Problems of housing affordability and ever smaller houses are afflicting an increasing part of the population (mostly young people and people on modest incomes), especially in London and the South East of England.
There is some debate about the extent to which demand-side factors (e.g. declining interest rates) have played a role in price increases, but evidence reviewed in this paper strongly suggests that the problem is intimately associated with supply constraints, which in turn are linked to the planning system. Three features of this system (and the institutional environment where it operates) increase the risk of planning decisions being distorted in favour of current homeowners:
- Weak or absent city-wide/regional planning coordination;
- High fiscal centralisation / limited local fiscal autonomy
- “Development control” (i.e. any change of land use is subject to planning permission).
This paper presents new empirical evidence which suggests the risk of distortions in favour of homeowners is real and economically significant. It reports that, between 2001 and 2011, the housing stock grew significantly less in local authorities with higher proportions of owner-occupiers among local households (controlling for a range of other factors that could influence the growth of the local housing stock).
There are a variety of difficulties in reforming the system:
- First, rising numbers of owner-occupiers and rising house prices from the late 70s fostered opposition to development.
- Second, as housing wealth inextricably intertwined with the macro-economy, it limited the scope for fast, radical reform.
- Third, successive governments have struggled to find a balance between regional/national planning coordination and preserving local democratic legitimacy.
Yet, there are some signs that problems are becoming so severe that they are triggering a shift in public perceptions and/or a rebalancing of the political influence of groups (e.g. homeowners vs renters and prospective homeowners) that may open opportunity for reform.
Credible proposals to reform the planning system should ensure that planning decisions allow for the full breadth of interests affected by development.