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The 6th RSAI World Congress 2000 Regional Science in a Small World
Lugano, Switzerland, May 16 - 20, 2000
The Use of Prices in the British Land Use Planning System
Christine ME Whitehead and Sarah Monk
London School of Economics and Property Research Unit, University of Cambridge, UK
Fax: 00 44 207 831 1840 E-mail: [email protected]
Abstract:
The British land use planning system has many of the attributes of a centrally planned economy.
Development rights were nationalised in 1947 and decisions on change of use are made in the
public interest, on the basis of quantitative estimates of land requirements. The introduction of
‘plan, monitor and manage’ by the current Labour government, together with stronger emphasis
on a ‘bottom-up’ approach to decision making, has brought with it the need to develop
consistent indicators on which decentralised decisions can be based.
The central role of
public/private partnership in regeneration and development similarly puts pressure on
distributional grounds on authorities to work with the market rather than to replace it through
administrative decisions. Further, the growing use of negotiated planning gain to fund local
infrastructure makes it desirable to assess the extent of economic rent generated by planning
decisions.
This paper reports on research, undertaken for the DETR, which examined how price could play
a role in assisting the land use planning system to make more efficient and consistent decisions
about the allocation of land; in monitoring the direct outcome of these decisions including their
impact on the local neighbourhood; and in evaluating the extent to which policy objectives are
being achieved. The research had three main elements; identify in the trigger points when
price could be effectively used within the current planning framework, empirical evidence on
how prices are currently being employed; and case studies providing examples of how price
might be interpreted in different circumstances. The paper concludes by assessing both the
potential for using price within an administered system of land allocation aiming to achieve
social objectives and the analytical and practical problems which must be addressed if the
system is to move towards incorporating market signals.
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1. Introduction
The planning system is undergoing rapid change (see particularly DETR, 1998a, 1988b, 2000a,
2000b). In part, these changes are concerned with the use of incentives to attain agreed social
objectives as well as the growing emphasis on evaluating the outcome of government policies.
The Comprehensive Spending Review (Treasury, 1997) has outlined the way the government
thinks public policy should operate more generally. In the context of planning the precise use of
incentives has not been made so explicit. However, the dictum ‘plan, monitor and manage’ can
be interpreted as suggesting that planners need first to agree the desired policy goals, then to
assess the current position and finally to work out how current practice needs to be changed in
order to ensure that the policy goals can be achieved. This is seen by many commentators as
very different from the earlier approach of ‘predict and provide’ which was top-down,
quantity-driven, and generated little evidence on which to base monitoring and evaluation of
planning policy outcomes.
The main focus of this paper is to ask whether, in principle and in practice, price can play a role
in planning for housing, and if so, to explore what that role might be. It thus addresses the
relationship between planning and the market in the current, evolving, planning policy context.
In particular, it seeks to address the view which is widely accepted by planners that prices have
no role in the planning system because planning replaces the market by directly addressing
required quantities. While this may have been the case in the past, the paper argues that in
today’s policy context it is clearly recognised that planning decisions modify the market rather
than replace market decisions and that any assessment of planning must take these impacts into
account. Prices can therefore provide a measure of the market value or benefit of planning
decisions and are thus a useful tool for assessing the extent to which particular planning policies
are capable of implementation. Far from ignoring prices, planners have the potential for using
price to undertake market impact assessments of their decisions in order to improve planning
practices and outcomes. The processes of ‘plan, monitor and manage’ can all benefit from
transparent evidence on the relationship between planning and the market.
The structure of the paper is as follows. First, we outline a traditional view of planning which is
widely held in the UK and contrast it with a ‘pure’ economics view of planning. We then outline
two more behavioural, ’market indicators’ approaches, one in which price is used only to
provide information while in the other price provides incentives and a rationing device. This
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leads on to an analysis of planning as modifying the market and at the role of price within this
context as a key measure which integrates the whole system, focusing on the limitations of price
as well as its strengths. On the basis of this, we bring economics and planning together to
describe the potential role of price in planning for housing and explore how price might be used
in practice, highlighting the benefits for planning decisions. Drawing on case study research
undertaken for the DETR (Jarvis, Monk and Russell, 1999), we present some examples of the
use of price in planning decisions, emphasising the need to interpret prices and price changes in
the light of other economic variables. Finally we conclude that for planners to use price more
widely, greater incentives as well as practical guidance are needed, and we make some
recommendations for further research.
2. The traditional view of planning
A traditional planners’ view of land use planning is that its role is to replace the market to ensure
that social rather than purely private objectives are achieved. Because price reflects the market,
it is seen as having little or no role to play in a fundamentally administrative system. The
appropriate indicators are measures of housing requirements and the available supply of land
and housing, with relative value assessed directly within the decision making process. In this
interpretation, using price can almost be seen as dangerous because it provides a direct and
immediate measure of market value which may come to distort planning decisions so that they
are less able to contribute to wider, social objectives.
