Err, no Mr. Clark, no

At the moment, the planning system rewards speculators with huge profits if they are successful at lobbying planners to have their land zoned for housing. An acre of land can increase in value from £6,000 to £1 million or more — all at the stroke of a planner’s pen. That isn’t a free market: it is an invitation to corruption.

That\’s entirely true.

Development land — identified as such by democratic process — should be purchased by development corporations at agricultural or other current-use value. It should then be parcelled up, granted planning permission and auctioned off to developers: some in the form of large parcels of land for volume housebuilders and some in the form of individual plots for private individuals. That would prevent the present situation where a few big developers have a virtual monopoly over building.

The profits should then be ploughed into infrastructure. That would allow enforced social contributions, known as Section 106 agreements, and the new Community Infrastructure Levy to be abolished, cutting thousands of pounds from the cost of building a new home.

No, that\’s not the way to do it.

For a start you\’re arguing in favour of using compulsory purchase to benefit the pockets of other private citizens. This is an abuse of eminent domain and a trampling of property rights. The second is that redistributing the profits made from artificial scarcity isn\’t the point: abolishing those profits from artificial scarcity is.

It isn’t simply a case of dismantling the planning system, as Nick Boles, the Planning Minister, seems to believe.

We don\’t even need to dismantle the system. We just need for it to approve many more plans. So that the scarcity value of planning permission falls to, ooh, say £0?

For if houses cost too much because the price of a piece of paper is high then the the way to reduce house prices is to reduce the price of the piece of paper by issuing more pieces of paper. An analogue of Milton Friedman\’s point, inflation is always and every where a monetary phenomenon. We\’d actually rather like to see hyperinflation in planning permissions: so that the value approaches zero in real terms.

34 comments on “Err, no Mr. Clark, no

  1. Well, really it is simply a case of dismantling the planning system. Just as the slavery is dismantling the slavery system, the cure for censorship is dismantling the censorship system, and similar. There really isn’t any other solution. Because if you say-

    We just need for it to approve many more plans.

    How do you actually intend to achieve that end? The whole purpose of a planning system is to deny approval. It’s a veto system. That is its design purpose. That is why the laws were passed. To stop people building.

    So really, either you abolish it, or you accept that most of the population will have to live in rabbit hutches while the green-wellied Shire Communits gambol in their unspoilt rustic nature thing.

    It’s one or the other.

  2. Surely the scarcity value never gets to zero however many planning applications you approve.

    A ten acre sugar beet field on the edge of Cambridge will always be worth considerably more as development land than a similar field in the wilds of Lincolnshire.

  3. “For a start you’re arguing in favour of using compulsory purchase to benefit the pockets of other private citizens. This is an abuse of eminent domain and a trampling of property rights.”

    But it’s ok for privatised roads…

  4. I wish people would stop this ‘getting planning permission suddenly makes land worth £1m/acre’ concept. Firstly it was only £1m/acre for serviced land (ie land ready for a builder to build houses, with all roads and services laid on) at the height of the last boom. Prices are half that now, less for large areas, maybe a bit more for small areas already in urban areas. So you don’t get planning permission and suddenly have something you can sell for £500k/acre. You have to spend a heck of a lot of money putting in roads, and drains, and services, and leaving green open spaces, and digging storm water lagoons, and building schools (if its a large urban extension). Thats all as well as the Section 106 ‘contributions’ demanded by the Local Authority for every pet project they can think of in their area. Oh, and you have to build a certain % of ‘affordable housing’ as well.

    So the immediate uplift in value is nowhere near £6k to £1m. Its more like £6k to somewhere between £150k and £250k, for the landowner. There will be extra profits for the developer after that, but they come at the expense of considerable expenditure.

    So if one takes an urban extension of say 100 acres, roughly 60 acres are what they term net developable acres, the rest is used for infrastructure and non housing use. The hundred acres costs the developer perhaps up to £25m, and they only get 60 acres to build houses on. You get 12 to 20 houses per acre, depending on the types, say 15 average. So 60 acres builds 900 houses. Therefore the cost per house of the planning permission alone is roughly£25-30k. Less for high density flats and terraces, more for detached and semi-detached houses. Th rest of the cost of the new house is build costs, and infrastructure costs, and some profit for the developer.

