hilber economic impact of british planning and fal system

Christian A. L. Hilber The economic impact of the British planning and fiscal system: business rates devolution and other policy options Conference Item Unpublished Original citation: Department for Communities and Local Government Research Seminar, 19 September 2016, Department for Communities and Local Government This version available at: http://eprints.lse.ac.uk/68084/ Available in LSE Research Online: October 2016 © 2016 The Author LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.

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http://eprints.lse.ac.uk/68084/

The Economic Impact of the British Planning and Fiscal System:

Business Rates Devolution and other Policy Options

Christian Hilber London School of Economics

19 September 2016

Presentation given to DCLG – Research Seminar – London, 19/9/2016 – © C. Hilber (LSE)

http://www.google.co.uk/url?sa=i&rct=j&q=Help+to+buy&source=images&cd=&cad=rja&docid=wVf_-v5VenS7jM&tbnid=esVTgAsvm2m4AM:&ved=0CAUQjRw&url=http://www.newhomesforsale.co.uk/help-to-buy-scheme.php&ei=WlChUfCBIcil0AXg8oHwDg&bvm=bv.47008514,d.d2k&psig=AFQjCNEUkAHRDPM9Wrv8VeKdfX9-lG44HQ&ust=1369612642657486

Overview

2

1. The key policy issue – some stylized facts

2. Features of the British system of land use planning (and taxation) and testable implications

3. Empirical evidence: Impact of planning constraints on house prices

4. Assessment of policies in light of existing institutional setting

a) Business rates reform

b) Other proposed policies

5. Conclusions

Intro – Stylized Facts Features of British system Empirical evidence Assessment of housing policies Conclusions

Overview

3







5. Conclusions


Stylized fact 1

4

Real HP growth in UK over last 40 years has been extraordinarily high by international standards…


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

1975 1980 1985 1990 1995 2000 2005 2010 2015

Real house price growth in UK vs. US & Switzerland Rebased (1975=100) – Sources: ONS, Nationwide, SNB, St Louis Fed

UK London Switzerland US

0%

50%

100%

150%

200%

250%

300%

350%

Accumulated real house price growth in % 1970 – 2015 for selected OECD countries

5 Sources: Bank for International Settlements (BIS), World Bank, Bank of England


0

400

800

1200

1890 1915 1940 1965 1990 2015Year

Real house prices Real land prices

Source: Cheshire (2009) and own calculations for 2008 onwards / Land Registry & Nationwide

Note: House and land price data for war years are interpolated

Real land and house price indices (1931=100)

Stylized fact 2 Volatility has increased in recent decades…

6


110

140

170

200

230

1976q1 1981q1 1986q1 1991q1 1996q1 2001q1 2006q1 2011q1 2016q1Year and Quarter

Av. house price in London rel. to UK (in %) Fitted values

Source: Nationwide, own calculations

House prices in London increase more strongly and are more volatile (1973q4-2016q2)

7


Stylized fact 3

8

Despite extraordinary price growth since 1970, construction has been in continuous decline…


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

UK real house prices vs. UK permanent dwellings completed Rebased (1970=100) – Source: ONS, DCLG

UK real house prices UK permanent dwellings completed

Stylized fact 4

9

There are not only fewer new-build homes but these are also extremely small by international standards

A new-build house in UK is 38% smaller than in densely populated Germany and…

40% smaller than in the even more densely populated Netherlands (Statistics Sweden 2005)

And houses are built in the wrong places: very little construction in the prosperous South

Very little new housing in e.g. Oxford & Cambridge (compared to say Doncaster or Barnsley)


Derived research questions

10

What factors constrain housing supply (and thereby cause the corresponding high level and volatility of prices)?

Might the British system of land use planning be a – or the main – culprit?


Overview

11







5. Conclusions


Some background: The British system of land use planning

12

Today’s planning system established in 1947 through Town and Country Planning Act

Key features

Expropriated development rights of land owners

Designated ‘use’ classes, whereas any change of ‘use’ requires development control permission (granted at local level)

Aim is ‘development control’ or ‘containment’


The London green belt

13

Source: Barney’s blog

(http://barneystringer.wordpress.com/2013/11/21/londons-green-belt)


http://barneystringer.wordpress.com/2013/11/21/londons-green-belt






But not just green belt containment – many other planning constraints…

14


14 Source: Cheshire and Dericks (2014)

Protected view from King Henry VIII’s Mound (Richmond Park)—created in 1710

15

16km

Backdrop:

Liverpool Street

Station area

Distance to…

- Silicon roundabout:

850m

- BoE (City): 600m

- St. Paul’s: 1km


Who decides in UK?

