Broken market or Broken policy? The unintended Consequences of restrictive planning

Is the title of an article by Paul Cheshire in the National Institute Economic Review, Volume 245, No. 1, August 2018.

The abstract reads:

This paper summarises the evidence from recent research relating to the British Planning system’s impact on the supply of development. Planning serves important economic and social purposes but it is essential to distinguish between restricting development relative to demand in particular places to provide public goods and mitigate market failure in other ways, including ensuring the future ability of cities to expand and maintain a supply of public goods and infrastructure; and an absolute restriction on supply, raising prices of housing and other urban development generally. Evidence is presented that there are at least four separate mechanisms, inbuilt into the British system, which result in a systematic undersupply of land and space for both residential and commercial purposes and that these have had important effects on both our housing market and the wider economy and on welfare more widely defined.

The article's conclusion reads,

The evidence shows, then, that our planning system is restrictive in terms of the overall supply of land and housing space in the aggregate. It is not just locally restrictive in order to preserve land of significant environmental quality which in its unbuilt state generates amenity or has recreational value. Such purely local restrictions are likely to have positive welfare effects although the costs they impose also need to be taken into account. Overall restrictiveness of supply relative to demand, in the absence of such environmental gains, does not increase welfare but does increase the price of housing relative to incomes, so reduces welfare, and has, as we have seen, unintended adverse consequences; for example on the length of commuting.

Our planning system imposes this overall restrictiveness by means of at least four separate mechanisms. Its decision making is systemically restrictive because results of applications and conditions imposed for ‘affordable’ housing are unpredictable, so development risk is increased; it imposes quantitative restrictions on the supply of space (where it is most valued) by its imposition of Green Belts and height controls; its mechanism for deciding how much land to allocate for housing ignores the most important determinant of demand, so systematically undersupplies land; and there is substantial variation in local restrictiveness measuredby the proportion of applications refused.

Since all have the effect of reducing the supply of housing and other development relative to demand this drives up prices in real terms. Not only has this made housing increasingly unaffordable but it has had very regressive distributional effects, especially redistributing assets to older home owners. There are other unintended effectsof more restrictive planning. A more restrictive pattern of local decisions on housing proposals causes a substantial increase over time in the proportion of local homes that are empty. Not only that but greater local restrictivenesssignificantly increases the average length of commutes for those working locally. There is also evidence consistent with Green Belts increasing commuting distances as workers leap frog out to buy less expensive housing space. This increases the spatial extent of cities even if it reduces the footprint of urbanisation.

The extent of the price distortions induced by restrictions on the supply of land and housing mean that there is a misallocation of resources. Even in the US, where overall restrictiveness has historically been considerably less than in Britain, it has been estimated (Hseih and Moretti, 2017) that GDP would have been some 13.5 per cent higher had not restrictions on building slowed the flowof labour to the highest productivity locations over the period 1964 and 2009. No similar estimates have been done for other countries. Cheshire et al. (2015), however, did estimate that the loss of total factor productivity in the supermarket sector in England, as a result of forcing them to locate on particular sites in ‘town centres’, was 32 per cent just between 1996 and 2008. Cheshire and Hilber (2008) estimated that the restriction on the supply of office space in British cities reached the equivalent of a tax on construction costs of 800 per cent in London’s West End and even in less prosperous cities, such as Birmingham, averaged 250 per cent: there is certainly evidence that the economic effects of planning which is generically restrictive, can be large.

To sum up, there seem to be many reasons for concluding that our policies determining housing supply are broken but no obvious reason to conclude that the housing crisis results from a ‘broken housing market’.

So the answer to the question in the title seems to be broken policy. This raises the interesting and important question of, if you did a similar study for New Zealand would you get similar results? I'm very afraid you would. But just how broken are New Zealand's housing policies? And how costly are these blunders?