What went wrong with housing?

We are still amazed (horrified) by this graph, from the independent research firm Global Financial Data.

They point out that the cost of UK housing in 1940 was lower in real terms than it was in 1340. Since then, housing has become eight times more costly, again in real terms.

It seems pretty clear that something started going badly wrong over the second half of the twentieth century. What was it?

How to use air rights to improve US cities

After the amazing 2017 YIMBY conference organized by East Bay Forward, many of our American friends have been asking about air rights.

Air rights or ‘Tradeable development rights’ (‘TDRs’) are used in New York and in some 22 other states.¹

Zoning systems with TDRs set two limits for each property – the ordinary zoning envelope and a higher envelope that can be reached if the landowner buys from other property owners their space under the zoning envelope. Professor David Schleicher of Yale has suggested the envelope can be seen as a ‘budget’, or the overall allowable amount of building.

Schleicher notes that TDRs are often used to subsidize certain land uses like New York’s ‘theaters’.

In New York, TDRs can normally only be used by another landowner on the same block, but Schleicher suggests that they could be tradeable citywide.

Subject to state constitutional requirements, one way to overcome electoral obstacles to more housing could be to propose a reform that allocates TDRs to every registered voter (including tenants and people who are homeless, not just landowners) on the date of the reform. Those TDRs would have a financial value and each voter could choose to sell them when they wanted.

The use (not the initial allocation) of the TDRs could be limited to certain areas of the city – near transit for example – to make their use less controversial and keep development away from the neighbourhoods that are historic or most resistant to change.

Basically the reform would hand every voter a valuable right that they could sell when they want to, while guiding new development to the right areas. We think it could be a powerful way to win majority support for reform in US cities with fewer objections to tall buildings and fewer historic buildings to protect.

Please get in touch if you'd like to know more! 

1. Much of this description is adapted from Schleicher, David and Hills, Jr., Roderick M., Planning an Affordable City (November 13, 2015). Iowa Law Review, Vol. 101, pp. 91-136, 2015; Yale Law School, Public Law Research Paper No. 558; Yale Law & Economics Research Paper No. 530. Available at SSRN: https://ssrn.com/abstract=2690311

What should be in party manifestos to end the housing crisis?

More homes will make our streets better if we build them well.

More homes will make our streets better if we build them well.

Ending the housing crisis will make society much fairer. If done well, it will also make our cities, towns and villages better, improve the environment, and boost economic growth by an extra 2% a year for 15 years, creating many great jobs and opportunities.

We would like to see these ideas in party manifestos:

Any of these could create millions more homes over time, while making nearly everyone better off. Which parties will show they are most serious about ending the housing crisis?

An easier way to introduce road pricing

Many say road pricing is a good idea because it means people only use roads when they need to. That reduces congestion, encourages ride sharing, cycling, walking and buses, and increases road capacity for important journeys. More road capacity would unlock a lot more housing, which is why we’re interested.

Economists think road pricing (varying with time and demand) is much better than a congestion charge or a free-for-all. The problem is that bringing in road pricing would make some people worse off – particularly some poorer people.

Is there a win-win solution? Building on ideas of Prof. Lee Anne Fennell from the University of Chicago, we think there could be.

Win-win solutions are the Holy Grail of politics. If you make everyone better off, only those who really want to see other people lose will be unhappy.

Economists call win-win solutions ‘Pareto superior’. Having invented that phrase, they almost never use it in real life. Most economists and governments look for reforms that are just ‘Kaldor-Hicks’ improvements: they could be win-win solutions, if you went round afterwards and redistributed some of the winnings to the losers. But no-one ever does that redistribution, so all the potential losers fight tooth and nail to prevent the reform. Special interest groups have many ways to block reform, as the late Mancur Olson explained. That’s a big reason why many otherwise good reforms don’t happen.

Almost by definition, when an economist thinks something works badly, it’s because there are win-win ways to improve it. The devil, of course, is in the details.

A road without road pricing – yet.png

Why don’t people suggest true win-win refoms? Sometimes they have an agenda (subconscious or not) to help one group over another. Often, we suspect, the answer is because it’s very fiddly. Economists don’t like fiddly details, and lawyers who are supposed to deal with fiddly details often don’t like economics.

