Land Supply and Demand. Have we run out of places to build?

Well ‘yes’ and ‘no’, and not for the reasons you might at first think (confused yet? It will get clearer, I promise). Because the intriguing thing about our housing crisis is that, as a society, we have conceived it, nourished it, and then gone on to teach it everything we know. Many other countries have experienced a similar issue, but in almost all of these cases, house price rises have been moderated by a rebalancing of the fundamental supply and demand equation. But not in the UK. That alarming fact that house prices have risen by a factor of forty over the last forty years*, has only been matched, in the developed world, by Australia. As Dr. Kristian Niemietz of The Institute of Economic Affairs says in his excellent paper ‘Abundance of Land, shortage of Housing’, “not even Spain, with its notorious house price bubble, has paralleled the British experience”.

So is there any glimmer of hope for us as we try and untangle this microeconomic mess? Well, let’s start by getting our terms defined: According to Wikipedia (underpinned by my decidedly average grade at Economics, A level) ‘In microeconomics, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity’. Right, so a fundamental law of markets yes?

Well not in the UK apparently. So what is it that makes the UK housing market unable to conform to the economic norm? Many other countries have also witnessed housing cost appreciation, but in the majority of cases this been far less severe and often only temporary. To get at the answer, we need to start by considering what government has been doing about the issue.

Supply

Well, unsurprisingly, given the gravity of the situation, the coalition government has taken a range of actions to try and get the supply situation under control. In 2011 for example, Planning Minister Gregg Clark +launched the ‘National Planning Policy Framework’ (‘NPPF’) a reform of the land-use planning system. Aimed at simplifying the decision-making process, this move was an attempt to skew land-use more in favour of development. The idea was for the NPPF to leave protected areas, such as the Green Belts and Areas of Outstanding Natural Beauty, untouched, whilst opening up areas outside of these to residential development.

But no sooner had the ink dried on the NPPF launch announcement, than a slick and noisy nationwide ‘Hands off our land’ campaign was launched, backed by a plethora of interest groups: The National Trust, English Heritage, The Campaign to Protect Rural England, Greenpeace and Friends of the Earth, all joined forces to form a well orchestrated anti-development lobby. Dr Kristian Niemietz of The Institute of Economic Affairs takes up the story: “It is not unusual, of course, to see vested interests trying to derail a reform which they perceive as a threat. What was surprising, however, was how easily the media and coalition itself let those vested interests get away with arguments that were quite obviously flawed.” How and why? “Well the most likely explanation for this phenomenon is that besides a lot of scaremongering and plain misinformation, these groups were able to revert to straw men, red herrings and blind alleys which have muddled the housing policy debate for far too long.” continues Dr. Niemietz.

Taken as Given?

“In the housing debate, supply-side conditions are too often taken as given” adds Niemietz “and high housing costs, poor housing conditions and overcrowding are then erroneously treated as ‘market outcomes’. This results in a counter-productive tendency to concentrate on what are, at best, side issues, and more often just non-issues.” And for a compelling snapshot of the state of the housing debate just a year before ‘Abundance of Land, shortage of housing’ was published, in 2011, the Social Attitudes Survey asked people the following question: ‘If the government were going to do something to make homes more affordable, what do you think the most useful action would be?’. Intriguingly, 69% of respondents selected demand-side measures – subsidies for home buyers for example. Only a modest 5% chose the rather obvious option – ‘allow developers to build more homes’. So there you have it. The majority is aware that there is a problem in the housing market, but seem to think it can be resolved without more development.

So to return to our original question, is a lack of available land one of Dr Niemietz’s ‘red herrings’, or does it constitute the real reason why we are in this house price spiral? In terms of our supply and demand definition, it’s got to be a contender hasn’t it? The answer to this is provided by a further dose of Dr. Niemietz’s trademark candour: “Compared with other relatively densely populated parts of Europe, there is nothing unusual at all about the density figures obtained for the South East. The West Midlands, or Yorkshire and the Humber, and these are the most densely populated regions in the UK. The constraints to residential development do not arise from ‘overpopulation’” because according to Niemietz “Developable land is available in plentiful abundance.”

So the search goes on. Read next week’s article to see if we can get further in our attempts to unpack the housing development conundrum. And join the debate by Tweeting us @TWSolicitors and posting an alert to our LinkedIn page.

* ‘Abundance of land, shortage of housing’, Dr. Kristian Niemietz, The Institute of Economic Affairs.