You’ll recognise this argument from elsewhere

For, as I said earlier, a house costs in Seattle just what a house costs anywhere. It’s not even the price of land which drives it up in that locality. It’s the permission to put a house on a piece of land which does. Allow more housing on that set amount of land, and the price of each piece of housing will fall. This isn’t rocket science, just basic economics: Increase supply, and prices fall. And again, it’s permits to build which are in short supply, so issue more permits and the price will fall.

My preferred solution is to simply abolish zoning altogether. You own a piece of land? Build as you wish upon it. That would solve one of our modern world problems by having less government. Indeed, simply stop government from doing something (rationing house-building), and the price of housing will fall.

Even if that’s a bit radical for you, it is still true the Seattle City Council is causing the problem. Thus it’s one the Seattle City Council can solve entirely. Allow people to build more dense housing in Seattle, and the price of housing in Seattle will fall. That’s what they say is their goal, anyway, so why don’t they do it then?

29 comments on “You’ll recognise this argument from elsewhere

  1. BTW tim, your Contins piece on the stupid “minimum wage person can’t afford a 2-bed apartment anywhere in the US” missed out mentioning the massive point that the statement is simply untrue in the first place. The “study” compared average prices of 2-beds with 30% of MW.

    Cos Journos and similar types don’t understand numbers.

  2. Pcar: Tim has had to become a solid citizen over there to get the advertisers.

    Lucky they are there cos if he was being paid by the comment at Contins he’d be better off with a UK Rail franchise.

  3. Up to a point, Lord Worstall. Up to a point.

    As someone in the business of building residential properties in the UK, planning permission or no planning permission, you’d be hard pushed to build what you and I would recognise as a decent house for less than £250,000.

    Yes, you can blame the state for that, but not because of planning permission – which you have to be a fool to fail to get nowadays, especially as it is such a moneyspinner for councils; Section 40 payments, etc, etc – but because the massive increase in regulations around, energy, fire, etc and the concomitantly created gravy train for armies of parasitical consultants to certify compliance have made it so.

    And, no, I’m not going to build unless I can see a return and in lots of places there isn’t a hope of that.

  4. It is possible that they are building dense housing in Seattle. There’s a lot of very high density construction in the San Francisco Bay Area. That should ultimately have an ameliorating effect on apartment rents and condo prices, though whether it is enough I don’t know, but there is almost no single family housing being built. The planning community pretty much wants to stamp those out but people still want them, so they remain an item that is scarce relative to the demand.

  5. The new proposed housing plan for Vancouver is to relax the density rules and allow duplexes on single home lots, cue cries of outrage………
    Can’t find a link but did read a study recently that the rate of Home building in Vancouver metro area (crazy property market) has kept pace if not slightly exceeded the rate of population growth, part of the issue was the mix as there were lots of condo towers in that number

  6. @ Recusant
    We bought #2 son a decent maisonette (not in the South-East) for £70k plus expenses last year. [1 double bedroom, good-sized living room, kitchen, bathroom/toilet, cupboards, own front door, central heating of course, fully carpeted, share of gardens and drying space, residents-only car park] so I have to ask what you mean by “a decent house”? Is it one that someone my age would consider decent or is it only one that would meet Laurie Penny’s criteria?

  7. John 77

    I’m not saying you can’t buy a property for less than £250k; you just can’t build one.

    Your son’s property is not what I’m talking about: a house for a standard nuclear family. Still , he got a good deal. Unlike the developer, unless it was not a new build.

  8. @Recusant: your point is what I keep telling our host, but he refuses to engage with it, thinking he knows all about how the planning and development system of the UK works these days, despite living in Portugal.

    The whole of the south of England is awash with development at the moment, every town and village has new sites either being built, already got planning, or in the process of getting it. The supply of new houses must be huge. Yet all this activity will have zero effect on the price that developers have to charge for these houses, because of the costs that the State bakes into the development process. Both regulatory (as you say, insulation, disabled requirements etc etc) and the de facto development tax that is s106 or CIL.

    All this means there is a floor in the price of houses below which the developer of any given site cannot build houses at a profit, and thus won’t if the market price falls. And if the market price rises, yes the developer with an extant PP will make some more money, but the next site he takes on will have higher levels of s106 contributions, or a higher CIL set, to take into account the higher market price.