We think that means many good reforms die for lack of thinking through the political realities and the art of the possible.

How do we apply this to road pricing? Why not let each person set their own level of compensation for which they’d be willing to move to a given system of road pricing with lower (or zero) road and fuel taxes? That is – the price that they would pay the government to be allowed to switch if they think it would save them money, or the price that they would want from the government if they think the switch would cost them money.

Then the government can decide when and which people to switch over, as time goes by. Some people might demand high prices to switch, but the government hasn’t guaranteed that it will always pay the price people have asked. The government can always wait until only a small minority hasn’t been switched over, and then just pay each remaining person what the government believes to be fair based on objective principles (that it could set out in advance). It’s like a reverse auction. And if everyone’s price is too high, the government doesn’t have to do anything.

That way, most people will know they are very likely to be better off after the reform, because they know the vast majority of people will only be switched if they receive the price they want. They also have good reason to set a fair price for themselves so that they don't have a price imposed on them at the end.

That sort of idea would never have been possible without modern technology. But now we have it, why don’t we try it – in a particular city, for example?

How to get more homes

We recently went to a disastrous local planning workshop.

Why was it so bad?

First, it was during the working day, for the convenience of the professionals. That meant the community participants were massively skewed to those who were anti-change and anti-growth. Hint: those who are most pro-homes and pro-growth often find it hard to clear a weekday morning at short notice. They often find email easier than meetings. They like preparation, not patronizing exercises with felt-tip pens.

Second, the plan was incredibly general, about use of sites. Because none of the community members knew what the resulting new buildings would look like, they felt the safest thing was to oppose all change. It is much easier to get people to support change with specific proposals for attractive designs. Asking people to write blank cheques is the hardest possible way.

Third, there were no specific proposals for any community benefit, in a part of London with high poverty rates but high commercial rents. It would be very easy to improve the lives of many for very little cost, given the economic potential at stake. Yet there was no effort to do that.

Fourth, the professionals had already been briefed, but the community representatives were surprised by various pieces of news during the session, giving them no time to consult with their communities. Again, the safest reaction was to err on the side of caution.

It almost seemed like the authority involved was bending over backwards to get as much opposition as possible.

Except that it wasn't: it was trying to be pro-growth. It had just failed to do anything to let that happen, and done a host of things to stop it.

We can all do so much better than this. If you're a local authority who wants more homes and more growth, we're happy to help for free. Please get in touch.

We could have many more of these if we got our act together

We could have many more of these if we got our act together

Why is some land underused, and what can we do about it?

Why does some land sit being used less than it could be, when there is such a shortage of housing and space for businesses?

We are not talking about housebuilders, which we have covered elsewhere. That is a complicated and different question.

There are some plots of land in existing towns and cities that lie derelict or with dilapidated buildings that the community would love to see replaced or upgraded. Opinions differ about how many, but there are at least a few. That land is often owned by families or by investment companies. How can this make sense? Are they crazy?

Sitting on land can make sense if you think you will make more money by doing that than by building homes on it now. House prices have rocketed ever since the the 1940s, after 500 years of little change, so there are some good reasons to think that.

700 years of UK house prices adjusted for inflation, from Global Financial Data

700 years of UK house prices adjusted for inflation, from Global Financial Data

Of course, they are losing out on rents that they could receive. They could develop the land and lease it out, like the great estates used to do, but after the leasehold reforms that means they would lose control of many aspects of it forever.

Couldn't they sell the land to someone to develop and buy another asset to sit on? They could, but that might incur capital gains tax. They have often owned the land for a long time.

They might also like the lack of clarity about the current value (due to lack of planning permission) but high potential end value, to keep inheritance taxes down in the meantime. They might have historical connections to that piece of land and to the local government who will make decisions about it, which makes that land more valuable to them than to a potential buyer.

The owners may not have the funds to pay for the development, and not want to borrow it or lose control by teaming up with someone else. Some people just like having an asset that goes up in value by, say, five or six percent a year forever. It has a lot of what economists call real option value – the freedom to choose later from a range of possible things to do with it.

