Housing Reform in England

Housing in England is under-supplied, resulting in high costs.  The government’s proposed reforms to address the problem are a step in the right direction but do not go nearly far enough.

I don’t usually engage in autobiography, but it so happens that my own case illustrates the problems of housing in England rather well.  I left university in 1978 and started work in London.  At first I lived in rented accommodation, but by 1983 I was in a position to buy a house – a fairly typical 3-bed terraced property in outer London, only a few minutes walk from my work.  The house cost £24,500, which I funded via a mortgage of two and a half times my then annual salary as a part-qualified accountant of £8,600 together with £3,000 savings accumulated while I had been renting.  The annual interest on the mortgage, at a rate of 10%, was £2,150 or 28% of my income.

I wouldn’t be able to do that now.  The current estimated value of that house is £400,000 (1).  The current salary for an equivalent job in London would be unlikely to be much more than £30,000.  So the value of the house is more than sixteen times larger than in 1983, while the salary is only about four times larger.  To buy the house with that salary, assuming an equivalent proportion (12% or £48,000) from savings, would require a mortgage of more than eleven times salary.  No mortgage lender would agree to that: the risk of default would be too great, since the annual interest, at a current variable rate of around 4%, would amount to some £14,000 or almost 50% of income. 

Because homes in London and some other parts of England are so expensive, many young adults face a choice between unsatisfactory options: live with parents; club together with friends or rely on help from parents to buy a property; live where property is less expensive but suitable jobs are hard to find without a long commute; or rent forever at an annual cost that may be no less than that of buying.  The current average monthly rent for a one-bedroom flat in London is £1,250 (2), equivalent to 50% of an annual salary of £30,000.  Renting a room or studio apartment is cheaper, but few would consider it satisfactory as a long-term arrangement.  Sharing a larger rented property can also reduce costs, but is not for everyone. 

Most informed observers consider that the main reason why housing costs are so high is that supply is constrained by the limited quantity of land with approval for housing development (3).  Such approval may be granted  by local authorities acting within a framework of law created by the Town and Country Planning Act 1947 and much subsequent legislation.  But even if a proposed development is well-designed, a local authority may gain little from allowing it to proceed, and by doing so will become responsible for much of the initial cost of associated roads and other infrastructure, and the ongoing cost arising from the extra population including children’s education and care for the elderly. It may also face campaigns from local people opposed to the development for reasons which may include loss of countryside, pressure on local services, the possibility of undesirable neighbours, and loss in value of their properties.  Furthermore, much land around London and other cities is protected from development by national designations such as Green Belt. 

The government (4) now proposes a reform of the planning system in England.  Details have been published in a White Paper Planning for the Future (5).  The Prime Minister, in his foreword, introduces the proposals as (6):

“Radical reform unlike anything we have seen since the Second World War.  Not more fiddling around the edges … a whole new planning system for England.”

He concludes that:

“… what we have now simply does not work.  So let’s do better.  Let’s make the system work for all of us.  And let’s take big, bold steps so that we in this country can finally build the homes we all need and the future we all want to see.”

Consultation on the proposals, inviting general comments and answers to specific questions, is open for 12 weeks from 6 August 2020.  I set out below the response I have submitted.  Questions are shown in bold with, in some cases, my brief explanatory comments in italics (for fuller context, reference should be made to the White Paper itself).  My responses are in plain text.

General Comments

The Prime Minister’s foreword quite rightly identifies the need for radical reform of the planning system.  It states that the new system should provide “the homes we need in the places we want to live at prices we can afford, so that … we can connect our talents with opportunity”.  The Secretary of State’s foreword quite rightly refers to “the present generational divide”: the fact that many young adults, even those on above-average incomes, are unable to buy their own home in the way that their parents’ generation were, and have little option but to pay high rents or else live with their parents.  The Introduction (on p 14) quite rightly refers to “long-term and persisting undersupply” of housing, and to the fact that housing in England can be much more expensive than in other European countries. Two points which might have been added are:

  1. The high cost of housing is a major contributory factor to poverty for families with moderate earnings whose rent is a high proportion of their income, and indirectly adds to government expenditure via the provisions for housing costs within Universal Credit.
  2. The average number of persons per household in the UK (2.4) is higher than in many other European countries (cf Germany 2.0) (7).  This has probably facilitated intra-household transmission of Covid-19 and may be a contributory factor to the UK’s relatively high death rate from the virus.

