Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by Professor Alan Evans (AFH 24)

  I have been Professor of Environmental Economics at the University of Reading since 1981. My main areas of research have been in urban economics and specifically in the economics of land markets and of land use planning. I am the author of The Economics of Residential Location (1973), Urban Economics (1985), No Room! No Room! (1988), and numerous articles in academic journals.

  At the University of Reading I have also been Pro-Vice-Chancellor (1990-94) and Deputy Vice-Chancellor (1994-96). Since 1988 I have been the academic responsible for the provision of (affordable) housing for the 4,500 students in residence. I am also a Chartered Accountant.


  A constructive step towards achieving more affordable housing would be to try to get tax policies aligned with land use policies. And a first step in this process would be a shift in the tax burden to make the Council Tax into a property tax, at the least, proportional to the value of houses within the local authority area.


  1.1  The term "affordable housing" is difficult to define in economic terms. Although it sounds as though there should be some absolute standard, actually the term is relative—this housing is more affordable than that. To try to clarify the issue I shall approach the problem by what may seem to be a circuitous route. It is, however, necessary to understand the interaction of policies which have led to the present situation.


  In the 1940s, when the current British land use planning system was put in place, a number of limits were put on the uses to which certain areas of land could be put. These limits were not intended to be constraints. With respect to London, for example, it was anticipated that the demand for housing in the metropolitan area would not increase. Indeed it was thought that both population and densities could be reduced by moving some out to New Towns and by regional policies which would lead to jobs being moved north. It was therefore believed that a Green Belt could be put round London designating land which would not be needed for development. All the development land which would be necessary could be found within the area contained by the Green Belt. Only later as incomes rose and people's expectations also rose did the demand for housing land increase and the prediction turn gradually into a constraint—not "this will not need to be used" but "this must not be used" (Cullingworth, 1997: Inwood, 1999).

  2.1  As a result of the constraints on the availability of land for development which began to bite in the early 1960s the price of land and the price of housing began to rise, a trend which has continued to the present. The increase has been most evident in southern England as regional policies were not strong enough to shift demand elsewhere. The relaxation of regional policies in the 1980s and the withdrawal of the state from the supply of public housing at that time exacerbated the situation. A further factor has been the greater willingness of local planning authorities in areas of higher unemployment to allow development than those in areas of full employment.

  2.2  The increase in house prices was also fuelled by the incentives for house purchase which were available through the tax system. The most obvious of these was tax relief on mortgage interest. Particularly in the 1970s and 1980s, when inflation and interest rates were both high, this encouraged people to spend as much as they could on buying the largest house that they could, whilst, paradoxically, physical planning policies were trying to restrict the amount of land available for housing. Subsidies for local authority housing probably did not have the same effect in terms of increasing demand since housing was allocated by administrative fiat not through the market. It may even have been that many families occupied smaller properties than they would otherwise have done in order to gain the subsidy. The phasing out of council housing may therefore also have served to increase demand from the late 1980s onward.

  2.3  It may be noted that for a long time it was denied by the planning profession that restrictions on the supply of land could and would affect house prices. The planners' position was put by Grigson (1987) and the economists' position by Evans (1988). After due consideration, and the employment of consultants to review the evidence, the then DoE came down (rightly) on the side of the economists, and accepted that physical planning policies of constraint could and would, if the demand for land and housing increased, have the effect of increasing the price of developable land and of housing above what it otherwise would be.

  2.4  The apparent acceptance of the economic argument by the DoE, and so, presumably, its successor Departments, has nevertheless not been reflected in any recognition of the problem in, for example, the Rogers Report or the Urban White Paper. To cite an example, on page 67 of the Rogers Report it is stated that "average floor space in new German homes can be as much as 50 per cent greater than English equivalent house types" and goes on to argue that English architects should learn how to achieve this. But this quite fails to recognise that the main thrust of physical planning policies in England has been to constrain land use. The economic result, higher land prices, means that people use the land which is available more intensively, living at higher densities in smaller houses. The smaller houses which the Committee observed in England were thus a consequence of the policy of constraint, a policy which the Committee itself endorsed and advocated.

