Economics, Planning and Housing

Michael Oxley

• Publisher: Bloomsbury Academic
• Year: 2004
• ISBN:
  9781350318014
• Edition: 1
• Topic: Politik & Internationale Beziehungen
• Subtopic: Öffentliche Ordnung

This broad-ranging new text applies economics analysis to the aims, instruments and outcomes of land use planning and housing policies. The core focus is on providing students with a substantive and sophisticated understanding of the relation of the state and market and such key current issues as sustainable development, urban renaissance, affordable housing and the relationships between planning, housebuilding and house prices. Drawing examples from Britain, the rest of Europe and the USA, it emphasizes the role of economics in promoting a theoretically-informed and evidence-based approach to policy formation and implementation.

Chapter 1

Introduction

London, Paris and New York all have severe housing shortages and an increase in the stock of housing would be valuable in each of these three cities. Why then do the authorities not promote building in Hyde Park, the Jardin du Luxembourg or Central Park? Quite obviously such construction would promote public outrage nationally and internationally because all three locations are cherished for the beauty, joy and amenity they provide. However, if houses were built in these parks there would be no shortage of people wanting to live in these pleasant and convenient places. No doubt substantial profits to the municipalities and to private developers could be generated by such prime residential developments. Alternatively, what about easing housing shortages by promoting housebuilding on land that is currently occupied by run-down industrial premises or using agricultural land just outside the boundaries of each urban area? The protests would be less severe than those that would meet proposals to develop globally renowned green recreational space, but there would still be opposition. In these cases, at least, there would also be powerful supporters. Whilst there would be some concern about the loss of potential employment land and the environmental losses associated with depleted agricultural land, there would be some support for the provision of extra dwellings. Diverse interest groups would lobby for and against the proposed new development.

The decision about whether or not housebuilding is allowed in each case in each city will not be made on the basis of how much money can be made from residential development. It will, instead, be made by considering the social and political costs and benefits of permitting or promoting the provision of new dwellings in particular locations. In other words, the decision on the use of land will not be determined by commercial market forces, it will be a public policy decision. The public policy will involve land-use planning, and the way that land-use planning mechanisms work in each country will vary. They will be a product of the history, culture, politics and chance that determine the shape and operation of the institutional arrangements in each place. However, the aim of planning will in each case be broadly similar. It will be to achieve land-use outcomes that are socially desirable rather than only financially beneficial. The land-use decision will be made not simply by firms and households, but also by governments, the agents of governments and all those groups that influence governments.

The British government has stated that ‘a key role for the planning system is to enable the provision of new homes in the right place and at the right time. This is important not only to ensure that everyone has the opportunity of a decent home, but also to maintain the momentum of economic growth . . . Planning is concerned with the provision of homes and buildings, investment and jobs . . . [It] recon-ciles a number of different demands for new development’ (ODPM, 2003a, p. 3). It is also clear that planning is expected to ‘secure more affordable housing’ (ODPM, 2003b, p. 3). Similar views about the expectations of the planning system in relation to housing can be found in many developed countries. There is also a worldwide recognition that land-use planning addresses a multitude of objectives in addition to those associated with housing. A thorough analysis of the aims and the instruments of planning in a UK context can be found in Rydin (2003).

This chapter provides a descriptive overview of the policy issues that are to be considered and it introduces the economic theory that is to be applied to these issues. The chapter also sets out some sign-posts to the rest of the book, providing the reader with advance notice of what follows.

Planning and housing

The analysis in this book is relevant to all countries in which there is a land-use planning system that operates within a broadly market economy. That is, it is relevant to most of the countries in the world where there is some form of mixed economy in which governments work with and moderate market forces. Many of the examples come from Britain, but they are also drawn from the rest of Europe and from the USA. The benefits of a comparative approach are demonstrated in Chapter 10 where similar issues are considered in different contexts and, with regard to different policy instruments, in several countries.

In detail, planning systems are expected to do different things in different countries and objectives are pursued within different institutional structures. However, there are some broad similarities of purpose and method. Planning systems are used by governments to promote policy objectives. These objectives include securing sufficient quantities of new housing and ensuring that the location of this housing is appropriate. This means that housing is built where it satisfies consumer demand but does not conflict with other objectives such as containing road congestion and protecting the natural environment. Planning may also be expected to have some effect in making housing more ‘affordable’ for certain sections of the population. Affordability concerns typically relate to ensuring that low-income households have sufficient housing of an acceptable quality and that excessive housing costs are not a barrier to the supply of lower-income workers.

Planning objectives can thus relate to improving the well-being of certain groups, particularly low-income groups, but the objectives also encompass concerns for the local and national economies. Planning is expected to contribute to promoting local urban economic growth and national economic growth. Growth may be promoted by sufficient supplies of workers available in the right places and for the right wages or salaries. By promoting sufficient and appropriately priced housing, planning may be expected to promote the required supplies of labour. Using land for housing will frequently conflict with using land for the production of other goods and services, and planning will thus sometimes seek to influence the distribution of land between residential, industrial and retail uses, for example, with a view to the consequences for the value of the output of local and national economies. The origins of urban town planning are often viewed in the context of reducing slum housing to improve the health of the residents. It could also, of course, be expected that a healthier workforce might be an economically more productive workforce.