    So there is a constant ratchet upwards on prices, entirely created by the States regulatory actions and desire for cash to fund local services and infrastructure. There can be no crashing of the price of houses by issuing lots of PP, as there is no market to crash. You could issue PP on square miles of open countryside, and any houses built would still cost what they do today, because of the fixed costs the State loads onto land development.

  9. @ Recusant
    No it was not a new-build, so the add-on costs that Jim describes did not apply.
    Where your and Jim’s asrgument fall down is that you assume that the same level of add-on costs would apply if Planning Permissions and housebuilding trebled. NO because (i) the loot that the local authority wants to extract from housebuilders would not treble – Conservative Councils will sigh with relief and stop demanding more as soon as they can balance their books without increasing the rates – (ii) Councils will compete against each other to attract development and the loot (and increased rateable values) going with it and as soon as there isn’t a shortage of chitties the developers can negotiate deals (iii) a lot of the add-on costs are not legally mandated

  10. @john 77, June 16, 2018 at 10:27 pm

    imho very naive suggestion believing councils will conclude enough S106 raised “to balance their books without increasing the rates…Compete…not-mandated:bribe us”. In general, Lab Lib & Con councils/gov’t have a never satiated appetite for more taxpayers money to fund their pet projects aka bribe voters.

    See May’s £20 Billion pa more tax to “save” the NHS. Might as well give the £20 Billion to DFID to squander as NHS will be no better and demands for not enough, more will continue.

  11. “Where your and Jim’s asrgument fall down is that you assume that the same level of add-on costs would apply if Planning Permissions and housebuilding trebled. NO because (i) the loot that the local authority wants to extract from housebuilders would not treble – Conservative Councils will sigh with relief and stop demanding more as soon as they can balance their books without increasing the rates – (ii) Councils will compete against each other to attract development and the loot (and increased rateable values) going with it and as soon as there isn’t a shortage of chitties the developers can negotiate deals (iii) a lot of the add-on costs are not legally mandated”

    Most of the money raised in s106 and CIL payments from new developments are not available for the council to spend how they like on annual bedget costs. They are to provide the infrastructure that the new housing (or rather the inhabitants) will require from the local authority. Yes occasionally the council may get funding for some pet project elsewhere in the borough out of a developer, but 99% goes towards improved road junctions, bypasses, new schools, new medical facilities, cycle paths, sports grounds and leisure centres etc etc. The council still has to fund the ongoing running costs of these facilities out of the council tax/central funds, it doesn’t get to spend s106 money on annual budgetary costs. The developer pays for the school building, the council have to staff and run it.

    So the s106 costs won’t fall, however many houses are given planning, because each house creates the same amount of demand for local services. So the same s106 costs will be attached to every one of those houses, whether 1000 are to be built in a given location or 10000. Now its entirely possible that if 10k were given permission in one area they wouldn’t all be built as they wouldn’t be the demand for them. But every one that is built will have to pay the same s106/CIL costs (CIL is the Community Infrastructure Levy, aka the roof tax, which tells you rather explains what it is – a tax on every roof erected, whether its one or 1000).

    This is what you don’t seem to get – the s106 costs are a fixed cost that every prospective house (ie one with PP but not yet built) have built into them at the point of grant of PP. Its no good the council giving PP for 10,000 houses with a very low s106 bill, then having every one built and there not being enough schools for all the children to go to, and the road junctions won’t take the extra traffic. They have to assume that every house given PP will be built and will create demand for local services. Ergo every house must bear the same costs. This is the crux of the matter – these costs are not reduceable regardless of how many planning permissions are granted. They are not a market cost – more PP does not equal lower s106 costs per house.

  12. Jim,

    I get the argument, but not the maths.

    House prices have shot up in recent years by far in excess of any normal inflation.

    If there is (apparently) little development profit now, then like-for-like there miust have been stonking great development losses previously (which we know was not the case), or otherwise costs across the board have all increased way ahead of normal inflation (again unlikely?).

    We should be confident that bricks, brickies and the like have not had costs rise at the house price inflation rate. Which means other costs rising even faster than the exaggerated house inflation rate.

    Hence, were all these add on costs (s106) previously funded from elsewhere? If from elsewhere, then where? My memory is rubbish which doesn’t help?

    Or is it that the additional regulation costs (Prezza etc) have had a very disproprtionate effect in this equation?

    Or a bit of both?

    And given that house prices have risen in certain areas much faster than in other areas, that suggests there exist huge swathes of the country where it is no longer financially viable to develop (with free planning), which I doubt?

