Last week Policy Exchange
published a
report calling for drastic and urgent reforms to deal with our sclerotic land
planning system. They accurately point out that property prices are primarily a
function of land prices, which as with all commodities are determined by supply
and demand. That demand is ever-growing due to rising incomes, population
growth and separating families, while the woefully inadequate supply is
controlled by a rusty ‘socialist’ throwback from the 1940s. As supply has
limped along behind demand house prices have soared, misdirecting the savings
of the baby-boomers away from productive investments and denying the young a
foothold on the property ladder.
The report makes some excellent
points, but its policy recommendation is dubious. It calls for a shift away
from a ‘plan-led’ approach towards an ‘externality-led’ approach, whereby those
in the vicinity of greenfield development are financially compensated. This
they hope will placate the NotInMyBackYard lobby’s reasonable objections and
pay for the external costs imposed on them.
Calculation issues aside, this
will necessarily underestimate the external cost and so lead to an over-supply
of housing built on greenfield sites. The reason is that in cost-benefit
analysis existence value matters. Coined
by Krutilla in 1967, this refers to the value nonusers place on the existence
of certain goods. As described by Kopp (1992) they are a form of pure public
goods, since one person’s nonuse enjoyment – e.g. positive reflections on the
existence of the Amazon rainforest – does not exclude anyone else’s. The
challenge of policy analysis is how to design a system which maximises the
welfare of everyone in society. So as Kopp puts it, ‘if the objects giving rise
to these values are diminished, the well-being of these people is similarly diminished.’
Simply compensating those directly adjacent and in the local vicinity ignores
the potentially huge aggregate existence value the rest of society places on
greenbelt land. If they were willing-to-pay a greater sum to avoid development
than those beneficiaries were willing-to-pay to have it, it should not go
ahead. Not only that, as greenbelt developments are irreversible, the
discounted present existence values of those unborn ad infinitum must also be
included.
The report quotes the totally arbitrary and wildly vague statistic that ‘only’ 6-10% of England has been developed. Wikipedia and a back-of-the-envelope calculation tells me they are unsure whether an area three times the size of London is built on or not…This should give us pause for thought, and little faith in anyone’s ability to accurate calculate appropriate compensations for heavy external costs such as these.
The report quotes the totally arbitrary and wildly vague statistic that ‘only’ 6-10% of England has been developed. Wikipedia and a back-of-the-envelope calculation tells me they are unsure whether an area three times the size of London is built on or not…This should give us pause for thought, and little faith in anyone’s ability to accurate calculate appropriate compensations for heavy external costs such as these.