The real problem behind our crazy housing market...

George Kerevan asks...

DOES Britain have a new housing bubble? If so, why?  And what can we do about it, assuming it is a Bad Thing?

There’s no doubt house prices are on the up suddenly. In September, homes in England and Wales posted their biggest month-on-month gain in six years, according to Hometrack, a property analyst. This is confirmed by other studies. The Nationwide Building Society sales data indicates UK house prices are rising at their fastest pace since the credit crunch knocked the market for six. More to the point, Nationwide says property prices are rising in every UK region, not just in billionaire London.

The hunt is on for an explanation. It could be down to the various new state subsidy schemes introduced by the Westminster Government and Holyrood – the Scottish Government is making £220m available to borrowers over the next three years.

Equally, it could be a reflection of rising consumer confidence – now at its highest level since 2007, according to market research specialist GfK. It could be the endemic shortage of new housing starts. Or a lack of suitable outlets for savings fuelling the buy-to-let market. Or it could reflect the pick-up in economic growth. Or some combination of all these factors.

One thing is certain, though: it has taken hardly a consumer nudge or political wink to turn a flat housing market in Britain into a runaway express. We may be nowhere near a full property bubble – that would imply the rate of new mortgage debt outstripping any conceivable future price rises.

On the other hand, the endemic weaknesses of the British property market – and the threat they pose to economic performance - are back on show. Actually, despite the worst recession since the Hungry Thirties, they never went away.

So why is the British housing market so peculiar?

The key problem is lack of output. In the UK, in normal years, the number of dwelling completed per 10,000 of the population runs at around 30,000-35,000. But in France and Germany the number is well above 50,000 units. The Austrians, Finns and Dutch (who, after all, are not supplied with an abundance of free land) all build far more new homes per head of population than we do.

Why do we build so few homes?

It is not a matter of basic construction costs, which are far higher in most of Europe. Rather, it is a lack of available land supply caused by the planning system, coupled with the time it takes to get local planners to pass new construction projects.

I can vouch for this: I spent the best part of 12 years on the Edinburgh City planning committee. For Jean Paul Sartre, Hell is other people. For me, Hell is being trapped as a member of a Stygian planning committee for all of eternity. Generally, that’s about how long it takes to pass a new application to build houses.

For a start, planning committees exist to stop development, not encourage it. I remember being at the leaving do for one Edinburgh Planning Director, who (in his valedictory speech) proudly reeled off all the construction schemes he had personally thwarted. He got a round of applause from staff and councillors. (I resorted to several more glasses of wine.)

Council planning departments are tasked legally with producing general area ‘plans’. These list the likely land use needs for the coming period; i.e. the extra homes required to meet expected population growth, future retail and school needs, and industrial demands. Then the planners and councillors pour over their maps and allocate theoretical bits of land (virgin or recycled) to take said developments.

All this sounds very rational. It is meant to ensure that when a house builder comes with scheme to construct 500 new homes in accordance with the area plan, the powers that be will take out their green pencil and help them get on with it.

You must be joking!

In practice, the area planning system is a Byzantine Stalinist apparatus designed to thwart development. To begin with, it is based on the assumption that the planners can predict demographic trends accurately. Of course they can’t.  As a result, the area plan becomes a straitjacket that is used by Nimby groups to block development.

If the local economy grows unexpectedly or above average (which has happened repeatedly in Edinburgh) then the existing area plan is inadequate, as it has not made available enough development land. But opponents of growth can use the area plan to say that new planning applications are in excess of requirements, and veto them! The plan becomes the reality, not economic need itself.

There is worse to come...

The area plans zone likely new developments. In theory, this is meant to ensure planners have identified land available for construction. If they can’t instantly find such land, that is supposed to act as a trigger for compulsory purchase, the cleaning-up of derelict sites, or new infrastructure investment (roads etc) to open up new development opportunities.

For instance, when I was chairing economic development in Edinburgh back in the early 1990s, we identified the rundown industrial areas along the north shore and began a long-term scheme to remove chemical waste and put together strategic development blocks.

However, such a rational approach is soon derailed by politics. The zoning of future developments affects votes. Which means, for instance, that the majority political party or parties on a council will often connive to dump unpopular social housing zones on their political rivals in other wards. Or councillors will block new housing being zoned for their patch lest it dilute their majorities. And who is going to vote to have a new incineration plant in their ward? Which means getting any fresh energy or waste facilities put into the area plan is very difficult.

As a result, the entire forward planning exercise becomes a tool to sabotage development.

Yet any private house builder has to prove they are ‘conforming’ to the area plan. The instant way of killing a new application is for objectors to show it is ‘surplus to requirement’ or ‘not sanctioned by the area plan’.  But if the area plan is itself defective, or has been deliberately written to thwart particular types of necessary development, then there is nothing a builder can do but to go to appeal at a higher level. And that takes time and money.

It is no surprise that the big developers build in from the start the need to circumvent local plans by assuming an appeal will be necessary. Welcome to the mad, mad world of British planning laws.