A fresh look at land use
Financial Times : May 13, 2004 : Martin Wolf
Reproduced here by kind permission of Financial Times.
Asked the wrong question, the most intelligent analyst will fail to reach the right answer. An example is the review of housing supply by Kate Barker of the Bank of England's monetary policy committee*. Her recent report makes an invaluable contribution to debate on the UK's biggest economic failure: the huge distortions in land use. But the question posed by the Treasury was too narrow. It is not how to increase housing supply, but how to use the country's scarce land more efficiently.
Start with planning. Even in the south-east of England, just 7.8 per cent of land is in urban use, while nearly 60 per cent is protected from development. A 50 per cent increase in the land covered by urban development would cut the non-urban remainder by just 4 per cent.
In response to this point, made two weeks ago, Lawrence Wragg, vice-chairman of the Campaign to Protect Rural England, wrote to the FT arguing that expansion of housing should be within existing residential areas, via so-called "brownfield" development. The CPRE insists on keeping the bulk of the UK population in urban ghettoes, to the advantage of those happy few who own housing in protected rural areas.
We must reject this form of not-in-my-back-yard-ism (Nimbyism). As Paul Cheshire of the London School of Economics and Stephen Sheppard of Williams College have pointed out, the arbitrary system of allocating land "has resulted over time in the emergence of very substantial price discontinuities for adjoining parcels of land"**. These discrepancies tell us that what Mr Wragg calls a "careful structure of strategic land use planning" is a fancy label for arbitrary quantitative controls that we would not tolerate in any other area of policy.
These authors suggest that planning permission should be granted whenever the discrepancy in land prices in alternative uses exceeds a nationally pre-determined threshold, unless amenity value in the existing use is demonstrably exceptional. Permission for development should also be granted automatically whenever the price discrepancies became sufficiently large. But this approach needs to be applied across the country. Otherwise local Nimbyism would continue unchecked.
Such a proactive, economically rational system of land-use planning is the first reform we need. It would interact superbly with the second: nationwide site-value taxation. With site-value taxation, the needed incentive to develop land designated for that purpose, be it greenfield or brownfield, while also ensuring occupation of homes and offices, would exist automatically. No special regulations would be needed.
Site-value taxation is far and away the most effective way to tax land. It should replace all other property taxes. Ms Barker's failure to see the power of a combination of site-value taxation with more rational land-use planning represents a great missed opportunity.
Charging development fees related to cost would automatically defray the cost of the additional infrastructure needed to service new developments. But site-value taxation would help finance infrastructure automatically, since improving infrastructure raises the value of land.
Where would nationwide site-value taxation leave local authority finance? One approach could be to distribute money to authorities in the light of identified needs, as happens today, while giving them the right to raise the rate of site-value taxation, above the nationwide rate, up to a certain limit. In addition, the revenue gains generated from site-value taxation by local authority investment, over a baseline, could also accrue to the authorities undertaking such investments.
To its credit, Ms Barker's report has brought out the absurdity of the UK's planning regulations. But changes should not aim only at increasing the supply of housing. The fact that land is scarce does not mean, as Nimbys argue, that as much as possible should remain undeveloped. On the contrary, it means that it should be used more sensibly. The Barker report is a start. It must not be the end of reform.
* Review of Housing Supply, Final Report. www.barkerreview.org.uk
** 'The introduction of price signals into land use planning decision-making:
a proposal' (London School of Economics. December 2003)