What's more, they will know that the number of homes they will get permission to build on the land will probably increase over time, as the housing crisis gets worse. Building homes on it now would make it impossible to add more homes later, because the current system gives massive weight to the views of existing residents (but not so much weight that existing residents are happy about new development, as the frequent waves of protest show).

We've written about potential sensible property tax reforms here, but the idea we wrote about would only take effect after the next transfer of the land, which wouldn't help here. We'd love to hear any politically feasible plans for tax reforms to fix this sort of situation, if you have one.

If we can't fix that, the easiest thing to change is the expectation that prices will keep going up. After all, they stayed nearly flat for 500 years until the 1940s. That will create a race to use derelict plots now before prices drop. The easiest way to do that is to make sure that many more beautiful, decent, secure homes get built. That will end the housing crisis and make our existing places better.  We've written about a suggestion for that here. Please let us have your thoughts and other ideas.

Let parishes green their green belt

Incredibly, local parishes have no power over their own green belt now.

Much of the green belt is precious, but some parts of it are disused quarries, car parks, airfields, or just fields of industrial monocrops, sprayed with pesticides and without public access.

we're sure local people could think of a better use for this piece of green belt if they were allowed to. Image from paul wellman

we're sure local people could think of a better use for this piece of green belt if they were allowed to. Image from paul wellman

We should give more control to parishes and other neighbourhood planning areas to decide if there is an unpleasant and unwanted piece of land in their green belt that would look better with some beautiful, well-designed homes and gardens to meet the needs of local people. Then they can talk directly with the landowner to require the style, size and type of houses and the benefits that they want. They should also be able to insist on their own design code, so it looks exactly how they want and enhances the area. They might even decide to allow a new garden village or extension.

Imposing homes from the top down can cause a massive backlash. Local people know whether a particular plot is precious countryside or would be better used for attractive housing, gardens and trees. Of course, areas of outstanding natural beauty and other designations should retain their national protection. Those are national assets, for the whole country.

There are parishes with only a few hundred residents but thousands of acres of green belt, some of which is sometimes quite ugly. Allowing new homes on that part could pay for a new school and village hall, or allow a new park or common to be created — whatever the community needs.

The landowner could also create a new development company, shared with the community, or dedicate affordable homes for current residents.

Parishes can’t discuss directly with the landowner to get what they need at the moment, because parishes don’t have power to decide. It is up to a higher authority, so the results are rarely something that local people like.

It should be up to local communities to decide how best to enhance the precious resource of their current green belt. Who is in a better position to decide than they are?

Let streets vote themselves permission to extend

Why don't we let single streets vote to give every house on the street permission to extend – or even replace?

That would quickly generate tens of thousands of additional flats and terraced houses, especially near transport hubs, where the need for more homes is greatest.

Half of the homes in London are in buildings of just one or two floors. Bloomsbury is much taller – often four or five storeys – but much more attractive than many low-rise streets.

There are endless miles of semi-detached and detached homes whose owners would be thrilled to get permission to extend upwards, forwards or sideways. If the street can choose a design code for the extensions, it could often make the street much prettier.

There are also plenty of terraced homes that could be improved with a well-designed additional floor with a mansard roof.

A Georgian mansard roof at the top — why not allow more of these?

A Georgian mansard roof at the top — why not allow more of these?

If the permissions are granted to every house on the street, every owner benefits from the increased value of their house due to the planning permissions, even if they do not actually do the extension. They could always sell to someone who does need a bigger home (or to a small builder who wants to create several flats) and then save the spare money for their retirement or to help their children pay for housing.

The best way to do it would be with safeguards for the houses beyond the back gardens and for houses on street corners. We'll write more details later.

If you ask people whether every house on their street should be allowed to extend to add new flats or homes, they often say yes. Building on a street mainly affects other people on the street. It should be up to them.

A YIMBY flowchart

Fixing a housing crisis is easy. You just need to specify the constraints and solve for them.