16

Local Planning Authorities (LPAs) grant or reject planning applications Problem: Since 1947 virtually no fiscal incentives at local

level to permit development (costs far exceed benefits)

Central government grant equalisation system in medium-term more or less eliminates any revenue gain for LPAs that permit more development

Underlying causes?

UK = highly centralized country, virtually no fiscal power at local level

Planning system tilts political power towards homeowners (NIMBYs)

Local long-run supply curve nearly vertical…


Theoretical prediction…

17

House

prices

Housing

stock

Demand today

Long-run supply

Demand

tomorrow


Theoretical prediction…

18

House

prices

Housing

stock

Demand today

Long-run supply

Demand

tomorrow


How to test?

19

Hilber and Vermeulen (2016)

Exploit spatial variation in three different types of supply constraints: regulatory, scarcity of developable land and topography

Interact supply constraints with demand shifters (local earnings; labour demand shock)

Use instrumental variable technique to identify causal effect of local supply constraints measures on local house prices


20

Average refusal rate

(major residential

projects) 1979-2008

Share developable

land developed,

1990

Elevation range


Source: Hilber and Vermeulen (2016)

Main findings

21

Tight local planning constraints in parts of England (in conjunction with strong demand) are to a large extent responsible for extraordinarily high house prices

Local scarcity of developable land matters but very non-linearly (only in most developed locations)

Topography matters in statistical sense but very little in economic (quantitative) sense…


Quantitative effects (based on IV with all instruments)

22

If planning were completely relaxed in average LPA:

House prices in average LPA: -35%

and developable land were abundant:

House prices in average LPA: -45% (Δ= -10%)

and LPA were completely flat:

House prices in average LPA: -48% (Δ= -3%)

Note: These are likely lower bound estimates for a number of reasons (see Hilber and Vermeulen, 2016, for details)


23

What would house prices in average English LPA be if…

50000

100000

150000

200000

250000

Hou

se p

rice

s in

20

08

pou

nd

s

1974 1980 1990 2000 2008Year

Predicted real house prices in average English LPA

Prediction with refusal rate set to zero

- and share developed set to zero

- and elevation range set to zero

- and earnings assumed constant

226k

147k

124k 117k 112k

23


North East vs. South East & 90th vs. 10th percentile

50000

100000

150000

200000

250000

300000

Hou

se p

rice

s in

20

08

pou

nd

s

1974 1980 1990 2000 2008Year

Predicted real house prices in average English LPA

Prediction with refusal rate as in NE / SE

Prediction with refusal rate as 10th/90th percentile

Had the SE the restrictiveness of the NE,

house prices in the SE would be 25% lower!

24


But large variation across locations…

25

-.5

0

.5

1

1.5

Log

of re

al h

ouse p

rice

s (1

974

= 0

)

1974 1980 1990 2000 2008Year

Predicted log real house prices in Westminster





-.5

0

.5

1

1.5

Log

of re

al h

ouse

pri

ces

(19

74

= 0

)

1974 1980 1990 2000 2008Year

Predicted log real house prices in Reading





-.5

0

.5

1

1.5

Log

of re

al h

ouse p

rice

s (1

974

= 0

)

1974 1980 1990 2000 2008Year

Predicted log real house prices in Darlington





-.5

0

.5

1

1.5

Log

of re

al h

ouse p

rice

s (1

974

= 0

)

1974 1980 1990 2000 2008Year

Predicted log real house prices in Newcastle upon Tyne




- and earnings assumed constant 25


Preliminary conclusions: There are two fundamental issues…

26

1. Planning system effectively assigns development rights to local policy makers, planners & NIMBYs

In contrast: In most other countries, development is rule based – if land is zoned as residential, presumption is in favour of development

2. Lack of fiscal incentives to develop at local level

Discourages local authorities to permit development (most costs – little benefits!) – NIMBYism reinforces

Creates incentives to impose horizontal restrictions (Green Belt) and vertical ones (height restrictions etc.)

1. + 2. jointly cause affordability crisis!


