LSE research was the first to recognise and rigorously estimate the impact of planning policies on the price, quality, and affordability of housing.
What is the problem?
Housing affordability presents an urgent problem in many countries, especially for younger households in larger cities. This growing affordability crisis has led to a decline in owner occupation since the early 2000s in both the US and the UK. Not only has there been a transfer of wealth from young to old but there are wider regressive impacts on income distribution.
In response, governments have often attempted to fix the problem through a variety of policy interventions, such as tax incentives for owners or special deals for first-time buyers. There have also been measures intended to increase house-building. Lack of housing construction is the starkest problem in the UK. In England over the 30 years to 2019, 3.1 million fewer houses were built than the 7.4 million built in the previous 30. Understanding the causes is essential if policies for both housing and commercial property are going to work to improve affordability. Research has shown that a lack of housing in places where people want to live and work increases housing costs and commuting distances, while restrictions on commercial property reduce productivity and so restrict growth.
What did we do?
Professors Paul Cheshire and Christian Hilber have researched the impact of land and planning policies on housing affordability for over twenty years. Their research was the first to show that housing unaffordability was affected by planning policies, which exert constraint (often intentional) on the supply of land for development. Land use policies that, for example, designate particular zones for limited or no development (such as greenbelt policies around a city) have costs for both housing and commercial property.
Cheshire’s initial work considered the price of housing in terms of cost, quality, and economic welfare, including the benefits from planning-produced amenities, such as open space. With Professor Stephen Sheppard (Williams College, Massachusetts), he developed a model to estimate how any given decision on the supply of land can lead to a change in the space in and real price of housing. Insights from this informed specific policy recommendations for planning reform, intended to reduce its economic costs while (as far as possible) retaining the value of public amenities. Hilber and Wouter Vermeulen (SEO Amsterdam Economics) extended this research to provide powerful evidence that more restrictive local planning policies cause rises in local housing costs.
Tax policies can further aggravate the housing affordability crisis. In research published in 2017, Hilber and Dr Teemu Lyytikäinen (VATT Institute for Economic Research) showed how the UK tax on the sale of property or land (Stamp Duty Land Tax) significantly reduces short-distance and housing-related moves but not long-distance moves or moves related to jobs. This indicates that, although the tax may not stifle labour markets, it affects housing availability, as it discourages downsizing and impedes growing families from moving when they need to.
In many countries, one popular policy response to housing affordability problems is to boost aspirant homeowners’ purchasing power (demand) by making mortgage interest tax-deductible. In a study on the unintended effects of this on US housing, Hilber and Dr Tracy Turner (Iowa State University) produced two novel insights. First, the net effect of the policy on individual homeownership turned out to be essentially zero. Second, the impact varied enormously depending on location. Where there was flexible land use regulation and responsive housing supply, the tax deduction had little effect on house prices and did help increase homeownership. However, in locations with tight control and unresponsive supply, the tax deduction raised prices and in fact lowered homeownership.
Insights from this body of research have stimulated wide-ranging policy debates amongst policymakers and in the media. It has also directly informed changes to housing policies in the UK, US, Belgium, and Canada.
In the UK, Cheshire and Hilber have engaged directly with public policy debates relevant to their research, recommending proposals to change planning on greenbelt land; lower stamp duty and to publish land prices, changing public policy in the process.
Through meetings with government departments and by submitting expert evidence to parliamentary select committees, they have advocated reforms to allow residential building on greenbelt land near to stations that give good access to major cities including London. This catalysed the “London’s Non-Green Belt” campaign, started by Labour MP Siobhain McDonagh, which garnered substantial national media coverage. The proposal was included in the original (2017) draft Housing White Paper. While deleted from the final version, it remains in the policy debate and has been taken up by the House of Lords Select Committee on the Built Environment.
Hilber and Lyytikäinen’s work on UK stamp duty also stimulated public debate and ultimately led to a reduction in this tax for first-time buyers. Hilber gave evidence on their research to the Treasury Select Committee in 2016. The research was also widely cited in a media campaign calling for changes to stamp duty, and in the 2017 Budget relief from stamp duty was granted to first-time buyers paying up to GB £500,000 for a home in England, Wales, and Northern Ireland. The research and media campaign played a vital role in securing this change, which saved first-time buyers an estimated average of GB £2,500 each. In 2018 the UK recorded its highest number of first-time buyers in 12 years. Although we can’t quantify how much of this rise is because of the stamp duty reform compared to other policies or wider macroeconomic changes, it seems reasonable to assume that it was a contributing factor.
In 2017, the USA passed the Tax Cuts and Jobs Act, which dramatically reduced the cost of mortgage interest tax deduction (MID) from US $60 billion in 2017 to US $25 billion in 2018. Citing Hilber and Turner’s research, the White House’s Council of Economic Advisors’ report evaluating likely effects of the policy change, noted: “empirical evidence indicates there is no significant positive effect of the MID on homeownership rates”.
The same research has been influential beyond the US, including in reforms to mortgage deductions in the Belgian regions of Flanders and Brussels City Region. Evidence since has showed these changes led to lowered house prices and an increase in homeownership, benefitting younger buyers and lowering government subsidies.
In Canada, in 2019 the Ontario Government passed ambitious new legislation to tackle the state’s housing crisis. It was based on a 2018 report by the C.D. Howe Institute on the high costs of and barriers to new housing in Canadian municipalities, which drew extensively on Cheshire and Hilber’s research insights and methodology, and which they consulted on. The legislation’s main aim was to stimulate faster construction of new housing near transit by simplifying planning procedures, creating more incentives to build and allowing homeowners to create new residential units.
A central finding of much of Cheshire and Hilber’s research has been the critical role of the supply side. Through public commentary and engagement with policymakers globally, Cheshire and Hilber have been influential in shifting housing policy discussions towards addressing land supply and land use as a key factor in driving housing affordability.