First, pick a set of laws on land use that would actually work, more or less forever, to let your city grow organically and attractively, without needless sprawl and giving people the chance to walk if they want to. @ProfSchleich at Yale and Prof. Lee Anne Fennell at Chicago have given some ideas. Remember to fix the collective action problems that Mancur Olson described.

Homeowners are less likely to object if they like the look of the new homes

Homeowners are less likely to object if they like the look of the new homes

Second, look for a reform that gets nearer to that and will win votes (net) at every relevant election for the politicians in power who enact the reform.

This part is crucial but amazingly often forgotten. Politicians like ideas that win votes. They do not like to lose votes.

Remember that homeowners are probably a voting majority in your city and that even some non-homeowners may not want to see market rents go down. Even market-rate renters sometimes vote against housing near them, especially if moving is inconvenient or if gentrification might drive up rents locally. 

Clue: reforms that benefit existing individual homeowners in some way, such as giving them rights to add more built square footage on their land, are often an effective way to create a majority coalition in support. If, like San Francisco or London, you have huge latent demand for housing, there are reforms that can make nearly everyone better off, including current homeowners.

If you can't find that reform, go back to step one and find another option.

Third, spread the word about your vote-winning reform until a smart politician hears it and steals it.

Repeat from step two until you have permanently fixed your housing crisis.

Congratulations!

‘Objectively assessed need’ – not what it says on the label

Objectively assessed need is not objective. It is not properly assessed. And it is not need.

The fundamental idea underlying current national planning policy is nonsense.

What does ‘need’ mean? Well, we could ration housing to provide basic shelter for everyone, even if it’s nowhere near any decent job opportunities or their community. We don't strictly ‘need’ any more housing at all in some kind of totalitarian sense.

The real question should be whether more housing could be provided at affordable levels where people want it – generally near good job opportunities or other amenities – while protecting precious countryside, making our towns and cities more attractive, walkable and liveable, and with the support of local people.

The current system has no idea because it’s never tried to work that out. And we certainly can’t adopt that as a definition because trying to force councils to come up with that much more housing using the current system would cause a revolution.

So on one way of looking at it, there is no ‘need’ for more housing, because we could ration it out. On the other hand there is an incredibly long list of people who would love to live near better job opportunities. The fact that house prices are so many times the actual cost of building more homes in those places tells you that. We’ve also explained how that has caused massive damage to the economy.

What does ‘objectively assessed need’ really mean? It is being used to mean something like ‘taking the current insane shortage of housing in many places, and ignoring all the people who have been priced out, what is a reasonable projection of the organic growth in housing need in this area, assuming the situation doesn’t get any worse’?

It is a way of pressuring councils to allow as much more housing as politically feasible, without a revolt at the polls. That, and similar doublethink, have failed to work for forty years.

You just can’t fix a concept that is such rubbish. And we think forcing councils is not the easiest way to get more homes anyway.

There are plenty of ways to get many more homes that are truly affordable, while protecting everything that is precious, making our places better, and with local support. We'll be talking more about them soon.

Where are the lawyers?

The more we learn about the housing crisis, the more clearly it is caused by badly-written laws. They could and should be a lot better.

How about more of these?

How about more of these?

It's easy to protect precious parts of the countryside and build many more beautiful, decent homes that are truly affordable, with the support of local people, while making our cities more walkable, attractive and liveable.

There is a profession that's supposed to be expert at writing rules well so that society works better.

What happened to the lawyers?

English lawyers normally don't learn about land use regulation. They have to learn lots of complicated rules that are mainly important for conveyancing. But the system that has impaired the economy by 30%? Rarely gets mentioned in law schools.

They also don't often study economics, or any other science.

US lawyers do — which is why people like Professors Lee Anne Fennell at the University of Chicago, David Schleicher at Yale and Michael Heller at Columbia University are making huge strides with the problems caused by badly-written laws on land use, and how to fix them.

Our challenge to English lawyers: how about some decent work on land use law over here? It's the opportunity of a lifetime.

 

 

What's your YIMBY roadmap for your city? (wonkish)

We all know about the inequality, loss of opportunity and economic damage caused by lack of housing.

There has been plenty of great political and legal activism.