In promoting national economic growth, planning might be expected not only to ensure sufficient supplies of employment land, but also to contribute to an entrepreneurial environment. Thus it will be desirable for industry and commerce to be in locations that enhance the mutual dependency of firms and reduce production and transportation costs.

Governments in mixed economies have from time to time and in varying degrees been concerned about the effects of land ownership and development on the distribution of wealth, and a range of methods have been tried to limit the gains that property owners may achieve from increases in demand that are outside of their control. For example, planning in the form of restrictions on development rights, or requirements for developers to provide facilities for the community, such as roads or schools, has in many cases been expected to achieve redistributions of wealth. Planning is often associated with protecting the countryside but it is also expected to enhance the quality of urban life. Bringing people back into cities and making them better places in which to live is an increasingly significant planning objective.

This very broad agenda for planning is further evidenced by the environmental objectives that are now of great importance. Environmental concerns range from the very local to the global. In preventing proximate incompatible land uses, planning is expected to minimize the nuisance that new developments can cause to a neighbourhood. This ranges from stopping smokey factory chimneys being built in residential neighbourhoods, to stopping the extension to the house next door blocking out the light.

The environmental agenda embraces concerns about the balance between development on greenfield sites and brownfield sites. The former includes agricultural land and previously undeveloped land. The latter includes land that has been previously developed, and has thus been used, for example, for industrial or commercial uses. A reduction in the use of greenfield sites for residential and industrial development is promoted to preserve natural habitats as well as the beauty and recreational benefits of open spaces. Traffic congestion is partly a function of the location of economic activities, and the disbenefits of congestion in terms of time wasted, costs incurred and energy consumed might be eased by improved local planning. Reductions in energy consumption might in turn be expected to have an effect on global warming and the well-being of future generations.

Although much of the economic analysis in this book is applicable to all forms of development, the emphasis is on residential development. The role of land-use planning in influencing the volume, type, location, allocation and affordability of new housing should be examined in the context of other policy measures designed to influence both new and existing housing. It is thus appropriate to examine the aims and the instruments of housing policy as well as planning policy. The aims of housing policy stretch wider than those addressed by planning, to include securing housing of at least minimum quality standards for all households. This will include households who have a ‘need’ for decent housing but lack the financial resources necessary to afford such housing. Policies will sometimes include a desire to promote particular housing tenures, especially owner-occupation, and increasing home ownership has been and is a policy objective in many countries. Ensuring a sufficient supply of, and fair access to, rental housing is also a widespread objective.

Most governments also have concerns about the relationships between housings markets and the wider, or macro, economy. The interrelationships between house price inflation and general inflation in the economy, between mortgage rates and interest rates generally, and between housing expenditure and national expenditure will all be legitimate areas of concern for governments anxious to ensure compatibility between housing objectives and macroeconomic objectives. A refreshing overview of the application of economics to a wide range of housing issues can be found in O’Sullivan and Gibb (eds, 2003).

The instruments of planning policy can include the designation of land for specific purposes in land-use plans; the granting of planning permission for acceptable development and controls on the density of development; the layout of estates; the design of buildings and the type of materials used. We can extend our view of planning to encompass controls on the structure, safety and energy consumption of buildings. The instruments of housing policy extend further to include the use of subsidies to the consumers and producers of certain types of housing, and influences over the cost and availability of credit to buy and develop housing. The exact mix of instruments varies from country to country, and the type and degree of government control does in detail depend on the history, politics and values of each society.

In addition to the traditional planning instruments listed above, several countries are expanding the complementary use of fiscal policy instruments, including tax concessions and financial penalties, to achieve both planning and housing objectives. At several points in this book the pros and cons of this expanded range of policy instruments will be debated.

Much of this text is about the role of planning policy instruments in solving problems. There will also, however, be recognition of arguments that suggest that planning and government activity more generally are the cause of problems. There are often suggestions that planning causes shortages of development land, contributes to low levels of housebuilding and pushes up house prices. There are also views that some of the problems tackled by planning, such as the provision of affordable housing, are better addressed through other means. These views of planning will be set out and examined. The aim is to provide a critical analysis of planning and housing policies. This analysis should aid an understanding of what is happening and encourage better approaches to policy in the future.

Economic analysis

Economics is about choices. These choices are made by individuals, households, firms, governments, international organizations and a whole range of local, national and international committees, clubs and groups with a multiplicity of configurations. Usually economists assume that choices are made with some objective in mind. The objective usually relates to making things better. Some intended improvement is thus behind the choice. Various schools of economic thought have focused attention on differing decision-makers and differing objectives.

Neoclassical economists, whose thinking dominated Western economics in the late nineteenth century and much of the twentieth century, focused their attention on consumers and firms as decision-making units whose aims were to use resources to maximize individual well-being and to maximize profits. The decisions were made logically and rationally with purposeful actions following a weighing of the available information on the possible choices and their outcomes. Key contributions in neoclassical thought came from the works of Jevons (1871) and Menger (1871) and later Robinson (1933) and Chamberlin (1933).

