Well, no Nick

But if the events of the past two years have taught us anything, it is that economic theory is a poor guide to practice.

Economic theory is in fact an extremely good guide to practice.

Consider, for example, this shortage of housing you are speaking of in the article. The ever rising prices underlying the boom and bust.

A small dose of economic theory tells us that it isn\’t in fact the price of houses that has been rising nor is it houses per se that have been booming and busting.

The cost of building a house has been pretty static (inflation adjusted that is), if not falling slightly over the years as with just about every other physical good that is manufactured. We do get better and thus cheaper at making things over time.

At a guess (and a vaguely informed one but no more than vaguely) you can whack up a nice three or four bedroomed house for £100,000 today. Certainly, I\’ve a quote on my desk for a Portuguese builder to put up a two bedroomed for me at €80,000.

It\’s also not the price of land that has been rising nor contributing to the boom and bust. Even now prime agricultural land is about £ 5,000 an acre and current planning guidelines are that there should be 5 or 6 houses on such an acre (I think that\’s right, 14 to the hectare isn\’t it?). So the cost of land is some £1,000 per house as a nice round number.

So why is the average price for a house something like £160,000? For a four bedroom perhaps £220,000 or more?

Because there is a third part of the system. The cost of permission to build upon a certain piece of land. that\’s what takes a house from a replacement cost of roughly £100,000 to that £220,000 or whatever it is.

Economic theory says that, in the absence of supply restrictions, we would expect a house to be valued at or around replacement cost. For if prices rise above this then some people will start to provide more houses. Assuming, of course, that there is no supply constraint.

But we do have such a supply constraint, it\’s called the planning process. Until we remove that constraint then we\’re going to continue to have this problem of high house prices.

Amazingly, someone\’s even written a paper detailing a scheme to get us out of this problem. Here, at the Adam Smith Institute. Land Economy.

Remove the restrictions upon what you may build and where and we\’ll have solved the boom and bust problem and also the high prices problem.

See, economic theory is useful.

9 comments on “Well, no Nick

  1. Not a bad paper that.

    I suspect a LVT will come up in this discussion so could I ask two questions which someone might be able to answer (I’m just about beginning to understand it). If your garden is larger than your house in square foot and (obviously) in the same location, am I right in assuming by large it gets taxed more than the house? And would planning permission be relaxed so you could ‘develop’ it? Second, the tax is on the undeveloped value of the land. If a piece of land had no access to a road, and then did get access, would it’s tax rise signficantly?

    Tim adds: Yes, the tax is upon the land, so a large garden will raise your tax. And yes, it’s the undeveloped value, so access to a road increases the value and thus the tax.

  2. One thing that hasn’t been discussed much on LVT is what happens in areas that we might describe as “heritage” areas. Do we want people to be able to build in the fields next to stonehenge, or to put a modern building in the old part of Bath?

    I’m generally of the opinion that we have much too much protection of heritage in this heritage, but can also see how, for instance, the people of Bath and Lacock make their living from the fact that there is a cohesive thing.

  3. Matt: “If your garden is larger than your house in square foot and (obviously) in the same location, am I right in assuming by large it gets taxed more than the house?”

    A major part of the value of the land is the planning permission, so, it would depend on the planning constraints on the land, in the same way that agricultural land in an area would have a lower value than land with planning permission for housing. I imagine that, if you were able to build another house in you garden, the land would be more valuable than if you were constrained to keeping it undeveloped

    “And would planning permission be relaxed so you could ‘develop’ it?”

    I view the planning system and LVT as being independent. The LVT would probably change if the planning permission were relaxed, but LVT doesn’t necessarily require a change in the planning system to function.

    Unfortunately, removing planning restrictions won’t solve the boom and bust problem on its own. The value of currently developed land would fall and the value of agricultural land would rise, resulting in a more land being developed and less being used for agriculture, but as soon as the equilibrium between the two is reached, the boom and bust cycle would continue from the new base level.

  4. Ah, ok, so planning permission would be taking into account of the value of the undeveloped land. Makes sense.

  5. Sorry Tim I missed your comment. I think though as Paul says the two things would (if you separted the taxation of them) be taxed rather different, the land a house is on clearly has planning permission and so is worth a lot, its garden doesn’t (in most cases) and so is worth much less.

    The access thing I thought interesting as presumably one could simply block off access to a field (say by building another house in the way) and reduce the tax.

  6. I suppose that would depend on how the land is parcelled on the land register. If the house was part of the same plot as the field, then it would disregarded when assessing the undeveloped value. If the house and the field were separate plots, then it would bring down the value of the field. That would be dependent on somebody owning two adjacent plots and being able to use one to completely separate the other from the road.

  7. Well I was thinking that my garden is surrounded by other people’s gardens and my house, except for a ‘side return’, so I could probably block of it off quite successfully.

  8. I’ll take a look at that paper, I’d recently been considering (and arguing with my girlfriend about) a Coasean bargaining system of planning permission, where the builder buys the right to build off people who object, or is compensated for being unable to build.

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