This representation of the traditional view of planning is perhaps an extreme one. It suggests that
price is likely to be of minor importance both because social objectives are so different from
private and because prices are so difficult to interpret. Such a traditional model is thought to
typify the planning system of the 1980s. In this model there is a tendency to see the private, and
thus price, as the antithesis of the social, rather than to see social as including all benefits,
whether private or more widely spread. Administrative allocation is substituted for the market
and the production of housing is seen as a process in which key actors negotiate with each other
to produce planning outcomes. Local authorities respond to top down (regional) advice on
housing quantity requirements; the subsequent allocation of land for housing and the granting of
planning permission are conducted as a highly micro level exercise. Many commentators who
support this view also argue that planning practice does not impact on residential land and house
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prices because planning decisions reallocate rather than change demand (see for example,
Grigson, 1986; Barlow et al, 1994). In this perception, the market for land and housing is
viewed as continuous, rather than geographically segmented, so that land in one location is a
more or less perfect substitute for land elsewhere, and similarly for housing. On this view, it
would only be possible for land and house prices to be affected by a land supply modified by
planning if all local authorities acted together to constrain the total amount of land available for
housing.
Such a view is not held in many other countries with systems of land use controls, notably the
USA (see, for example, Mayo and Sheppard, 1992, 1996). Instead the role of planning is seen as
to work with the market to ensure that social objectives are achieved, largely through market
processes. Price has an important role to play, not as a means of imposing market outcomes, but
rather as an indicator of relative values and costs which can help in planning decisions. Price can
help determine what can effectively be achieved, the implicit costs and benefits of different
decisions, and the extent to which what actually occurs on the ground is consistent with planning
goals. Price also provides a measure of the benefits or value added of planning decisions. The
American literature in particular, while it mainly addresses zoning which is inevitably somewhat
different from the British land use planning system, sees price as a key indication of whether a
zoning decision has been successful or not (Malpezzi, 1996).
In the context of the British land use planning system, we can typify this view as a more
economic approach, in which the value of price information is seen to be large enough that price
can be used as both an input into planning decisions and as an output measure for monitoring
and evaluation. In the simplest version of this ‘pure’ economic model, originally based on work
by Alonso (1964), Muth (1969) and Mills (1972), price is seen as capitalising all relevant
information into a single equilibrium price, reflecting both the current and future value to the
individual and society, and the opportunity cost of resources. Goods such as housing can be
broken down into their component attributes  including not only the quality and quantity of
housing but also locational aspects such as access to good schools, closeness to green belt  and
the cost and value of each attribute can be measured separately using hedonic pricing
techniques. Market constraints modify price and again hedonic price methods can measure the
cost and the value of the constraint separately.
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Both approaches are somewhat stylised abstractions from reality. In practice, there are at least
two additional models of the role of price in planning for housing. The first is a ‘market
indicators’ approach which reflects the more enabling role that the planning system is currently
adopting, as local planning authorities recognise the need to be more flexible towards the market
in order to achieve planning objectives. This enabling role has evolved as perceptions within the
planning system have changed, particularly concerning housing markets, affordable housing,
economic development and urban regeneration. Recognition of the impacts of recession on local
housing markets, the burdens of negative equity during the long recession of the early 1990s,
and the statutory requirements for the provision of affordable housing have all, to varying
degrees, started to alter planners’ perceptions about the appropriateness of traditional planning
mechanisms for resolving housing matters.
In terms of the economic theory of price, such an approach is characterised as a more
behavioural, reflecting the body of theoretical work on markets conducted initially by Austrian
economists such as von Mises and later developed by Hayek and Schumpeter and now known as
the Austrian school (see Littlechild, 1990). This sees the market system as dynamic and price as
an input into and out of a learning process. The Austrian approach accepts that, in practice,
markets are generally inadequate compared with those specified in neo-classical theory. Real
markets often have few transactions, high information and transactions costs and inefficiencies
including external costs and benefits and disequilibrium (excess demand or supply). The starting
point is a realistic market in which a price change modifies behaviour (for example, a rise in
house prices raises densities, shifts land into housing and raises land prices) which in turn leads
to further house price changes. But there is no expectation of achieving a static equilibrium,
because the system is imperfect and is constantly changing (Littlechild, 1990). This is very
different from an ‘efficient’ market (Samuelson, 1965), where complex economic processes are
conflated into a single equilibrium price which only changes when the determinants of that price
change, because all other influences and expectations about present and future costs and benefits
are capitalised into price.
The Austrian school emphasises the value of price as information, incentive and rationing device
in a dynamic world. It should be acknowledged that the Austrian school also sees no role for
government intervention or regulation, as this is seen as restraining the market from working
properly (there is no concept of markets working efficiently). Nevertheless, this behavioural idea
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of price as an input and an output of decision making is intuitively helpful when exploring the
relationship between planning and the market. In particular, because the characteristics of land
and housing are so different from other goods that are traded, with few transactions, high
transactions and information costs and so on, the idea of price as an indicator, however
imperfect, in a learning process is particularly apt.