The planning and tax system determine housing affordability

27


0%

50%

100%

150%

200%

250%

300%

350%

Accumulated real house price growth in % 1970 – 2015 for selected OECD countries

28 Sources: Bank for International Settlements (BIS), World Bank, Bank of England


…And urban form

29

Dutch concentrated dispersal

Wider South East

green belt constraint

Flemish region dispersal Source: Echenique (2009)

Reading

Similar densities

Less restrictive

planning

associated with

more sprawl…

29


Overview

30







5. Conclusions


Business rates reform

31

Idea

Devolve fiscal power to tax businesses to Local Authorities

Aim: Boost enterprise and economic activity

Proposal

By 2020 LAs retain 100% of revenue from business rates (~£26 billion) replacing current retention scheme

Replaces core grant funding for LA services


Key concern

32

If LAs can indeed keep all revenue this should provide more incentives to permit commercial development on brownfield land, great but…

Problem: May divert brownfield land away from housing (substitution effect) so probably even less new housing, reinforcing affordability problem!

(If central government grants were to offset business rate revenue, then no effect at all)


Empirical evidence

33

Cheshire and Hilber for UK (2008)

(Reverse) Reform of business rates in April 1990: creation of Uniform Business Rate (except for City of London)

Reform generated strong fiscal disincentive for LAs (except City of London) to permit commercial development

Created huge “Regulatory Tax” making British office space (some of the) dearest in world

Average 1990-2005 in % of MCC

London West End 809%

City of London 488%

Canary Wharf 327%

Paris La Defence 167%

Brussels 68%

NYC 0-50%


Empirical evidence (cont.)

34

Quigley and Raphael (2005) for California

Jurisdictions in California can benefit from sales tax revenues, whereas property taxes are limited to 1 percent of the transaction price

California’s tax policies created fiscal disincentives to build new housing in favor of expensive retail buildings!

Various other studies with similar findings

Burnes et al. (2012) for Florida

Jacob and McMillen (2015) for Chicago


Other problems

35

Which public services are funded with local business rates? Can’t be social welfare (redistribution)

Not education or police

Public infrastructure (transport, electricity, gas, water, broadband)? Garbage collection?

How to ensure revenue and spending are congruent?

Further incentive-issues LAs may focus spending on services that attract businesses

rather than residents

LAs may try to outsource new housing developments to neighbouring LAs (free-riding), increasing commute distances


Other proposed policies

36

1. Housing construction targets

2. Help-to-Buy and other demand subsidies

3. Increase in stamp duty on buy-to-let properties & second homes (Autumn Statement)

4. Limit on increase of rents for social tenants (Chancellor announcement)

5. Allowing local authorities to build starter homes on Green Belt (DCLG consultation document)

6. Expansion of Right-to-Buy (Autumn Statement)


1. Housing construction targets

37

Idea: Announce housing construction targets to encourage development

Problem: Targets alone neither tilt development rights in favour of development nor do they provide fiscal incentives

Expected effect: Nil!

Evidence: Construction in decline since 1970 despite ever increasing targets by all parties and consecutive governments of different colours


2. Help-to-Buy & other subsidies to homebuyers

38

Idea: Subsidise demand for owner-occupied housing

Problem: Local supply extremely price inelastic, in particular in London & South East

Expected effect: Policy raises prices but does not spur development

Evidence:

House prices in London rose by 25.8% b/w 2013Q2 and 2014Q4 & there was no housing construction boom!

Evidence from US: In tightly regulated cities demand subsidies are counterproductive (Hilber & Turner 2014)


3. Increase in stamp duty on buy-to-let properties & second homes

39

Idea: Discourage buy-to-let & second homes

Expected effects: Makes buy-to-let and second homes less attractive compared to owner-occupation

Buy-to-let: Increase in stamp duty will reduce supply of private rental homes Increase in private rents & possibly slight reduction in price of owner-occupied homes

Second homes: Might increase supply of primary homes in short-run and slightly reduce house prices (good!) but may provide even fewer incentives to add new housing (bad!)

Overall: Likely zero sum; private rental will become less affordable and owner-occupied housing slightly more affordable


4. Limit on increase of rents for social tenants

40

Idea: Make social housing more affordably by limiting social rent increase (to e.g. 1% p.a.)

