New study reveals that excessive planning constraints make UK housing 35% more expensive

David Kingman reports on some new academic research which quantifies the impact of excessive planning constraints on average house prices in BritainHouse Prices

Most of us are aware that homeowners in Britain have enjoyed an enormous uplift in house prices since the mid-1970s, which has made it much harder for today’s younger generation to get on the housing ladder. But how much of the increase in prices is explained by the UK’s tight planning laws? A new piece of academic research recently set out to try to answer this question.

Planning laws make British housing “35% more expensive”

The paper, which was jointly authored by Christian Hilber of the London School of Economics (LSE) and Wouter Vermuelen of VU University Amsterdam, is entitled The Impact of Supply Constraints on House Prices in England. It is due to appear in an upcoming edition of the Economic Journal (an earlier discussion version is available here).

The authors set out to analyse the impact of two specific factors on house prices in England: supply constraints (i.e. planning laws) and physical constraints (how much land is available for building on). Their statistical analysis reveals that in the absence of supply constraints, real average house prices would have increased by about 100 percentage points fewer between 1974 and 2008. In other words, they made a huge difference: this means that the average house price would have gone up from £79,000 to £147,000, rather than £226,000, which is what happened in reality. As the Telegraphs Allister Heath argues, this means prices would have been 35% lower.

Of course, there probably isn’t anybody who would advocate creating a system in which there were no planning constraints at all. However, the authors also modelled how much it would have changed house prices in the most regulated part of the country, the South East, if they had copied the same planning policies adopted by the least-regulated area, the North East, during the last 40 years. They found that prices in the South East would still have been 25% lower on average.

By contrast, the paper’s authors found that physical constraints had much less of an impact on house prices during this period. They concluded that if the physical shortage of usable land could somehow have been removed, prices would be just 15% lower. Unsurprisingly, most of the inflation caused by this factor took place in densely-populated urban areas, where for years developers have been trying to get around the shortage of space by building taller and taller buildings.

Taken together, these findings demonstrate that, even if Britain had relatively liberal planning laws, housing in urban areas would still have become more expensive over the last three decades, but the effect would have been far less pronounced. This paper provides further evidence that Britain’s high house prices are not the result of a physical scarcity of land, as is sometimes claimed, but it is largely the result of deliberate planning policies which have sought to restrict development.

Something to build on?

These findings should make a further contribution to the urgent debate that is currently taking place about the future of the Green Belt, the land-use zoning policy which largely prevents development in the immediate vicinity of major towns and cities. Other commentators have previously argued that the planning system needs to be fundamentally reformed to allow more development to take place on land which is currently protected by the Green Belt, which critics say is often not worth protecting because much of the land is of poor environmental or aesthetic value, while large areas of it contain no public rights of way.

One such critic is Paul Cheshire, also of the LSE, who published his own research earlier this year that attempted to quantify the role the Green Belt policy has played in creating house price inflation in urban areas. His analysis reached the provocative conclusion that “the only value of green belts is for those who own houses within them…what green belts really seem to be is a very British form of discriminatory zoning, keeping the urban unwashed out of the home counties – and, of course, helping to turn houses into investment assets instead of places to live.”