Cheap housing, negative equity and crashing the banks | Brussels Blog

Cheap housing, negative equity and crashing the banks

posted by on 17th Jan 2019

Cheap housing, negative equity and crashing the banks

“it’s not my bricks and mortar that’s gone up in value, it’s the
permission I have to have a house in my particular Street”


Planning permits (again)

A previous article, Planning permission is not a natural resource, gave a meaning to the term planning permit: A planning permit is a right to have a building or ‘other structure’ on a plot of land It is a separate entity from the physical land of the plot.

This right can be granted by planning permission but in most cases it owes its existence to historical precedence: e.g. This house has been here for 100 years so in ordinary circumstances there is a right for it to remain. In these articles planning permit will apply both: the rights given by planning permission and the rights obtained through historic precedence.

The article showed using the methods of the Office of National Statistics, planning permits are half the net wealth of the UK. This value is determined by a balance between supply and demand. Government controls the planning system which in turn controls the rate at which planning permits are created. Consequently, through the planning system, the Government is in control of the value of planning permits.

When planning law was considerably tightened under the post-war Labour Government, the value of the planning permit, the development value, was taxed.

The post-war Labour Government’s Town and Country Planning Act of 1947 put in place statutory town planning in Britain. This had a provision for a charge taxing development value at 100% but it ran into difficulties partly because it deterred landowners from selling. (Value capture and land policies by Ingram and Hong). The Conservative Government of 1951 abolished the charge.

A summary might be this: The 1947 Act put the planning system in charge of development but captured the value of new planning permits for the state. The 1951 Act kept the planning system in charge but let landowners keep that value. It’s much the same situation today.

Today, however, the value of planning permits has increased enormously and they overwhelm the value of ‘land as a natural resource’ to such an extent that Figure 2 (modified from Figure 1 in Planning permission is not a natural resource) retains the accuracy.


Restricting the supply of planning permits increases their value

As OPEC often demonstrates with the supply of crude oil, restricting the supply increases prices. The supply of housing is restricted by the supply planning permits increasing their value. This is to the benefit of land owners when new planning permits are issued: In the York Local Plan, which guides planning policy in York for the next 20 years, the planning gain to landowners has been estimated earlier at £2.5billion. Most of that will go to four or five organisations.

The rewards to individual home owners are very much greater: In real terms the value of the average house in York has doubled over the past 20 years to £256,000. That’s increased the value of dwellings in York by over £10 billion. This is a windfall averaging over £100,00 per homeowner [1,2], very much more for the very affluent at the higher end of the housing market [3].

In the terminology of these articles, the supply of planning permits has been restricted by the policies of planning authorities, under the guidance of central government.

Government, both local and national, continues to engineer the transfer of enormous wealth to the owners of planning permits. When others pay rent, their rent is higher because it is related to the value of property.

This is largely driven by the value of planning permits.

[1] House Prices Report for York – January 1995 to October 2018
[2] Historical UK inflation rates and calculator
[3] The baby boomers housing bonanza


The difficulties with new policies

If the value of planning permits could be removed, the cost of homes, particularly starter homes could fall enormously. In a free market this is what should happen. The free-market Adam Smith Institute think government should take the brake off the supply of planning permits and let their value fall.

But this has several difficulties in letting this happen:


1) The NIMBYs won’t like it – and they vote.

Colin Wiles described their power in Why the nimbys are winning the UK’s housing battles:

Take Cambridge, where I live. I recently attended a meeting for residents’ groups about the examination of the local plan. Representatives from around 30 groups were present but all of them were from affluent parts of the city. Poorer neighbourhoods were simply not represented.

The Cambridge plan proposes 14,000 new homes, of which just 3% are due to be built on the green belt. This has caused a frenzy of opposition from campaign groups who were heavily represented at the meeting.

They used every possible argument to protect their views and their house prices, even proposing that a city centre flood-plain site occupied by a bowls club should have houses built upon it instead


2) Negative equity – Real people loose their homes.

In The economics and estimation of negative equity (Quarterly Bulletin 2009 Q2) the Bank of England described negative equity:

Negative equity occurs when the market value of a house is below the outstanding mortgage secured on it. As house prices fall, the number of households in negative equity tends to rise.

In January 2009 Myra Butterworth reported in the Telegraph that repossessions doubled in a year as a family loses their home every seven minutes and reported Adam Sampson, Shelter’s chief executive, as saying:

These new figures are not just numbers, they are heartbreaking tales of real people losing their homes and the rescue schemes announced by the Government recently will help just a fraction of those in trouble.

Homeowners have powerful incentives to avoid the pain of negative equity. This puts pressure on policies which could flood the market with cheap housing and reduce house prices.


3) Debt and the banks

The Bank of England also pointed out the problems of to the wider economy:

Negative equity can also have important consequences for the wider economy and the financial system, and it is these consequences that are the focus of this article. In particular, negative equity can have implications for monetary policy by affecting the pattern of aggregate demand and supply in the economy.

Andy Haldane,Chief Economist at the Bank of England , has written in personal correspondence (May 2014):

Cheap homes and the housing market

You asked about macro-prudential considerations if house prices were to fall as a result of increased supply of cheap housing. The Bank of England uses both micro and macro prudential policy instruments to the risks that come from the housing market, but only to the extent they might damage financial stability.

If additional housing supply was to cause sharp declines in house prices, this might raise concerns about the adequacy of mortgage lenders‘ capital positions and hence raise financial stability concerns.

A columnist from the Financial Times replied more bluntly when asked about building lots of very cheap houses: “It would crash the banks.”



The search is now on for policies which can provide cheap housing – lots of it – and to avoid a dramatic fall in house prices. In addition to promote lifestyles that will not ruin the climate.

Watch for the next article.


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