Britain is suffering from a major building shortage. We often think of it as a “housing crisis” because the most obvious signs of it are the eye-watering rents and house prices in our towns and cities. But the problem is much wider reaching than that: there are not enough buildings, of any kind, in places where people want to live and work.
As a general rule in the UK, the more people earn in a city, the less space they have per person. London has 353 sq ft per person, New York, one of America’s most expensive and desirable cities, has 531 sq ft. This is more than Blackpool (480 sq ft), which is Britain’s city with the most space per person.
The UK also has some of the highest office rents. In fact, the most expensive office in the world is in London, charging £277.50 per sq ft. The shortage of office space costs businesses an extra £32 per sqm. For a firm of 200 office workers, this would cost them an extra £48,000 per year.
Additionally, the UK seriously lacks the lab space it needs to grow its research base and analysis of planning data show that there are few plans to build many new labs anywhere in the country. To put the scarcity in perspective, London has only 90,000 sq ft of lab space in total while New York has 1.36 million square feet available.
In most markets, if demand exceeds supply then prices rise and the market attracts more producers and sellers. Property prices far outstrip construction costs, and yet, developers aren’t rushing in and closing the gap. Why?
The answer is the Town and Country Planning Act. Local governments have almost complete control over what can be built in their jurisdictions. Decisions are not driven by supply and demand - instead they are driven primarily by local politics and there are powerful incentives that make approving new housing difficult. Local residents have an active interest in limiting construction near them. They think that new homes can decrease the value of their homes, increase the strain on local services, the building work will be noisy, and the new buildings are often uglier and less attractive than what they replace. They are often right on all of these counts.
So when developers want to build anything, they have to battle the council. This is an expensive process and Section 106 means that councils can extract expensive commitments from the developers, who will, in the process of building new houses to sell, also have to build new roads and affordable (subsidised) housing.
This makes it very difficult for small builders to succeed. While development can be very profitable when a project is successfully approved, it is such a high risk endeavour that developers need to spread this risk over multiple projects, meaning that it is more difficult for smaller SME builders to compete. This is bad for innovation and competition in the sector.
Some argue that the problem is not scarcity. Sometimes people will blame high costs on the price of land or on interest rates. A piece of land in Oxfordshire without planning permission granted to it sells for 1% of what an identical piece of land with planning permission granted can sell for. The value of the land itself makes up 1/100th the cost of the sale price. The planning permission is the valuable thing. Others argue that high prices are caused by low interest rates. They are failing to understand why interest rates would have a direct impact on the value of houses: in the absence of supply, cheaper finance and lower returns on other assets push house prices up so house prices are primarily driven by how much people are able to borrow and save rather than by how much such homes cost to build. In the North, where supply is more elastic, house prices are less impacted by interest rates. Borrowers in Doncaster face the same interest rate as borrowers in Cambridge. In cities where planning is much more liberal, this relationship barely exists.
A lack of buildings causes a number of wide-ranging knock-on problems for the economy by damaging entrepreneurship.
People have less money. High housing costs are potentially the greatest squeeze on the cost of living. Both rents and house prices have continued to rise faster than wages and 66% of households either pay rent or have a mortgage. This money is generally a transfer of money from poorer people to richer people. This money doesn’t disappear, it goes to landlords or the former owners of homes who may spend or invest it but it would be better if more of it stayed with younger people.
If people are living paycheck to paycheck or putting all of their savings towards a deposit for a house, they aren’t going to have the money to start a business. Especially because home equity is often used to fund early-stage businesses.
There is even greater damage than this being done to the UK’s entrepreneurial dynamism. People are less able to relocate to where they are most productive. If we want more successful entrepreneurs in the UK, we have to be capable of building a hub like Silicon Valley, where people can meet, found businesses together and hire each other.
Take Los Angeles for an example. Everyone knows that LA is where a person goes to make films and this makes films cheaper to run. Aspiring actors move to the city which means there is a wealth of talent to draw upon, people who want to make costumes or sets move there, and filmmakers move there. These people then go to the same parties and meet in the same coffee shops and come up with ideas for new projects to embark on together.