Although the White Paper contains many sensible proposals, these fall well short of what is needed to address these problems.  In particular:

  1. The annual target of 300,000 new homes is far too small.  It represents annual growth in housing stock per capita of about 0.75% (see answer to Q5).  That’s not big and bold. What is needed is a target supported by careful economic analysis showing that, over a period of 5-10 years, it can be expected to result in a substantial reduction in the cost of housing. 
  2. Although the proposed designation of Growth areas is welcome, it needs to be accompanied by measures to ensure that such designation does not result in huge gains to existing landowners with little benefit to developers or potential residents.
  3. The White Paper offers little to discourage the speculative element in demand which is one reason why housing is so expensive.  People expect an upward trend in the price of houses, and this may lead them to buy more, or larger, homes than they require for their own use. When many people do this, prices do indeed rise.  Reform of the planning system offers an opportunity to break this cycle of expectation.  Two measures that would be desirable in themselves and also help to change expectations include increasing the annual target for new homes to considerably more than 300,000, and allowing development on some Green Belt land.

Although outside the scope of the White Paper, it should be recorded that, to be most effective in addressing the problems of England’s housing, reform of the planning system should be accompanied by:

  1. Cessation of the Help to Buy scheme which increases demand for housing and so tends to raise house prices;
  2. Appropriate reform of taxation relating to housing, including:
    1. Ending the anomaly under which VAT is charged on major renovations and extensions to existing homes but not on construction of new homes, so discouraging an important means of maintaining and expanding housing space;
    2. Bringing main homes within the scope of Capital Gains Tax (perhaps with the charge rolled up over a lifetime), so removing the current tax incentive to treat housing as a speculative investment;
  3. Policies to ensure an adequate supply of skilled labour to the building industry (including via immigration), and to support the development and application of building methods with reduced labour requirements such as modular construction.

Q5 Do you agree that Local Plans should be simplified in line with our proposals?

It is proposed that Local Plans should identify three types of land: Growth Areas suitable for substantial development, with automatic outline approval for development; Renewal Areas suitable for smaller scale development such as densification and infill of existing residential areas, with a statutory presumption in favour of suitable development; and Protected Areas, including Green Belt and Areas of Outstanding Natural Beauty, which justify more stringent development controls to ensure sustainability.

My response:  Yes (in part).  I agree that the role of land use plans should be simplified and with the proposed definitions of Growth areas and Renewal areas.  Automatic outline approval for development within the former and a presumption in favour of development within the latter would simplify and accelerate the process of obtaining approval for development.  However, consideration should be given to the effect on the market value of land within Growth areas especially.  Existing landowners, who would not have had to apply for permission to develop or indeed to do anything at all, could be expected to enjoy very large gains if they then sell their land.  There is a risk that too much of the economic benefit from automatic outline approval would accrue to existing landowners and not enough to either developers or potential residents.  In other words, there is a risk that the designation of Growth areas might make more land available for development, but only at a cost to developers that would make it unprofitable to undertake development unless homes could be sold at prices at least as high as at present.  Taxation (via Capital Gains Tax or otherwise) of the undeserved gains made by existing landowners would be justifiable but do nothing to help developers or residents.  A much more constructive approach to the problem is suggested in the Letwin Report on Build Out (8).  In outline, if designation of land as Growth area comes with an automatic requirement that development of that land must provide for diversity of housing in respect of type, size, style and tenure, including a minimum proportion of affordable homes,  then the residual land value will be much less than it would have been with unconstrained development permission, allowing both lower prices or rents to potential residents and reasonable profit for developers.  The Report’s recommendation that residual land values be capped at around ten times existing use value seems very appropriate for greenfield sites, still allowing the landowner a very worthwhile gain.  There may also be a role for compulsory purchase powers, particularly in assembling large sites with multiple existing landowners where an individual landowner is holding out in the hope of a larger gain at a later date.