Problem: Reduces book value of social rented housing stock reduces ability of housing associations to finance additional social housing development

Expected effects: Less new social housing few lucky social tenants but even greater affordability crisis for all other young and low income households


5. Allowing local authorities to build starter homes on Green Belt

41

Idea: Relax (somewhat) constraints to build starter homes at edge of green belts & on brown-field land within green belts

Expected effects:

Tiny fraction of green belt is brownfield

Only possible if local authority wants it!

Problem: Local authorities still have no fiscal incentives to develop, especially not in green belt, so at best ‘a drop on a hot stone’.

But does send signal that low-amenity-value land in green belts may no longer be sacrosanct!


6. Expansion of Right-to-Buy

42

Idea: Expand RTB to housing association tenants

Expected effects:

Incentivises owner-occupation – may or may not be welfare increasing

But in any case: at huge cost to taxpayer because housing associations must be compensated for losses

IF they are not: Policy will endanger ability of associations to finance new homes, so may reduce new construction

Also creates more ‘homevoter’ NIMBYs, which in turn may further reduce new housing construction!


Conclusions

43

Planning serves important purpose - in principle it can improve welfare through correcting market failure such as externalities and public goods

But British planning and tax systems have serious “design flaws”:

‘Development control’ blindly favours containment and generates great degree of uncertainty

Lack of local fiscal incentives reinforces problem

Existing and proposed policies do not tackle these flaws – policies are, at best, ineffective but often counterproductive


So what ought policy makers do? Some guiding principles…

44

Radical reforms needed that simultaneously address flaws of planning and tax system

Planning system ought to…

1. Focus on correcting market failures: Designate parks, areas of natural beauty, historic buildings etc. that are off hands from (re-)development and

2. Change to rule based zoning system: Introduce presumption in favour of development in areas that are not protected


So what ought policy makers do? Some guiding principles…

45

Tax system ought to…

1. Align fiscal incentives to develop: Local residents & neighbours who bear costs also ought to be able to reap benefits

2. Move away from stamp duty & demand subsidies towards impact fees (reflecting marginal social costs) and genuine local property tax or LVT

3. Consider permitting private compensation payments


Q & A

Thank you!

Presentation with references & hyperlinks will be downloadable from:

http://personal.lse.ac.uk/hilber/

46

Q&A References




References & Further Readings

47

Burnes, D., D. Neumark, M.J. White (2012) Fiscal Zoning and Sales Taxes: Do Higher Sales Taxes Lead to More Retailing and Less Manufacturing? NBER Working Papers 16932, NBER.

Cheshire, P. (2009) Urban Containment, Housing Affordability and Price Stability – Irreconcilable Goals. SERC Policy Paper No. 4, September.

Cheshire, P. and G. Dericks (2014) ‘Iconic Design’ as Deadweight Loss: Rent Acquisition by Design in the Constrained London Office Market. SERC Discussion Paper No. 154, January.

Cheshire, P. and C. Hilber (2008) Office Space Supply Restrictions in Britain: The Political Economy of Market Revenge. Economic Journal 118(529), F185-F221. (Latest discussion paper version)

Cheshire, P., C. Hilber and I. Kaplanis (2015) Land Use Regulation and Productivity – Land Matters: Evidence from a Supermarket Chain. Journal of Economic Geography 15(1), 43-73. (Latest discussion paper version)

Cheshire, P. and S. Sheppard (2005) The Introduction of Price Signals into Land Use Planning Decision-making: A Proposal. Urban Studies 42(4), 647-663.

DeFusco, A., W. Ding, F. Ferreira and J. Gyourko (2013) The Role of Contagion in the Last American Housing Cycle. Wharton School, mimeo, June.

Q&A References

http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercpp004.pdf

http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0154.pdf


http://mpra.ub.uni-muenchen.de/5435/1/MPRA_paper_5435.pdf

http://mpra.ub.uni-muenchen.de/5435/1/MPRA_paper_5435.pdf


http://www.cepr.org/sites/default/files/GYOURKO - The Role of Contagion 09_23_2013.pdf

References & Further Readings (cont.)

48

Echenique, M. (2009) Sustainable Cities. Presentation given at the Spatial Economics Research Centre Policy Seminar, London, 15 October 2009.

Glaeser, E.L., J. Gyourko, and A. Saiz, (2008). Housing supply and housing bubbles. Journal of Urban Economics 64(2), pp. 198-217.

Globalpropertyguide.com (http://www.globalpropertyguide. com/most-expensive-cities; last accessed: 1 February 2015)

Hilber, C. (2013) Help to Buy will likely have the effect of pushing up house prices further, making housing become less – not more – affordable for young would-be-owners. British Politics and Policy at LSE Blog, June 25.

