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Economics and Land Use Planning: Insights from Britain

Blog Entry No. 3
October 19, 2016

The alchemy by which land use regulation turns housing in Greater London into gold 

This is the third in a series of five blog entries showcasing insights and recommendations via excerpts from the 2014 book Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom authored by Paul C. Cheshire, Max Nathan and Henry G. Overman. This entry focuses on the impact of the British land use planning system on housing prices and affordability in Greater London.
(Note: the term “city” as applied in the book refers to an “urban region.")

  • “In contrast to these natural constraints that underpin the relatively high and volatile price of gold, the high price of housing is essentially driven by policy not by natural constraints (as Figure 4.1 bears testimony). In short, the British planning system has been turning houses into gold ever since the Town and Country Act came into law in 1947.” (p 80)

  • “Since [land use planning] policy intentionally and very firmly restricts the land for housing or any other urban development it is no surprise that the supply of housing has become progressively more inelastic. Houses that provide more space and a greener environment cannot be built without the land on which to build them; and our system both explicitly and implicitly (by reason of how it is controlled and as a result of the incentives it has thrown up) drastically rations such space.” (p 83)

  • “The British [land use planning] system was identified by Barker (2003) as the primary source of Britain’s housing supply inelasticity.”  (p 88)

  • “These results provide strong evidence people get welfare from, and care about, space in both houses and gardens [yards]. They pay more to consumer more private space and so, implicitly, prefer to live at lower densities, all else equal. This result is consistent with Song and Knaap (2003) who again find a positive and significant price paid for houses built at lower densities, all else equal.” (p 96)

  • “The ‘compact city’ may be a planner’s dream but for ordinary people it is more like a nightmare.” (p 96)

  • “The length of time a restriction is imposed is critical in the housing market because of the durability of buildings and the small size of the flow of new building relative to total supply or stock.” (p 98)

  • “Then the planning system would have to provide enough land to satisfy the forecast increase in demand. Indeed, since in a free society planners do not determine whether land allocated is actually sold to developers to build houses on, nor, when it is sold, whether houses are actually built by the developers, we would have to allocate not just that quantity of land predicted as being compatible with price stability but more. Not all the land allocated as available for development will actually be developed. One rule of thumb suggested (Evans and Hartwich 2006) is that this implies allocating 40 percent more land than the estimated growth in demand indicates is needed.” (p. 98- 99)