Silicon Valley, and to a lesser extent London, is like that for tech. And Oxford and Cambridge are like that for Life Sciences. But high housing costs dampens innovation by pushing up the cost of living in these places, meaning that fewer would-be entrepreneurs, tech workers, and researchers are able to live side by side and start new projects together.
This makes it less likely that people will start companies and more expensive for them when they do. Because high housing costs discourage people from moving to productive cities, startups find it harder to hire people. Because offices and labs are expensive, entrepreneurs have to pay more for space. As a result, entrepreneurs are punished for wanting to start companies in the UK.
This then has a devastating impact on the economy as a whole. Academics in the US estimate that lowering building constraints in their most productive cities to the limit imposed on median cities would increase US GDP by 9.5%. No such studies have been done for the UK, but because the UK has an even more restrictive system it has been estimated that solving the housing crisis could boost GDP by as much as 30%.
As part of the “science superpower” agenda, the government should make solving this issue a priority. Lab-space is a low-hanging fruit and we should immediately embark on a scheme to make it easier to build labs across the country. But that would only be the start and would do nothing about housing or office costs.
One way of reforming the system would be to liberalise the planning system completely and allow anyone who owns a piece of land to do whatever they like with it. That would be politically untenable and would, in any case, be an overcorrection, because it would create a market which fails to price the externalities of building.
Attempts at liberalisation have faced stiff opposition because reforms are win-lose and people fiercely want to protect their house prices and what they see as their rights. A viable solution needs to balance two things: it needs to bring market forces into planning, so that housing is built in places where it is most expensive, and it needs the popular consent of the people who will be affected by it. If we can get this right the gains are so large that everyone can be a winner.
For example, a street of 26 bungalows in Barnet, if redeveloped to terraced housing could make about £54m, when the building costs and the cost of rehousing the current occupants is taken into account. This is enough money to compensate everyone if the rules governing such a system were properly drawn up.
This sort of win-win proposal is set out in Policy Exchange’s Street Votes:
Residents of a street should be able to agree by a high majority on new strict rules for designs to make better use of their plots. A street of suburban bungalows, for example, could agree on the right to create Georgian-style terraces. In many cases, an adopted ‘street plan’ would greatly increase the value of residents’ homes, giving them strong reasons to agree on it.
These proposals will foster gentle intensification within about half a mile of existing transport and town centres, creating better and greener places with more customers to support struggling local high streets. More people will be able to live in neighbourhoods that pass the ‘pint of milk test’, living in walking distance of somewhere they can buy a pint of milk, along with other essential social infrastructure.
These ideas were put forward in a presentation bill to parliament last week. Before Wednesday’s reshuffle, the then Secretary of State for Housing, Communities and Local Government Robert Jenrick, supported these reforms and was going to put them into the upcoming planning bill. Micheal Gove may be keen, and has indicated in the past that he is in favour of ideas like this.
Of course, street level democracy cannot be the only way new buildings are created. It is best suited to urban and suburban areas which already have public transport links and low density housing.
There are many villages in the UK which will also need new homes, and it may not be viable to make street-by-street design codes. There may also be places in the country where we want to build entirely new garden villages, for example, along the HS2 and Crossrail lines. The government should conduct pilots of how the core principles of fixing the broken incentives and transaction costs in the planning system can also be applied to those, for example by giving local people more power to bargain for greater benefits from such schemes.
Poundbury is a popular housing development in the South West. It was built as a project by the Prince of Wales. It was created to be walkable and sustainable and it borrows from traditional forms of architecture. It is incredibly popular and homes in Poundbury are worth 43% more than those in neighbouring villages. If we can work out how to build new, beautiful, and sustainable villages then this should be encouraged.
And on top of these reforms it should be easy to convert properties between different types of use. The economy is fast-moving and dynamic. We have seen regions that used to be full of factories turn to wastelands as the economy has moved on. While people bemoan the death of the high-street, calls to allow commercial property to turn into other uses of building space are scarce.
With a similar votes-based system, we should make it easy to turn shops into offices, homes into labs, cafes into co-working spaces, and we should make it easy to turn them back again.
When looking at the system as a whole, it is obvious that making it easier to build in the UK would solve a whole host of problems. It would make the country more dynamic, productive, entrepreneurial and a much nicer place to live.