Hilber, C. (2015a) UK Housing and Planning Policies: The evidence from economic research. CEP 2015 Election Analysis Series – Paper EA033.

Hilber, C. (2015b) Help-to-Buy ISAs Will End up Feathering Nests of the Wealthy – Here is How. The Conversation, 19 March.

Hilber, C. (2015c) Deep-rooted vested interests are to blame for our housing crisis,” Disclaimer, May.

Q&A References

http://www.globalpropertyguide.com/most-expensive-cities





http://blogs.lse.ac.uk/politicsandpolicy/archives/34388

http://cep.lse.ac.uk/pubs/download/ea033.pdf




https://theconversation.com/help-to-buy-isas-will-end-up-feathering-nests-of-the-wealthy-heres-how-39031

http://www.disclaimermag.com/economics/deep-rooted-vested-interests-are-to-blame-for-our-housing-crisis/


49

Hilber, C. (forthcoming) The Economic Implications of House Price Capitalization: A Synthesis. Appears in Real Estate Economics. (Latest DP version)

Hilber, C. and T. Lyytikäinen (2015) Transfer Taxes and Household Mobility: Distortion on the Housing or Labor Market? SERC DP No. 187, October.

Hilber, C., T. Lyytikäinen and W. Vermeulen (2011) Capitalization of Central Government Grants into Local House Prices: Panel Data Evidence from England. Regional Science and Urban Economics 41(4), 394-406. (Latest DP version)

Hilber, C. and C. Mayer (2009) Why Do Households Without Children Support Local Public Schools? Linking House Price Capitalization to School Spending. Journal of Urban Economics 65(1): 74-90. (Latest DP version)

Hilber, C and F. Robert-Nicoud (2013) On the Origins of Land Use Regulations: Theory and Evidence from US Metro Areas. Journal of Urban Economics 75(1), 29-43. (Latest DP version)

Hilber, C. and O. Schöni (2016) Housing Policies in the United Kingdom, Switzerland and the United States: Lessons Learned. Asian Development Bank Institute Working Paper No. 569, April.

Q&A References




http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Lyytikainen_Vermeulen_2010_08.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Lyytikainen_Vermeulen_2010_08.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Mayer_2008_WP.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Mayer_2008_WP.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/hilber_robertnicoud2012_forthcoming JUE.pdf

http://www.adb.org/sites/default/files/publication/183139/adbi-wp569.pdf




50

Hilber, C. and O. Schöni (2016) The Housing Market Impacts of Constraining Second Home Investments. Mimeo, London School of Economics, August. (Latest DP version)

Hilber, C. and T. Turner (2014) The Mortgage Interest Deduction and its Impact on Homeownership Decisions. Review of Economics and Statistics, Vol. 96, No. 4, 618-637 (Latest DP version)

Hilber, C. and W. Vermeulen (2010) The Impacts of Restricting Housing Supply on House Prices and Affordability – Final Report. London: Department for Communities and Local Government. (Link to report)

Hilber, C. and W. Vermeulen (2016) The Impact of Supply Constraints on House Prices in England. Economic Journal, Vol. 126, No. 591, 358-405. (Latest DP version)

Jacob, B. and D. McMillen (2015) Border effects in suburban land use. National Tax Journal. Special Issue 68(3s): 855-873.

KingSturge (2004) Global Industrial and Office Rents Survey, London: KingSturge.

Mirrlees, J., S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles and J. Poterba (2011) Tax by Design: the Mirrlees Review. Oxford University Press.

Q&A References



http://personal.lse.ac.uk/hilber/hilber_wp/HilberTurner_forthcoming_REStat.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/HilberTurner_forthcoming_REStat.pdf

http://www.communities.gov.uk/documents/housing/pdf/1767142.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Vermeulen_EJ_forthcoming.pdf

http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Vermeulen_EJ_forthcoming.pdf


51

Quigley, J.M. and S. Raphael (2005) Regulation and the High Cost of Housing in California. American Economic Review 95(2), 323-328.

Statistics Sweden (2005) Housing Statistics in the European Union 2004, Karlskrona: Boverket, Publikationsservice.

Q&A References

http://www.iut.nu/EU/HousingStatistics2004.pdf‎

hilber economic impact of british planning and fal system

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