There's still a shortage of actionable plans to fix the problem permanently. In an ideal world, housing would catch up with the century of progress on affordability that we have seen with cars.

As YIMBYs we want to make sure that enough housing gets built so that housing is affordable for everyone. We're not going to achieve that by changing human nature. We're not going to achieve that by telling better stories.

We need better stories, but in service of a plan that will get us to a changed system. We cannot win with the current system. The only way to win is to change the rules.

The zoning system itself is broken. We need to fix it in a way that takes account of the way humans actually work, to create a system that allows enough housing to get built with a continuous process of densification and growth. As society gets richer, people are going to continue to want ever larger homes. Any system that doesn't recognize and enable that is bad law.

Here's one example of some great pieces by @ProfSchleich at Yale using the points that Mancur Olson made about how lobbying really works to explain why the current zoning system is so broken.

Homeowners are a voting majority in too many high-cost cities and in the US and UK as a whole. Trying to push for change that hurts all homeowners is unlikely to win. The classic way to get change in those circumstances is to bundle together a set of reforms that won't hurt too many of them.

The great news is that the economic damage from the housing shortage is so great that it's easy to write reforms that will make renters and many homeowners better off. We just have to find the ones that are politically achievable.

There are plenty of options. Upzoning a small part of a large housing market (like in the Bay Area) makes those homeowners better off by increasing the value of their land. Air rights (TDRs) partly worked in Manhattan. @ProfSchleich suggests TILTs or development budgets. We think it will be easiest in the UK if we can get something that also helps to make buildings more attractive.

Every YIMBY in the world has an interest in helping other cities to find great solutions, to prove that they are politically realistic.

So our question for YIMBYs in other cities is – what reform in your city is politically easiest to achieve for maximum impact? Because we're sorry, but human nature isn't going to change.

If land banking is the main problem, here's how to make forty times your money

If land banking is the main cause of the UK housing crisis, here's how to make forty times your money.

The market thinks the assets of the 10 biggest UK listed housebuilders are worth about £41 billion.¹ Of course, that includes the value of the houses they've built but not sold yet, as well as the unbuilt land banks. So the value of their land banks can only be a fraction of £41 billion, if the market is right.

is the market wrong by a factor of forty?

is the market wrong by a factor of forty?

But the total value of the scarce planning permissions that allow the current stock of UK housing to exist is about £3.7 trillion, as we explained in our previous post.

The top five or six housebuilders are vastly bigger than most of the rest. Even if the rest of the housebuilders have twice as much land between them as the top ten, that would mean those top ten housebuilders can solve one third of the housing crisis. If so their land banks are worth more like one third of £3.7 trillion, so £1.2 trillion.

All of the upside would go to the shareholders after paying off the liabilities of £13 billion. But the total value of the shares according to the market is only £28 billion.

So what the market thinks is worth £28 billion is actually worth about 44 times more.

If you're sure that's right, we assume you'll be betting whatever you can afford on the shares of the major housebuilders. Or perhaps land banking isn't the main problem.

 

 

1 Total equity market capitalization of Barratt, Taylor Wimpey, Persimmon, Berkeley Homes, Bellway, Redrow, Galliford Try, Bovis Homes, Crest Nicholson and Countryside at closing prices on 16th December 2016, plus total liabilities of approximately £13 billion based on last published balance sheets. 

The UK’s hidden handcuffs

UPDATE: a new article in CapX updates these estimates for the latest research, with graphs

If you live in the UK, you are getting by at three quarters of your full strength. So is everyone else, but most people don’t know yet.

The UK as a whole is running at three quarters of its potential, because of the shortage of homes. To put that in perspective, that’s more damage to the economy than anything since the Black Death.

As Matt Rognlie, a young economist at MIT, has pointed out, housing is the biggest cause of inequality. Half of the UK is worse off than 14 years ago because of housing costs.¹

But that is not all. The shortage of homes in the UK is now so bad that it hurts the economy by 25-30%.

Heard of the UK’s ‘productivity puzzle’? There’s less of a puzzle than you might think. There’s good evidence that low UK productivity is mainly down to lack of housing near the best job opportunities. That means everyone in this country is 25-30% worse off than we would be if we had a proper housing supply.

