Planning while ignoring markets: or designing planes but ignoring the laws of gravity

By Paul Cheshire

Urban planners typically do not think of themselves as concerned with markets: more with good design and building communities. Moreover, planners tend to be in favour of equality and making sure poorer people have better urban environments.  Economics is about the allocation of resources. Yet, as economists have understood for more than 200 years, resources are allocated via markets with prices determined by supply and demand. Shortages drive up prices reducing people’s ability to buy the good so bringing supply and demand into balance. At a price. The price makes manifest the reality that the ability to buy something is determined not by ones needs but one’s income together with ones taste for the good.

Popular planning policies are urban containment and height restrictions: often combined, as in London or Helsinki, and often with the aim of generating urban densification and a ‘compact city’. These policies, however, restrict the supply of a valued good: space – both private green space in gardens but also space inside housing (and offices). So planning takes on the economic function of allocating a good.

The most obvious economic effect is that the price of housing is bid up. Since the London Greenbelt was imposed in 1955 the real price of housing (that is offsetting for the general increase in prices) has more or less doubled in every decade. The result is that housing affordability, measured as the ratio of median house prices to median incomes, worsened across England: from 3.5 in 1996 to 7.70 in 2018. For the whole of London, the ratio was 12.82 by 2018. In the literature a ratio of 3 is considered ‘affordable’.

Less obvious effects are to price poorer people out of more attractive areas and deny them access to amenities. The price of houses fully reflects the value of all localised amenities – such as access to green space, cleaner air or a better local school. So houses in more attractive locations or places with better local services, cost more. The result is that they can only be bought by richer households and this is the process that drives residential segregation. In effect residential segregation is the articulation in urban space of the underlying inequality of income distribution.

So the Greenbelt, like minimum lot sizes in the US, prices poorer people out of greener areas around large cities – areas such as the ‘Home Counties’ – because space and access to green environments became relatively more expensive. And far from creating a more compact London, it has forced skilled London workers to jump across the Greenbelt – where no houses are built and space is most expensive –  to distant locations.  In proportionate terms the fastest growing locations for London’s workers are now some 200kms from London as people search for affordable space.

Moreover, houses have been transformed from places to live – as they are in Germany or Switzerland – into assets. Of personal assets now 62% are in the form of housing: up from 49% 20 years ago. This has had a major impact on the distribution of wealth, redistributing from the young to the old and to the ‘housing rich’. It has shut younger people out of house ownership. For people born in the 1950s the homeownership rate was more than 70% before they got to 34; just in the past 12 years, however, homeownership rates for the under 34s have fallen from 59% to 34%.

We do need planning. What economists identify as ‘market failures’ mean just left to market forces, we would have a socially suboptimal pattern of land use. There are two main reasons why land markets ‘fail’ in this sense. The value of all parcels of land depends on uses on neighbouring parcels – and neighbouring, for example airports and their noise, can be a long way away. But owners of plots generating either negative or positive impacts on their neighbours do not have to pay or be compensated without a legal framework ensuring it.

But problems such as spillovers to neighbouring land are minor compared to those related to public goods such as parks, wilderness areas, historic townscapes or urban views. These generate no revenue but do generate welfare – so there is no market incentive to provide or safeguard them. We need government intervention such as planning to ensure they are provided.

Perhaps more important still is the need to plan for urban growth: by that I mean the ordered expansion of cities – preserving land for transport links, infrastructure, provision of water and sewage: not just now but in the future. The problems that arise from unplanned self-built slum areas surrounding many cities in developing countries vividly illustrate this. Retrofitting infrastructure is hugely expensive, socially disruptive and inefficient.

While providing public goods such as parks, preserving historic cityscapes or wilderness areas by planning will generate local land shortages and so drive up local prices, effective planning does not require the imposition of a general restriction on land supply by, for example, a blanket restriction on building heights or the designation of extensive Greenbelts, regardless of the environmental quality of the land, freezing development out of the most productive locations. So land markets need regulation and we need planning. But because economies are complex systems, pushing in one place causes all sorts of unintended adverse knock-on effects such as re-distributing in favour of the rich or causing people to commute further in their search for cheaper housing space. So what we really need is planning that understands how markets work.

See professor Cheshire’s presentation here.