    Which to my eye says that even if the initial planning uplift was zero, houses wouldn’t fall by much more than £25-30k in price, unless all the other costs associated with planning (building regs, development rules, section 106 costs, etc etc) were removed as well. Which given we don’t want housing developments with no storm water provisions, or that overload the sewerage system, or road system, means that even if you could build wherever you liked there would still be considerable costs attached to development in a small overcrowded island.

  5. Can’t help but wondering how much of this cost of planning, supposed housing shortage etc is actually a product of the system itself.
    There’s certainly lots of people I know own property that’s surplus to their actual needs, either as second homes or as houses much larger than necessary. But the idea of property as an investment is so entangled with housing as somewhere to live that, to gain leverage in the ever rising spiral of rising values, they divert as much money as possible into bricks’n mortar.
    So if you did have a planning free for all, would that necessarily imply the concreting over of the South East? Remove the investment enticement, would the supposed housing need look the same?

  6. Surely abolishing the artificial scarcity is the point. Sure this might be done near enough by issuing more permissions, and it seems likely that this is a practical first step, but if it is done this way then the supply of permissions will gradually dry up in future years and bring us back to an artificial shortage.
    If we must have a system where “the community” dictates what you may and may not do with your own property the “the community” should pay for it- so planning permission should become free to the applicants regardless of outcome, and a refusal should entail an offer to buy the property at current market values, including legal costs. This should make “the community” restrict its objections to projects it really dislikes, rather than merely isn’t in favour of.

  7. Surely, if planning permission became worth £0 because it was so easy to get, agricultural land that might be suitable for housing sure ain’t going to stay at £6K / acre. I’d reckon that land owners would no longer be happy to sell so cheaply and that potential building land would increase dramatically in cost – not to Jim’s £250K/acre – but to something somewhere inbetween. Might knock £10K off the price of a newbuild I suppose.

  8. @BiS: I’ve always said that the rise of ‘houses as investments’ has its roots in the debasement of the currency, particularly since 1970. A house is the one thing that an ordinary person can get their hands on that is of basic need (we all need to live somewhere) , is in limited (within reason) supply, and that is fairly simple to both rent out and buy/sell. It was obvious to the most simple person after the 1970s that the last thing you wanted your savings in was cash, or a fixed income. If you retired in 1970 on a nice little pension, you’d be in poverty by 1980. Whereas if you owned a 2nd home the rent would rise with inflation (or at least it would have if the State hadn’t capped rents). Even ‘controlled’ inflation of 2-3%pa means prices double inside 30 years.

    So the simple solution to rampant house price inflation is to stop the State printing (or allowing to be created) more and more money. When money in the bank appreciates at 2-3% pa and buys you the same amount of goods in 10 years time, and a house stays the same nominal price plus costs you money in maintenance then they will lose their lustre as investments. In the village near where I live they knocked down farm workers cottages in the early 60s because they were worth nothing, and needed money spent on them, and no-one wanted them. Nowadays they would sell for hundreds of thousands, even as dilapidated shells.

  9. Instead of shaving a few % off the journey time to Birmingham or wherever, why not build a high speed spine through the backbone of an area where planning permission has been reduced to £0 in value?

    Let’s eat up s few hundred square miles outside the M25, but enable commuters to get to London in under an hour?

    This is the sort of thing that the State should be halfway good at. Let the whole country contribute to the infrastructure and let the market take care of the rest.

  10. The selling price of plots of land is bid up in the rank order of desirabilaty. The presence of less desirable unoccupied lots does not effect the size of price payed for the most desirable plot and this applys to each plot in turn. In this way the price of land is not effected by the presence of unoccupied plots.

  11. That’ll be an airing of the classic (and fallacious) Henry George (from Ricardo) argument, then. It’s hard to say what is wrong with it, because everything is (it’s all derived from Ricardo, who got everything wrong, since he was in turn stuck with Smith and value derived from costs idea, then bolted on an erroneous class analysis). But one specific error we can easily see is that it doesn’t take into account the fact that if the supply of land plots changes, the perceptions of value of the present land plots will also change.

    Thus, the dismissed “unoccupied lots” unavoidably alter the subjective values to customers of the currently developed plots. Ricardo (and thus George) couldn’t understand that, because they didn’t know about subjective value (i.e. marginal utility).

