At the Top of an Overheating Housing Market – ‘Relaxing Planning’ can Make Matters Much Worse

Yes we need more housing and more land for housing as shortage of land for housing is one of the main causes of the UK Housing Crisis.

We here every day in the media further calls to ‘relax planning’ at ever increasing signs of a housing bubble, especially in London and the South East, where year on year house price increases in some areas are over 20%, levels which historically are signs of an impending crash.

Yet planning has been relaxed to unprecedented levels.  Other than printing planning permissions at random in random locations and mailing them to citizens (pretty much Alex ‘Half Baked’ Mortons current plan) it is difficult to see what more could be done.  The current ‘liberalisation’ of planning has created civil war in the countryside, has decreased land allocated for housing, has increased time taken to adopt local plans, has reduced the proportion of local planning authorities with 5 year housing supplies, has increased the number of out of date local plans and created the biggest gap between the rate of household formation and rate of land being allocated for housing ever seen.  All the opposite of the intended consequence.  Clearly and unambiguously the NPPF has failed on every possible metric that Gregg Clark the minister at the time said it would succeed on, other than the number of yet to start consents housebuilders, and ‘shadow housebuilders’ like Gladmans (which don’t even appear in HBFs landbank stats) have on their books (and a very dangerous stockpile that is as we shall see).  This reality on the ground rarely commented on by broadsheet economic scribblers like Allister Heath is part of the reason why their narrative of ‘relax planning’ is so off the mark.

The conventional neoclassical narrative is that ‘demand’ is greater than ‘supply’ so simple – increase supply.

Lets put this more accurately ‘demand – fueled by rational speculation and irrational price expectation is greater than ‘supply’- fuelled by rational speculation and irrational price expectation – at that price level, where a range of price levels are  fuelled by irrational speculation and/or  irrational price expectations.

This is an adaptation of the circuitist view of the credit cycle pioneered by Professor Steve Keen (now Economics Professor at Kingston) and others with rather inconveniently fits the historical evidence.

Seen within this view the amount of ‘effectual demand’ within a market (put simply without government) is a combination of income spent (velocity of consumption)+change in consumer credit+change of consumer savings spent +inflow of spending from abroad, and ‘effectual supply’ is a combination of revenues spent of production (velocity of production) + change in producer credit +change of business savings spent +inflow of spending from abroad.  You can complicate this further through accounting for a secondary circuit of rentier income (which Piketty focuses on ) , government spending and borrowing etc. but for the sake of this argument lets keep it simple.

In terms of purchasing assets such as housing:

Credit is sucking effectual demand from the future to now on the expectation that the cost of the credit will be more than offset by the increase in profit on the asset.

Savings are taking effectual demand from the past to now on the expectation that the opportunity cost of the savings will be more than offset by the increase in profit on the asset.

Inflows of demand from abroad occur when the opportunity profits of asset purchases abroad will be more than offset by the increase in profit on the asset.

By ‘rational speculation’ I mean speculation which helps market discovery and liquidity and so helps prices achieve at least ‘partial equilibrium’ levels where supply=demand in that market.  ‘Irrational’ behavior is where the NPV of the servicing price of the spending on the asset (including interest on credit) is greater than the fundamental price of the asset (such as for housing the NPV of the rental stream).   Irrational behavior can include irrational speculation, but it also includes other irrational expectations as bubbles and busts have been observed in markets where speculation is impossible.   The trouble is its almost impossible to tell when speculation is rational or not – if you could you’d be richer than Warren Buffet.

The key here is that irrational behavior occurs on both the consumer and producer sides of the balance sheet and action on one side only can sometimes only make matters worse.  For example more land becoming available towards the top of a bubble might simple encourage more people to take out credit to support a house price at unsustainable levels if there have previously been in a ‘queue’ for a suitable property.   Similarly a landowner or developer might simply increase their inventory of unsold stock on the expectation of increased prices tomorrow, prices fulled by the increase in consumer credit.  Exactly the kind of disequilibrium behavior you would expect from options theory.  The rise in prices leads to increased book value of housebuilders and non building shadow housebuilders landbanks leading them to borrow more to buy land (pushing up prices).  The increase in bank profits from more lending on a rising market leads their ‘charter value’ to increase enabling them to create money via credit to lend more to producers and consumers fuelling the credit cycle.   Other than in the unlikely event of macroprudeetial measures achieving a ‘soft landing’ , or the past Chinese solution of ever further government liquidity creation to put off the dirty day, there is only one place to go, credit fueled boom, and if large enough, a balance sheet recession at the end.

So if the market is near its peak supply side measures such as relaxing planning can make matters worse.  Planning is a medium-long term measures.  By all means increase supply, as a long term well planned and rational way looking at a horizon of 10, 15, 20, 30 years through Garden Cities and other measures, not in a crazy rush which may simply pop the bubble and leave house builders like in 2009/10 with a massive burden of landbanks the debts of which they cannot service and which will drag down house-building levels to historically low levels.  Havent we been there before with Brown’s buetiful timing in implmenting the Barker Review 5 years after those measures would have been well timed.