Playing by the rules could help the housing crisis

A hard-to-see difference in building planning systems is making the business of creating houses a riskier, more expensive gambit in countries like Britain.

It’s a risky business building houses and discretionary planning rules make it even more so. It also makes the process far more expensive.

Other factors being equal, larger and more prosperous cities have more tall buildings because land is more expensive (and taller buildings boost productivity).

Similarly, space restrictions — whether because of coastlines, steep land or growth boundaries — make land more expensive so buildings will tend to be taller.

But if we look at actual cities, there are major deviations from these theoretical expectations.

Chicago may be constrained on one side by Lake Michigan but London has been wholly constrained by a rigid growth boundary since 1955. However, for its size, Chicago has nearly seven times as many skyscrapers — buildings over 100m tall — as London does.

On this metric, even Paris trumps London.

The only ‘tall building’ league table that London tops is the proportion of skyscrapers designed by Trophy Architects (architects who have won an internationally recognised lifetime achievement award). Of London’s skyscrapers, 25 percent were designed by Trophy Architects, compared to only 3 percent in Chicago and zero in Brussels.

London School of Economics analysis demonstrates that, while Chicago may have been the birthplace of great modern architecture, any competent architect can get permission to build a skyscraper there, providing it meets zoning regulations and building standards.

By comparison, London not only has strict height restrictions (which increases the price of office space), but its planning system is discretionary — decisions are made not according to clear rules, but by political committees.

In London, employing a Trophy Architect seems to be a passport to political approval and constructing a bigger building, allowing developer so generate a powerful signal of design quality when gunning for approval.

Buildings designed by Trophy Architects in London are 17 storeys taller than normal architects’ buildings, increasing a representative site value by 144 percent.

Not only that, buildings designed by an architect after they won a lifetime achievement award grew by between 13 and 17 floors compared to those the same architect had designed before the award. In Chicago, gaining Trophy Architect status adds nothing to the height of an architect’s buildings.

This may not seem important but it represents a serious, if difficult to observe, deadweight economic cost — an estimated £59 million for a representative site in the City of London — and is symptomatic of a planning system which, because unpredictable, injects opportunities for gaming the system (rent-seeking) and more risk into the development process.

There are vital reasons for having a planning system: if it works well, it guarantees a supply of public amenities, enhances the environment and creates a framework which ensures our cities and neighbourhoods are better places to live and work. There are endemic problems of market failure in land markets, so planning can improve social outcomes (economists may think of it as land use regulation).

All advanced economies have planning systems, but there are two fundamentally different ways of doing it.

There are ‘rule-based’ systems like the Master Planning system of continental Europe or the zoning system of the United States, which is less rule-bound and less detailed.

The alternatives are the systems which are discretionary. Derived from post-World War Two Britain, discretionary systems see decisions on all significant development made by political committees of local government.

These Local Planning Committees may or may not be guided by a local plan, but are always able to decide differently even when there is a plan. In fact, in 2021, less than 45 percent of English local councils had a valid plan.

The discretionary planning system originating in Britain, and the way it interacts with local councils’ finances, seriously restricts the supply of all new buildings.

As a recent report showed, had Britain built new homes at the same rate as equivalent countries in Europe since 1945, some 4.3 million more houses would have been built. This is comparable to an independent estimate covering the period of 1994 to 2012 of a shortfall of 2.6 million houses. Moreover, Britain’s planning system does not just restrict housing supply randomly across the whole country, it systematically restricts it most severely where people most want to live and houses are least affordable: southern England, where more productive employers are desperate for labour.

What makes a risky business riskier

Unpredictable decision-making is not the only way the British planning system restricts building.

Green belts, encircling all major cities for more than 50 years, freeze land supply. This is a major impediment to building, but especially to building homes with easy, therefore greener, commutes to better paid jobs where housing is least affordable.

Its unpredictability, however, does add significantly to the problems of building houses.

Each decision is subject to political lobbying. Since 1991, this uncertainty has been amplified by more decisions about planning conditions that can be imposed to require any development to include ‘affordable’ housing — so-called Section 106 Agreements.

These are a peculiar British form of what is usually termed ‘inclusionary zoning’. Again, because negotiated and not rule-determined, these cannot be predicted in advance and developers game the system by gambling on being able to come back and re-negotiate reductions as the building progresses.

In fact, this discretionary way of trying to mandate ‘affordable housing’ makes housing less affordable overall.

Development is an inherently risky business: there are big costs over an extended period before revenues flow. Adding uncertainty into investment decisions, such as housing development, increases these costs but also its risk, and higher risk translates into a higher necessary profit margin, all else equal, to justify the investment.

The uncertainty a British-style planning system injects into the development process means many otherwise viable developments do not get built.

In addition, its complexity, the incentive to ‘game it’ (taking steps like employing Trophy Architects) coupled with the costs of managing the uncertainty it generates, acts to squeeze out smaller developers.

This is a major reason why the British development industry is so uncompetitive. Smaller developers have been disappearing. In essence, negotiating the restrictiveness, complexity and uncertainty of such planning systems generates a big fixed cost favouring larger firms.

Over the long term this has created a crisis of affordability, driving a wedge of growing inequality between the housing haves and the housing have-nots, the young and the old.

Getting a decent house depends not just on whether your parents owned a home but increasingly on whether your grandparents did.

Moving to a rule-based planning system would make it far easier to build new homes and eliminate the incentive to game the system or lobby for NIMBYism (Not In My BackYard).

Paul Cheshire is an Emeritus Professor of Economic Geography at the London School of Economics.

The London School of Economics’ Economic Performance’s Urban Programme receives funding from the ESRC.

Originally published under Creative Commons by 360info™.