  12. @Pogo#10
    The price of land would be what someone’s willing to pay for it. With no planning permissions that one helluva lot of potential land for sale & very few potential buyers. In other words, a proper market. Should settle at whatever the land’s worth for current use plus the amenity value of someone living on it.

  13. locations are unique and the unnocupied lots do not effect the price the individual is prepared to pay as they are not the location that the individual wants and they are competatively bidding for it.

  14. @Dinero
    But that goes against observed reality. The houses that go on land are even more unique, unless it’s a new built development. But in house sales you don’t seem much difference in price across similar properties in a similar area. Market forces. People substitute.

  15. Price across a similar location are similar prices across different locations are dis-simmilar, and planning permision does not create locations.

  16. Dinero-

    Potential marriage partners are unique too, but if the supply of women or men (depending on your preference) changes, so does the “bidding” for particular men or women.

  17. But people are very particular about there prospective house. The other alternatives do not equate. And due to competative bidding thay pay the maximum they can afford.

  18. I’m pretty sure I’m not understanding what Dinero (who doesn’t appear have a blog) is getting at. But, unfortunately, from the little that is clear (#19 is trivial), that it is sufficiently irrelevant to the problem at hand that it ain’t going to be worth the bother.

    I think he might be confusing individual and aggregate market behaviour (and, for the levels we are interested in – i.e. those that might lead to a leastening of the ‘housing crisis’ – housing is closer to commodity than to a unique craft good.)

  19. Surreptitious Evil-

    Dinero appears to be a traditional Georgist, in which case you have to understand the Georgists’ Ricardian theory of how land generates its value, otherwise their arguments don’t make much sense. But it boils down to the idea that land value is intrinsic to the land. Each plot of land on a hypothetical map has an intrinsic value which is its productivity (which Ricardo calculated as its marginal production in “corn”).

    So on that basis, making new plots available can’t change the land values of the current plots, because those values are intrinsic. Plot A produces 3 bushels per acre, its rent is 3 bushels, Plot B produces 2 bushels per acre, its rent is 2 bushels. And so on.

  20. (To be accurate, in the Ricardian/Georgist model, the rent of the land is the production in corn minus “subsistence” in corn. If the farmer needs one bushel himself to subsist on, the rent of a 3 bushel plot is 2 bushels).

  21. So on that basis, making new plots available can’t change the land values of the current plots, because those values are intrinsic. Plot A produces 3 bushels per acre,

    So when Sir Walter (or whoever) brings potatoes across from heathen furrin parts, and the value of corn drops and many bits of land which were marginal for corn production suddenly become really quite valuable for tatty farming (or any other paradigm-changing shock to the existing system – steel frame buildings enabling real high-rise) then their simplistic model falls apart?

    A change in the planning laws might (hopefully but definitely not certainly) be such a shock. Worth a try in MNSHO.

  22. SE-

    Basically, yes. It falls apart. Except that you have to remember that Ricardo meant “corn” as a generic foodstuff, rather than the specific grain. It was his attempt to find some generic cost that set values, arithmetically. Marx then went on to try to do the same with “labour”- Marxism itself being a Ricardian (or post-Ricardian) theory.

    Ricardo was trying to figure out which of the three classes he perceived to be in competition- landowners (rentiers), capitalists and labour- would win the class war. He concluded that it would be the rentiers, since the rents are fixed by the land value, so they would expropriate the profits from the capitalists, and the labour from the labourers, who cannot escape the rentiers’ clutches since the supply of land is fixed.

    Hence the persistent belief among admirers of the Land Value Tax that such a tax will have no economic costs, i.e. it is entirely transparent and non-distorting. Since the land value is intrinsic, the land rent is fixed and must be paid, so taxing it just diverts this from being expropriated by the rentiers into Good Works by the State.

  23. Except that you have to remember that Ricardo meant “corn” as a generic foodstuff

    Which is fine. As long as all land is relatively as good, or as poor, for every foodstuff. So you can have a ‘generic’. Try growing wheat (or even worse, maize) in the Scottish horribly-wet-and-windy-bits. Sheep seem to fair okay, though. And potatoes manage.