  2.5  Other examples could be cited, but this serves to illustrate the problem, physical planning is seen in terms of land use not in terms of the economic effects of the planning policies pursued or in terms of the market forces which would be generated by the policies and would ensure that the policies were achieved. The view of the planning profession would appear to be that "Planning should lead, not prices. Land price should reflect planning, not the other way round" (Jarvis and Russell, 1999).

  2.6  This neglect of economics and the economic impact of the policies pursued is evident in the situation which developed in the latter half of the 1990s. The availability of green field sites was reduced and some 60 per cent of the new housing which was planned was expected to be built on brown field sites. It was calculated that this was physically possible. What was not apparently considered was the means by which the market would ensure that the objectives of the physical planning policy were achieved.

  2.7  Thus, whilst it may be true that there are sufficient brown field sites, it is also necessary to observe that the demand for housing is greatest in southern England whilst the supply of brown field sites is greatest in northern England. To ensure that the physical planning objective is met the demand has to be diverted north, through market forces.

  2.8  The way that this happens is clear. The demand of housing in the south cannot be met at existing prices with the existing supply of land. The price of housing and of developable land therefore rises. It has to rise sufficiently for demand to equal supply. This is achieved in several ways. On the supply side the high price of housing makes it worthwhile developing those brown field sites which exist. It also makes it worthwhile demolishing some lower density housing (or industrial buildings), particularly in suburban areas, and redeveloping the sites at higher densities. Thus we increasingly observe small blocks of flats built along main roads in South East England. They may not live up to the architectural wishes of Lord Rogers in creating a better environment but they achieve the objective of higher density living.

  2.9  On the demand side, the high price of housing in the south will deter people from moving south, thus reducing the number of families which have to be housed in the south. This will be balanced by the fact that firms in the south will increase their rates of pay to attract and retain their labour force. And in turn the high cost of labour will cause firms to cut back their labour requirements, either because their operations have become too expensive, or by using labour more intensively, or by moving operations elsewhere (or by going out of business).

  2.10  Thus the high cost of housing in the south is inseparable from the physical policy of constraint, a consequence of the policy and a means of achieving the policy as firms, activities, and people are discouraged from moving from the areas where there is a relative surplus of brown field sites. It is, in effect, a kind of regional policy.

  2.11  Whether it is an efficient regional policy is another matter. The economic activity which is choked off in southern England by the high cost of labour and of housing may, after all, not be moved to areas with higher unemployment and a relative surplus of brown field sites in Britain. It may be diverted across the Channel, to the rest of Europe or elsewhere, where land and housing is cheaper. Of course to the extent that activity is diverted north rather than south then this reduces the movement south and increases the demand for housing in the north, thus making it worthwhile redeveloping the brown field sites there. And to the extent that brown field sites are more expensive to redevelop than green field sites the increase in the price of housing and housing land also makes it worthwhile developing brown field sites in the south.


  3.1  The argument set out above demonstrates that the policies of successive governments have had the effect of making housing more expensive. This may not have been their deliberate intention, but it was an inevitable consequence of the stated policy of constraining the availability of land. In order to accommodate a larger more affluent population with as small an increase in the amount of land used as possible, housing has been made more expensive. Once this is recognised it raises a question as to what the term affordable means. The policy has meant that each successive generation has to live in less housing that their parents could afford at the same stage in life. Thus housing is being made less affordable in order to preserve green field sites.

  3.2  As well as an intergenerational effect there is also a sectoral effect. Private sector firms are usually more able to respond to changes in local labour market conditions. Thus private sector workers may generally be paid more in London and the South East, but in the public sector employers may be less willing or less able to vary national pay scales by paying higher wages in the south even though this is the logic of the planning policies being pursued. Compounding this problem is the fact that public sector services have to be provided to the existing population. Some private sector firms may close down or may choose to move elsewhere, but this form of adaptation is not possible for hospitals or schools or the police. Where it has been possible, for example in the case of the Inland Revenue, operations have been moved, but many years ago.

  3.3  There is also a differential effect with respect to housing. Those who own their own homes benefit from rising house prices. They feel richer. If they chose to move elsewhere they would in fact be better off. However, although their homes have become more valuable very few react to this by selling up and moving. Because of this inertia a policy of restraint is very slow to reduce demand. This wealth effect is also a reason why a policy of restraint is politically popular. On the other hand, for those who rent, increasing house prices mean higher rents and they are made worse off. For renters, who usually have lower incomes than home owners, there is no compensation for the rise in housing costs in the fact that the house they occupy is worth more. Since many renters may also work in the public sector the sectoral and the housing effects will reinforce each other. These people cannot afford to buy, and they cannot afford to rent in the south.