According to neoclassicists, individual well-being or utility came from the consumption of goods and services and firms made profits from the production of goods and services. Decisions were essentially made through choices expressed in markets where goods and services, and the factors of production necessary to make those goods and services, were traded. An examination of how markets work, and in particular the formation of market prices, was a central component of neoclassical analysis. Prices would change so as to balance the demands from purchasers and the supplies from sellers; balance or equilibrium in markets was a situation in which there were no shortages and no over-supply. Competitive markets, through adjustments towards equilibrium, allocated factors of production and goods and services to those who gained most benefit from their use. Neoclassical economics, however, is not a simple and cohesive body of thought. There are many ‘sub-schools’ and divisions which emphasize certain concepts such as utility or equilibrium, or concentrate on particular issues such as the reasons for different market forms including monopoly and oligopoly although there is much emphasis on the workings of competitive markets in which there are many buyers and sellers.

The neoclassical domination of economics has been challenged by economists who have criticized the simple assumptions on which it is founded. The reductionist approach of the neoclassicists has been set aside by economists who have emphasized the complications of the real world. Institutional economists, such as Coase (1937), Buchanan (1968) and Demsetz (1969), in particular, have emphasized the role of rules, organizations and administrative arrangements in understanding how economies function. The role of information and transaction costs in influencing the operation of markets has been emphasized by modern institutional economists who have viewed the virtual dismissal of these issues by neoclassical economists as a fundamental weakness of their approach. However, as one of the most authorative sources on the history of economic thought has stated:

For better or for worse, and despite all the arguments and counter-arguments, the vast majority of economists the world over subscribe to the received corpus of neoclassical economics centred around the concepts of utility-maximising households and profit-maximizing enterprises. (Blaug, 1990, p. 234)

Despite the shortcomings of neoclassical economics and the advances in modern economics, it continues to have a considerable influence on what we might call ‘mainstream economics’. This is the dominant form of economics taught as introductory economics on undergraduate courses in the Western world. The emphasis in mainstream economics is on microeconomics (which examines the operation of specific markets) and macroeconomics (which considers the functioning of national economies and their international interactions). Rather like neoclassical economics, mainstream economics is not a neatly bounded and easily defined body of knowledge. However, the content of standard introductory economics texts such as Lipsey and Chrystal (1995) and Samuelson and Nordhaus (2001) is principally mainstream economics. The emphasis in the microeconomics of such works is on markets in which individuals and firms trade competitively to achieve well-defined objectives.

This sort of microeconomics colours some of the economics in this text. There is, however, no attempt here to explain all the intricacies of mainstream microeconomics. Readers seeking a systematic introduction to this may find it useful to consult basic texts such as those by Begg et al. (2003), Harvey (1998) and Mulhearn and Vane (1999). Readers without prior knowledge of economic theory will, however, find sufficient explanation in this text for the value, application and implications of the economic concepts to be clear. When basic economic ideas such as ‘demand’, ‘supply’ and ‘market price’ are applied they should not be used in a crude and uncritical fashion. They should be used with an appreciation of their meaning, with caution around their implementation and sensitivity about their relevance to specific circumstances. This is true of all applications but there are particular problems that arise in relation to housing and land.

Housing is a complex commodity that is purchased for a variety of reasons including to provide a shelter, a home and an investment. It might be a one-roomed apartment or a 20-bedroomed mansion. It might be in the centre of town or on a remote island. Housing may be supplied by many sorts of providers including housebuilders, homeowners selling their property, private landlords seeking profits and social landlords trying to satisfy local wants. Both the location of the housing and the details of the rights and privileges that the purchaser acquires have a major impact on what the housing is worth.

The same complexities concerning location, rights and privileges apply to land. Land is also purchased for a variety of reasons including its potential to grow food, accommodate housing and provide recreation. The use to which land is put will, importantly, have implications not just for those who own or occupy the land, but also for those who live or pass nearby. Whether it is used for housing or some other purpose may even have implications through the environmental impacts for people in other countries.

Despite these complications, a basic contention of this book is that it is useful to think of markets in housing and land. These markets do not, however, exist in the absence of customs, laws and conven-tions that are determined by social and political processes. Markets do not exist independently of the state and governments. A recurring theme of this text it is that is wrong to think ...

Table of contents

• Cover
• Abstract
• Title Page
• Copyright
• Half Title
• Contents
• List of Tables and Figures
• Acknowledgements
• 1 Introduction
• 2 Markets, Development, Institutions and Efficiency
• 3 The Relevance of Welfare Economics
• 4 Market Failure
• 5 Environmental Economics and Sustainable Development
• 6 Public Choice Theory, Planning and Housing
• 7 Distributional Justice and Land Markets
• 8 Affordable Housing and Planning
• 9 Housing, Planning and Urban Renaissance
• 10 Policy Instruments in a Comparative Context
• 11 The Economic Consequences of Planning
• 12 Conclusions
• References
• Index