The third land type would more logically be divided into two (making four types altogether). Distinguishing the following types would help to promote public understanding of the varied reasons for restricting development and to raise awareness of the extent of land at risk of flooding.

  • One type (“At-risk areas”?) would be land which is unsuitable for development because of its current or likely future exposure to environmental hazards including coastal and river flooding.  Identification of such land should have full regard to the best available predictions of the effects of climate change, including sea level rise, over the next 100 years and beyond, and to realistic assessments (having regard to cost as well as technical feasibility) of the scope for mitigation of risk.   Land potentially at risk of flooding should not be considered suitable for development just because the risk can be fully mitigated in the short term.
  • The second type (“Protected areas”?) would be land which should be protected from development because it has environmental qualities sufficiently valuable to be worth preserving even at the price of restricting development.  Such land may provide direct benefits to visitors via opportunities for recreation and the enjoyment of natural beauty.  It may also provide ecosystem services yielding more indirect benefits such as drainage, water and air purification, biodiversity and (of especial importance in mitigating climate change) carbon sequestration by forests and woodlands.   This could include Areas of Outstanding Natural Beauty and Local Wildlife Sites.  As many people are coming to realise, however, it is not appropriate that all of the very large amount of land designated as Green Belt should continue to be protected (9).  Green Belt land is very varied in quality and much of it is inaccessible to the public. An effect of the London Green Belt is that much development is located beyond the Green Belt but occupied by people who work in London, whose resulting long commutes are harmful both to them and to the environment.  Allowing development on perhaps 10% of Green Belt land, chosen for its limited environmental value and proximity to existing transport links, would enable provision of many new homes in places where people want to live, such as around London, Oxford and Cambridge. 

Q8a Do you agree that a standard method for establishing housing requirements (that takes into account constraints) should be introduced?

By a standard method is meant a means of distributing the national housebuilding target of 300,000 new homes annually.  It would make it the responsibility of individual planning authorities to allocate land suitable for housing to meet their share of the total.  They would be able to choose how to do so via a combination of more effective use of existing residential land, greater densification, infilling and brownfield development, extensions to existing urban areas, or new settlements.

My response:  Yes.  To secure an adequate rate of provision of new homes, it is essential that binding targets are imposed on planning authorities.  However:

  • These targets should be part of a framework which also provides incentives to planning authorities to approve more new homes and leaves meaningful scope for local input to the planning process. This will minimise the risk of conflict between central government and local communities, allow planning authorities to innovate with successful practice being copied by others, and ensure a genuine role for local democracy.
  • The overall planning framework should prioritise number of new homes and quality of individual homes and appropriate infrastructure provision and placemaking.  Enforcement of the first should not implicitly downgrade the others.
  • The overall annual target for new homes in England should be considerably more than 300,000.  Given existing stock of c 24 million, and even if all of that stock remains in use, it represents annual growth of just 1.25%.  With likely population growth of 0.5% (10), this is equivalent in per capita terms to 0.75%. It is not credible that such a modest rate of growth, even if sustained over several years, can do much to mitigate what the White Paper itself (p 14) describes as a situation in which housing space in the UK can be twice as expensive as in Germany or Italy.  An OBR Working Paper (11) estimates the price elasticity of demand for housing in the UK at -0.92, suggesting that annual growth in per capita housing stock of 0.75% would reduce house prices annually by just 0.82%.
  • Targets should allow for development of selected Green Belt land.  Not to do this would unduly restrict home provision in areas where people want to live (see answer to Q5).

Q8b Do you agree that affordability and the extent of existing urban areas are appropriate indicators of the quantity of development to be accommodated?

My response:  Yes (in part).  Requiring more development in areas where property is more expensive, other things being equal, establishes a crucial link to the signals provided by the market, ensuring that development occurs where people want to live.  However, a link to the extent of existing urban settlement is more problematic and a simple algorithm, attempting to spread development “fairly” between planning authorities, would probably yield some bizarre results.  More important than such fairness is the need to ensure that new or expanded settlements are of a sufficient size to support a good range of local services, rather than requiring residents to make frequent car journeys to a neighbouring large town. 