That makes us less competitive against other countries, like China and the US. It’s also a great reason for us all to get together and fix the problem. It doesn’t have to be about us vs. them, or one group against another. We can fix the problem and make the whole country better off.

What's the evidence?

In 2015 two talented professors, Enrico Moretti at Berkeley and Chang-Tai Hsieh at Chicago Booth, got together to measure the effect of shortage of housing on US productivity. They concluded that lack of housing had impaired the US economy by between 9.5% and 13.5%.

How? Mainly by stopping people getting the best jobs that they want. Lack of housing also causes stressful insecurity and long commutes. Expensive offices and factories damage businesses and growth as well, of course.

Is the UK any better? Not by a long way. 

The value of land under US houses is about $10 trillion,² or 12.5% of US total net wealth. That gives some measure of the artificial shortage of homes, because many more great homes should fit into a square mile than you'll find in sprawling Palo Alto or London’s zone 5. Think of the beautiful terraces of Kensington & Chelsea, or central Paris. If homes in London as a whole were more like one of those places, land for housing would be much cheaper.

KENSINGTON & CHELSEA: HARDLY THE UGLIEST PLACE TO LIVE

KENSINGTON & CHELSEA: HARDLY THE UGLIEST PLACE TO LIVE

The same number for the UK is £3.7 trillion,³ or 40% of UK net wealth: more than three times as bad as the US proportion. If we take the total market value of UK housing from Savills rather than the ONS, the number is more like £5 trillion.

That probably means that the damage to the UK economy and GDP is somewhere around three times as bad. It may not be 39.5%, but 25-30% is a reasonable estimate.

That’s an incredible amount of self-inflicted damage, every year. 30% of GDP is about £600 billion, more than central government spends in a year. Of course, it’s a rough estimate until someone does a proper UK study.

Has anyone done a proper study? We sent a Freedom of Information request to HM Treasury, asking for their estimate of the impact of the housing crisis on UK GDP. Despite being supposedly focused on the housing shortage, they answered that they had no idea.

What gets measured, gets improved. If we recognize how much damage the lack of homes is causing to the UK as a whole, and to our competitiveness against other nations, perhaps we can finally all get together to build enough homes.

 


 

Footnotes:

1 Resolution Foundation, The Housing Headwind, Figure 21

2 See, for example, William Larson, New Estimates of Value of Land of the United States, Bureau of Economic Analysis, 2015, and the studies cited in Table 6.

3 UK Office for National Statistics, Blue Book data series for 2015, CGLK minus MJF8. The actual number may be higher because permissions on land not under dwellings are counted separately. Value of land under buildings and other structures was £453 billion. The value of land currently used for agriculture (including the value of planning permissions on greenfield land) is currently combined within AN.115 and will be disclosed separately for the first time in autumn 2017.

How would you block as many new homes as possible in existing cities?

If you wanted to design a system to approve as little densification as possible, what would you do?

First, prohibit all building unless specific permission is granted.

Second, create a lengthy procedure with extensive appeals and ultimate recourse to higher levels of government, to make sure that NIMBYs get as much chance to block as possible.

Third, make sure that questions about beauty are put at the back of the queue, so that NIMBYs are as worried about new development as possible.

Fourth, make sure you have blocked as many homes as possible for forty years, so that the price of land with permission is obscene and buyers are so stretched that they just want square footage, and can’t afford to care about aesthetics.

Fifth and most importantly, make sure that every approval makes the neighbours clearly worse off (unless they have exactly equivalent property that will benefit from the precedent), and that the approval doesn't really benefit anyone in particular except the landowner.

Does any of that sound familiar?

 

YIMBY book list

If you are looking for gift ideas or just what to read next, here are a few of our favourite books on how to fix the housing crisis:

Matthew Yglesias, The Rent is Too Damn High

Ryan Avent, The Gated City

Edward Glaeser, Triumph of the City

Enrico Moretti, The New Geography of Jobs

Mancur Olson, The Logic of Collective Action – be warned this is drier than the others.

Thanks to yimby.wiki for giving us the idea!