Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
We’ve all seen them on social media: flats that are “innovative” (the bed is accessible by a ladder), “compact” (the bed folds out of the wardrobe), or “intimate” (the bed and the toilet are in the same room). And we’ve all heard about Britain’s disappointing growth performance. Yimbys argue that planning reform would help with both. But how much?
The theory suggests that relaxing planning restrictions would guide to a building boom. The price of housing should fall, to cheers from those who would admire more of it. People would commute shorter distances, freeing up precious time. And individuals could advance where they would be most productive, boosting the economy.
All that sounds deliciously plausible, but tricky to make concrete. The first question is how much loosening regulations would actually raise supply and lower prices. What if housing is so expensive because incomes are rising and physical space is finite? In the metaverse we may all be able to pretend that we live in a four-bed house with a sauna and indoor cinema on the edge of Hampstead Heath. But we’re not there yet.
Paul Cheshire of the London School of Economics is certain that planning regulations bite. “I would be very surprised if the hit to the British economy wasn’t at least double the one in the US,” he says. One tell is how much longer ago and over how much larger an area Britain started to restrict its land use. Another is the magnitude of its house price increases. Between 1970 and 2022, they rose relative to other prices by around 170 per cent in America and 440 per cent in the UK.
Academics have tried to pin down the effects of planning. One 2014 investigate compared more and less restrictive local authorities and estimated that without any planning regulations, house prices in 2008 would have been around a third lower, mostly in cities. More realistically, relaxing the restrictiveness in the South East to the level in the North East could depress prices by around a quarter.
It’s hard to anticipate how particular tweaks to planning would boost housebuilding, says Anthony Breach of the Centre for Cities. But there are recent examples of reforms having striking effects. One investigate published in July, for example, found that a zoning reform in New Zealand led to an enhance in Auckland’s housing stock of around 4 per cent over five years, a remarkably fast enhance.
The next challenge is working out how much extra house building would actually raise the country’s productivity. A investigate by Henry Overman of the London School of Economics and Xiaowei Xu of the establish for Fiscal Studies documented that in 2019 average wages were 60 per cent higher in London than in Grimsby. But that difference overstates the potential gains from people moving to London (if they would indeed advance). Most of the gap is because highly educated people tend to cluster in the capital.
The number to pin down is the size of the agglomeration benefits on offer, or how much productivity rises simply because people can work near each other. If those are zero, then extra homes in cities would simply shuffle people around the country, improving productivity in some places but lowering it by just as much in others.
Economists have tried to work out the answer. One working paper by Cem Özgüzel from the OECD compares the earnings of otherwise similar people across locations to assess that for every 10 per cent enhance in the number of employed people per acre in a British city, productivity increases by around 1 per cent. That is disappointingly little bang for one’s buck relative to other countries.
One might hope that the productivity gains associated with more people might be bigger than that if, for example, there are dynamic effects from learning from others and becoming more productive over time. When Diego Puga of CEMFI and Gilles Duranton of the University of Pennsylvania incorporate that long-term effect in America, the productivity benefits associated with more house building double. In the UK, there is evidence that workers with experience of working in a city have faster wage growth than those without it.
There are also some important caveats. Productivity gains could take decades to emerge. Puga and Duranton emphasise the role of congestion costs. Enrico Moretti of the University of California, Berkeley, points out that London is already pretty well connected, suggesting that more houses might not deliver as much oomph to productivity as in, say, San Francisco.
A bit more strong evidence supporting the idea that relaxing restrictions on a massively important input would turbocharge the economy would be nice. I know a way of getting some.
Bid to have lunch with Soumaya at London’s Honey & Co restaurant and raise money for the FT’s charity, the Financial Literacy and Inclusion Campaign (FLIC)