Q9a  Do you agree that there should be automatic outline permission for areas for substantial development (Growth areas) with faster routes for detailed consent?

Approval for development is often in two stages, outline approval being the first stage.

My response:  Yes, for the reason given in answer to Q5.

Q14 Do you agree that there should be a stronger emphasis on the build out of developments?  And if so what further measures would you support?

‘Build out’ refers to the building of homes once approval has been granted. Build out of large developments can be slow due to low market absorption rates, with some sites taking over 20 years to complete.

My response:  Yes.  Slow build out has a direct effect in limiting the rate of provision of new homes.  It also invites the widespread mis-perception that under-supply of housing is the fault of developers and nothing to do with any deficiencies of the planning system.  Requiring diversity of housing within large developments so that provision more closely matches the range of housing demand, as recommended in the Letwin Report, should encourage faster build out by developers in the knowledge that homes are unlikely to remain unsold or untenanted.  Consideration might also be given to some form of penalty, such as a surcharge on the Infrastructure Levy, where the time taken to complete developments is determined (under suitable rules) to be excessive.

Q17  Do you agree with our proposals for improving the production and use of design guides and codes? 

Design guides and codes record architectural and other features of developments that have been judged successful in the past.  They can be used by architects as an alternative to original design, and by planning authorities in specifying the type of development they are prepared to approve.

My response: No.  The proposals tend to suggest that planning authorities would be required to comply with the National Design Guide, National Model Design Code and Manual for Streets.  Making individual planning decisions rules-based rather than discretionary is highly desirable since it will create greater certainty for developers and lead to faster decisions with reduced costs for all parties. However, each planning authority should be free to adopt its own rules via design codes, etc., adapting national guidance to their local circumstances as they judge appropriate.  For example, authorities may reasonably take different views regarding the balance in their areas between car use and public transport, with different implications for car parking provision and housing density. 

Q18 Do you agree that we should establish a new body to support design coding and building better places, and that each authority should have a chief officer for design and place-making?

My answer: Having a central body to support design coding and building better places is a sensible proposal, provided that its role is limited to support and planning authorities are free to adapt its output as they see fit.  While design and place-making are very important, a requirement for each planning authority to have a designated chief officer for these functions would limit the freedom of authorities to determine their own best arrangements having regard to financial constraints.  An authority might for example wish to provide training in design and place-making for a number of officers contributing to the planning process rather than appoint a single designated officer.  Such freedom enables authorities to try different arrangements and to learn from each other’s experience, and is more likely to lead to successful results than a uniform approach.  A requirement for authorities to have regard to design and place-making would be sufficient.

Q20 Do you agree with our proposals for implementing a fast track for beauty?

My response: No.  While there are many excellent suggestions in the report of the Building Better, Building Beautiful Commission (12), its emphasis on “beauty” as an overarching concept is liable to mislead and to be interpreted differently by different parties.  A development I happen to have visited – Great Kneighton, pictured on p 50 of the White Paper – appears to be well planned and well constructed, a good place to live, but I would not call it beautiful.  What is needed is not a fast track for a specific category of developments judged to embody beauty but a general acceleration of the planning process for all housing developments of sufficient quality.

Q22a Should the government replace the Community Infrastructure Levy and Section 106 planning obligations with a new consolidated Infrastructure Levy, which is charged as a fixed proportion of development value above a set threshold?

This question concerns the resourcing of the roads and other infrastructure required by new housing development.  The current Community Infrastructure Levy is a charge that local authorities may choose to levy – about half do – based on the floorspace of new development.  Section 106 (of the Town and Country Planning Act 1990) enables authorities to set conditions when approving a development, requiring the developer to do certain things or to pay money to the authority. 

My response:  Yes.  Negotiations over Section 106 cause delay in obtaining approval for development and may deter small builders from submitting applications at all.  A consolidated Infrastructure Levy at a rate known in advance would avoid such delay and provide certainty for applicants.