    Add some parsnips (yup, they’ll grow – or something similar will) and a cottage garden to force some greens (beans will do) and you’ve the makings of a decent roast dinner. You’re going to have problems with a fine white loaf, though. Barley or rye bread, possibly … Although you’d be better trading for the grain with some nancy southerner. Possibly for your wool.

    Well, not your wool. Your sheeps’ wool.

  24. SE-

    I think it sorta kinda made sense to somebody in Ricardo’s day if you stuck with the then relatively simple agrarian economy- everyone has little land holdings growing much the same stuff, so you could imagine a whole matrix of these “plots” with different productive capacities in generic “food” i.e. “corn”.

    But of course it isn’t really true; it’s conceptually broken, and as soon as the economy is more developed than that, it clearly falls apart. It’s the same as saying everyone’s production capacity is arithmetically defined by their ability to grow corn; fine when everyone (or nearly everyone) does indeed grow corn, useless when not only are some people growing spuds or cows, but utterly useless when people are scandium traders, web designers, electricians, etc etc.

    It’s the basic problem with all these costs-generated price theories. They seem to explain how prices arise, but don’t actually explain anything at all.

    I’ve believed for some time that the most fundamental thing anyone needs to understand in economics is value theory. If you don’t understand that, you cannot understand anything else. Unfortunately most people try to start off with complex stuff and reach real world conclusions without caring about such fundamental baiscs.

  25. I’ve believed for some time that the most fundamental thing anyone needs to understand in economics is value theory.

    Modern art and rap music both make people rich. Yet _I_ can’t stand (most of) either of them. Their value to me is probably actually negative – a blank space or silence would be an improvement. Yet, other people’s mileage clearly varies.

    The wife loves sweet potato. I wouldn’t reject it if I was starving.

    Whisky versus the new craze for expensive vodka. Hell, Smiths versus Laphroaig, Hazelburn versus Longrow.

    I live in an old farmhouse – I feel I need the space. Yet some people will live in a shoebox just to be within walking (or tube) distance of the London theatres.

    And endless other anecdata.

  26. rather than a cost generated price, the observation that land value is established by the buyer’s resources is the exact oppostite observation.

    today it is not the corn yield that is being transfered it the is occupational income, property in london is high because peoples salaries are high.

    I concur that there is a lack of planning permision in this country and that there is some scarcity value , but the technical point that I am making is that the value of the new planning permision is lower because it is granted for a development at a lower value location. Tims previouse post on the subject sujested more remote rural areas.

  27. the technical point that I am making is that the value of the new planning permision is lower because it is granted for a development at a lower value location.

    But the technical point you are making is irrelevant. It is completely trivial that planning permission for 100 new 4 bed detached houses would be more valuable on Hampstead Heath, say, than in Wick. However, this doesn’t change the fact that land with planning permission is more valuable than land without – whether that is Hampstead, Wick or even an area without a housing shortage.

    Are you one of these strange people, of whom I know far to many, who get panic attacks if they have to travel outside the M25 (conveniently for their holidays, Heathrow being just inside and air travel not counting)?

    Anyway – your actual argument (plots available in a different location cannot affect plots locally) is disproven by the London experience. Houses, in nice but remote areas, close to train stations (or easily travelable by car with a decent station car park) get a heavy London effect. In fact, the ratio of fast trains to slow trains on any line has a significant impact.

    Location is important (nobody is arguing it isn’t) but it is both fungible and less important for mass housing than for the non-price constrained.

  28. SEvil 29.

    Cannot agree more about value. It baffles me that people understand it (with regards to their own choices) but simply cannot understand it in others.

    Nothing in the world makes sense without it.

    Caviar is worthless if you don’t like caviar.

  29. Yes, that’s the basic reason you need to understand value theory. So that you understand that values are subjective to the individual and cannot be calculated from costs. Very few people understand this. Most bad economic ideas are because their believers don’t understand it. Hence why I said you can’t do any economics until you understand value theory, i.e. marginal utility.

  30. Tims post postultes that planning permision’s value comes wholly from its scarcity to the point that lack of scarcity could acheive £0.
    However even if planning permission did not exist, land would still have value, some more than others, and that value will still be reflected in the planning permisions, however multitudinos they are.

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