  4.1  The term affordable housing can have a number of meanings. It could mean that the dwelling is rented from a local authority or housing association, or some other non-profit making body, which charges rent. Thus the housing is "affordable" because the cost of occupation is less than the rate set by the market rent.

  4.2  Housing may also be "affordable" if it is sold at less than the going market price. In this case some conditions have to be imposed to prevent the buyer reselling and pocketing a profit.

  4.3  A third interpretation may be that housing is affordable because it is smaller. Curiously this seems often to be the position taken in public discussion of the problems facing public sector workers—"they" should build more small houses and flats for nurses and teachers to move into. But this ignores the fact that for a teacher choosing between a job in the north where he or she could afford a three bedroom house and a job in the south, where even a two bedroom house would leave little left over to live on, being told that there is a one bedroom flat that he or she can afford does little to make the job in the south any more attractive. The teacher in the south is still worse off.

  4.4  The problem is that most policies designed to ensure the provision of "affordable" housing conflict with other policies with other aims. Thus one response to the shortage of housing in London has been a proposal that small units should be built on public open spaces. Apart from the point made above—if housing is expensive it isn't made less so by telling people that if they occupied less space then they would be able to afford it, there is the paradox that it is proposed to build over accessible open space within urban areas in order to preserve inaccessible open space outside the built up area.

  4.5  The major conflict is one we have been at pains to point out. There is an inherent conflict between the wish to provide subsidised housing so that people can afford it and physical land use policies which aim to restrict the amount of land being built on by making housing less affordable. Widespread subsidies would be likely to encourage a greater demand for land and housing by those in receipt of them if only through encouraging people to move into the area. But since this reduces the supply of space for the rest the effect would be likely to be, over time, still higher prices for the rest and renewed demands for greater subsidies.


  5.1  Of course in the past the conflict between housing policies and land use policies has been even more evident, even if unrecognised. Until the 1990s all house buyers were encouraged to buy as much housing as they could through tax relief on mortgage interest. Whilst this has now been abolished other fiscal policies conflict with physical policies. A tax on the imputed income from owner occupied housing existed, as Schedule A, up to the 1960s when it was abolished. House construction has never been subject to VAT. Capital gains taxes are not charged on the sale of the principal dwelling.

  5.2  Most importantly the switch from domestic rates to the community charge to the council tax reduced the tax on property ownership and made it regressive rather than progressive. (In 1989-90 the tax payable on my house in Harrow on north west London was £1,522. It fell to a low of £556 in 1992-93 and returned to the 1989-90 level only in 2001-02. In the 1970s and early 1980s the rates payable were equivalent to 1 per cent of the value of my house at that time. The Council Tax payable now is equal to about one quarter of that percentage, the structure of the Council Tax seems almost to have been designed to work against the grain of physical policies. Small houses are charged at a rate per £ which is higher than that for large houses, and very large houses occupying large areas of land are charged the same amount as those which are smaller. Moreover the tax structure discourages high density development. Since high density low income housing is taxed more heavily than low density high income housing the effect is to encourage builders to put up larger more expensive houses.

  5.3  A constructive step towards achieving more affordable housing would be to try to get tax policies aligned with land use planning policies. And a first step in this process would be a shift in the tax burden to make the Council Tax into a property tax, at the least, proportional to the value of houses within the local authority area. If the system were also adjusted so that higher value properties paid more wherever they were located this would mean that the larger more expensive properties in southern England paid more and this would have the effect of damping down demand in the south. The effect ought to be that less expensive properties in the south should become more affordable.

  5.4  If the British tax system is not to be adjusted so that it does not conflict with land use planning policies, then the only rational alternative is to bring the latter into line with the former. This would entail the relaxation of current policies of constraint in southern England. To discuss these would, however, take us into areas where the Committee might not wish to go since they have more to do with the state of the economy than affordable housing. I can also be confident that the question of land availability will be raised by other witnesses.

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