Q22b Should the Infrastructure Levy rates be set nationally at a single rate, set nationally at an area-specific rate, or set locally?

My response: Nationally at an area-specific rate.  I suggest a uniform rate for most areas but higher rates for areas where development now requires or may in future require works to mitigate flood risk or maintenance of existing flood defences.  Such higher rates are justified because areas exposed to flooding are unlikely to have lower needs for non-flood-related infrastructure than other areas.  They would also provide some incentive for builders to prefer development in areas not exposed to flood risk.  Where such higher rates are charged the extra sums should pass to the appropriate bodies responsible for flood defence. 

Q22c Should the Infrastructure Levy aim to capture the same amount of value overall, or more value, to support greater investment in infrastructure, affordable housing and local communities?

My response: More value.  This is one way in which planning authorities can be incentivised to approve more new homes (as proposed in answer to Q8a).  However, the overall situation faced by developers, including the price at which development land is available and the sale price of new homes as well as the Levy, should provide reasonable scope for profit. 

Q24a Do you agree that we should aim to secure at least the same amount of affordable housing under the Infrastructure Levy, and as much on-site affordable provision, as at present? 

My response: No.  As explained in answer to Q5, the provision of affordable housing within a diverse development should be automatically required at the point that land is designated as Growth area.  Such a development can be profitable for the developer because that requirement will substantially lower the price which the existing landowner can obtain for the land and so its cost to the developer.  Under this approach, there should be no need for affordable housing to be funded from the Infrastructure levy, which should be reserved to meet the costs of infrastructure provision and placemaking.

Notes and References

  1. From Zoopla’s online property valuation tool.
  2. Valuation Office Agency  Private Rental Market Summary Statistics – April 2018 to March 2019  Read from Chart 3 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/809660/PRMS_Statistical_Release_20062019.pdf
  3. The economics of housing in England (and elsewhere) is complex.  For a concise and fairly orthodox account, identifying causes and effects of under-supply, see Barker K (2014) Housing: Where’s the Plan?  London Publishing Partnership.  A dissenting view (arguing that under-supply is not the problem) is set out in Mulheirn I  (2019) Tackling the UK housing crisis: is supply the answer? https://housingevidence.ac.uk/publications/tackling-the-uk-housing-crisis-is-supply-the-answer/   An international perspective is given by Davies B, Turner E, Marquardt S & Snelling C (2016) German Model Homes: A Comparison of UK and German Housing Markets  https://www.ippr.org/files/publications/pdf/German-model-homes-Dec16.pdf
  4. The UK government is responsible for housing policy in England, while housing policy in Wales, Scotland and Northern Ireland is the responsibility of their devolved administrations.
  5. Ministry of Housing, Communities and Local Government  Planning for the Future  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/907647/MHCLG-Planning-Consultation.pdf  
  6. As (5) above, p 6.
  7. Euromonitor International https://www.euromonitor.com/united-kingdom/country-factfile gives UK population 2019  66.65M and number of households 28.02M implying population per household 2.38; and https://www.euromonitor.com/germany/country-factfile gives Germany population 83.02M and number of households 41.58M implying population per household 2.00.
  8. Rt Hon Sir Oliver Letwin MP  (2018) Independent Review of Build Out  https://www.gov.uk/government/publications/independent-review-of-build-out-final-report   See especially paras 3.3, 3.8, 4.3. 4.4, 4.16 & 4.17.
  9. Those advocating selective relaxation of Green Belt to allow housing development include:
  10. ONS: National Population Projections: 2018-Based, Main Points (5% growth over 2018-2028 implies an annual average rate of 0.5%) https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationprojections/bulletins/nationalpopulationprojections/2018based#main-points
  11. Auterson T (2014)  Forecasting House Prices, OBR Working Paper No. 6, para 3.14 p 23 https://obr.uk/docs/dlm_uploads/WP06-final-v2.pdf
  12. Building Better, Building Beautiful Commission (2018) Living with Beauty: promoting health, well-being and sustainable growth  https://www.gov.uk/government/publications/living-with-beauty-report-of-the-building-better-building-beautiful-commission
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