    Which bit of the maths am I not getting?

  13. And you said this:

    but the next site he takes on will have higher levels of s106 contributions, or a higher CIL set, to take into account the higher market price.

    What has the real cost of what S106 provides got to do with the market price of houses?

    Which suggests that Councils are taking profits on s106 (or previously had to fund the losses on them from elsewhere), which possibly counters your “99% / it’s a cost” suggestion above, unless I am misreading it?

  14. “What has the real cost of what S106 provides got to do with the market price of houses?”

    Because councils will always find something for the developer to spend the money on. They’re always short of money for road improvements, new ‘community’ projects, money for local good causes (for example the cricket club I’m involved with has been allocated £70k towards a new pavilion from all the various s106 agreements signed by the myriad of developers who are building houses around that village at the moment, and the cricket club are just one of the local ‘good causes’ money has been sprayed at). Local government is a bottomless pit. As house prices rise the council will always find something that they can spend the money on, they’re not going to let the developer/landowner have any more than absolutely necessary. They see development as a nice little earner to pay for all manner of pet schemes they’ve had on the cards but can’t afford out of council tax.

  15. “And given that house prices have risen in certain areas much faster than in other areas, that suggests there exist huge swathes of the country where it is no longer financially viable to develop (with free planning), which I doubt?”

    Councils are like the mafia, they take enough that the goose can survive, just. In a marginal area they’ll demand the bare minimum (one school perhaps, or a contribution to a road improvement scheme). In a high house price area with lots of profit in the scheme they’ll have a wishlist as long as your arm and a price tag to match. In the scheme I’m involved with they were trying to get the developer to fund an improvement to a motorway junction 4 miles away.

  16. OK, no problem, but that takes us back to where Recusant started the discussion.

    He suggested falling prices would not spur development because of the on-costs, ie there is little profit at current prices.

    If s106 etc is a variable, which maintains (screws) development profit at a minimal level, then Tim is right?

    Free up planing, market prices slowly fall a little, and Councils will reluctantly, on new development applications, be forced to say sorry to the local tango club (or whatever the latest jolly is), as they amend their s106s back to something slightly more normal and realistic? And particularly if (more strategically) they have targets for new build, which ensures they have a proper incentive to re-assess their s106 practices?

  17. “Free up planing, market prices slowly fall a little, and Councils will reluctantly, on new development applications, be forced to say sorry to the local tango club (or whatever the latest jolly is), as they amend their s106s back to something slightly more normal and realistic? And particularly if (more strategically) they have targets for new build, which ensures they have a proper incentive to re-assess their s106 practices?”

    s106 is backward looking though. Houses in an area sell for £X. Ergo when a developer brings forward a project of 10k houses, the council will say those houses will all sell for 10000X, and base their s106 demand on that. The developer can’t say ‘But if we build all these houses the market price will fall so we need a lower s106 bill’ they’ll get laughed out of town.

    And plots with extant PP have the s106 costs based on the existing local prices. If the market drops for housing generally the developer stop building (as he’s not going to build houses at a loss) and then mothballs his site until the market price rises enough to make the site viable again.

    In the 2007/8 recession the price of development land with PP halved or more. Yet new build house prices didn’t halve. Because the s106 costs baked into the PP made that site nonviable at anything other than very close to the old market price before the crash. So all the developer could do would be to pull his horns in and wait it out, til higher house prices returned.

    So s106 is a one way ratchet – when houses go up in price generally s106 costs rise with it. But if the market drops the s106 costs in the existing PP mean those houses can’t drop much in price so the supply gets cut off. And when the market is low no one brings new developments forward because they’ve already got the old ones unfinished, so no lower cost s106 agreements are signed either.

  18. @ Jim @ 11 am
    If the s106 costs are just the cost of providing the necessary facilities for the house-buyers they are perfectly justified. But why didn’t all the local authorities go broke before they charged s106 costs?
    And no, they didnt. One or other of my parents was on the local authority’s housing committee in the late ’50s and throughout the ’60s and 70s when we built far more houses.
    Having said that I now see that when PF challenged you, you changed your tune and claim that Councils are like Mafia – so if we abolish s106 costs will drop and I was right all along.

  19. @ Jim
    What I don’t get is that s106 costs are a fixed cost – perhaps that is because they *aren’t* and later you admit that they aren’t.
    Many thanks to PF for conducting the discussion in a civilise manner when I might have got too annoyed.

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