’ brought about by financial deregulation.
Back to the Policy Paper.
Business Activity:
…overly tight planning frameworks for cities also have costs. For example, restrictions which have historically prevented sprawl and maintained urban sightlines are likely to place constraints on urban growth in popular cities today – both outwards (via Green Belts) and upwards (via height restrictions). By raising development costs, especially in urban areas, planning restrictions lower levels of business investment in these areas. SERC evidence shows that these costs can be high in both the commercial office and retail sectors…planning restrictions in England impose a ‘tax’ on office developments that varies from around 250% (of development costs) in Birmingham, to 400-800% in London…
We do not know of comparable evidence for manufacturing or wholesale distribution, but to the extent that factories and logistics centres tend to use more land than offices, we would expect the effects to be larger for these sectors.
Current planning rules also negatively affect productivity in parts of the retail sector. In a recent SERC report, Cheshire et al (2011) demonstrate that planning rules reduced productivity in a leading supermarket chain by at least 20%…
Perverse outcomes:
…top down targets for brownfield land haven’t always delivered the kind of development people want in the places where they want it. The combination of brownfield targets and density standards has also tended to produce large numbers of small flats in urban areas – although there is a clear need for larger, family homes in these places… These costs need to be offset against the benefits of preserving undeveloped land. Undeveloped land does deliver benefits, but SERC research suggests that these are often not as large as claimed…
Paradoxically, the restrictiveness of the current system also results in some clearly unsustainable development. In popular areas of the country, demand for land is high but supply tends to be highly restricted. This means large financial gains to landowners in popular areas when land is made available for development. Often, it is local authorities who realise these gains by selling off their own land – in particular allotments, parks and school playing fields…
…the social and environmental case for not building on school playing fields or allotments is very strong. One of the primary functions of the planning system should be to protect such areas from development. But by causing land in desirable locations to be in such short supply the system has created strong incentives – sadly often too alluring to resist – which result in development going onto exactly the most socially and environmentally valuable land…
As discussed above, there is good evidence that Green Belt policies impose a development ‘tax’ on urban businesses… These costs might well be an acceptable part of a planning trade-off if the environmental gains are substantial. However, as Kate Barker pointed out, in fast-growing cities like Oxford and Cambridge, development has leap-frogged green belts into the countryside proper. The result is more commuting, congestion and pollution than relaxing restrictions might have achieved…
In summary, the SERC Policy Paper shows that the UK planning system:
- Increases house prices (with a regressive impact on low to middle income families)
- Increases housing market volatility
- Increases office rents
- Lowers retail productivity
- May not properly assess the true social costs of brownfield versus Greenfield development.
As highlighted on numerous occassions on this blog, similar concerns are prevalent with respect to Australia’s urban planning system.