An alternative model may be closer to current practice. In this approach, price only has an
informational role. It does not provide incentives nor act as a rationing device, because decisions
are made by administrators, who use price as part of a wider set of information which helps
them to make decisions and in particular to ensure that they are consistent. In this model, price
enters the system at one remove rather than directly. Even so, prices reflect the outcomes of the
interaction between market forces and the administrative decision making framework. The
principles of flexible planning require information, and price provides some part of that
information. Current planning practice is moving closer to this approach, especially through
economic viability - i.e. planning decisions will not result in the desired outcomes unless they
are informed by price. Equally, planners themselves wish to ensure consistent decisions, and
price plays a role in assisting this (see Jarvis and Russell, 1998, for survey evidence in this
respect).
3. The role of price
In all except the last of the four approaches discussed above, price has three related roles. It
provides information, however imprecise, about the market/private value and cost of goods and
resources such as land and housing. It provides an incentive to increase or reduce consumption
or production in response to changes in relative prices; and it rations the use of scarce resources.
At the same time, because incomes also depend on prices, changes in price modify the
distribution of income, increasing the purchasing power of those owning the more valuable
scarce resources. By reflecting value, price is an indicator that should not be ignored, because
the outcome of planning policy and planning decisions should reflect value, however that value
is generated. And even in the last approach, price provides information and reflects value although it does not provide an incentive and it does not ration scarce resources. These functions
are replaced by planning decisions. The role of planning is then to modify that information, to
provide incentives and to ration resources in line with the difference between private and social
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values.
If markets worked perfectly, price would bring the whole system together. The neo-classical
model, by making some extremely strong assumptions, describes a system of independent,
decentralised decision makers who purchase the goods and services that reflect their personal
preferences as constrained by income and price. Price acts as a signal, so that for example, if the
price of land in one area rises relative to that in another, this implies that consumers find land in
the first area more valuable than land in the second, those owning land in the more valued area
have an incentive to bring more land forward for development and to use it for its highest valued
use, while consumers have an incentive to reduce their use of land in the valued area. Land in
both areas will be allocated to their most profitable uses, squeezing lower valued uses out of the
higher valued area. Owners of land in the higher valued area increase their income and
purchasing power.
Equally, if the price of housing land increases relative to that of industrial land, there is an
incentive to shift land from industrial to residential use and to use residential land more
intensively through higher density development. If markets were efficient, this process would
continue until the rate of return achievable on the different types of land is equal. At that point,
when the last unit of land for housing had the same net price as the last unit of industrial land,
there would be no further incentive to change use, but if land is not completely substitutable
between uses, house prices will be higher and existing owners richer than before. In this
perfectly efficient system, the equilibrium price (or rather, set of prices) is that where social and
private costs are equal in all markets at the margin.
In the modified administrative model, price provides information but no incentives to the
market. Thus if the price of housing land in one area rises relative to another, this shows
planners that consumers find land in the first area more valuable than land in the second. Higher
relative prices are an indication of relative pressure of demand in the more desirable area.
Equally, if housing land prices rise relative to industrial land, this also indicates to planners that
housing is considered a more desirable land use than factories or workshops. Planners can make
use of this information, allocating less industrial land and more land for housing. But they make
their decisions in the context of wider planning concerns such as protecting the countryside from
urban sprawl, as well as balancing the market’s desire for more housing against the local
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economy’s need for more employment. Prices then provide a market indicator of the costs and
benefits of their decisions which can be used as part of an assessment of the appropriateness and
consistency of planning decisions.
When markets are working well, price information has at least three direct uses. First, it is a
measure of the opportunity cost of decisions in terms of the use of scarce resources. The
opportunity cost of land used for housing, for example, is generally measured in terms of the
next most profitable use to which that land could be put, which might be agriculture in the case
of greenfield housing developments. Alternatively, the opportunity cost of a brownfield site
might be given by the value of an alternative, greenfield site.
Second, price provides a way of measuring the economic viability of a particular proposed
development. Given the costs of housebuilding, for example, including the costs of borrowing, a
developer can calculate the overall cost of a particular development in terms of the site size and
the density of development. The difference between this and the total value of the completed
development (calculated on the basis of the current sale price of similar housing) is the residual
sum available to purchase the site. If this residual is negative or negligible, the development is
not economically viable. This might be the case on a brownfield site, for example, where there
are additional costs in terms of clearing and preparing the land.
Third, and related to economic viability, price provides a measure of economic rent. This is
defined as the difference between the minimum sum necessary to keep a resource such as land in
its current use (say, housing) and the actual market value of that land. If this difference is
positive, there is economic rent associated with the site in its current use, and the existence of
this extra profitability, as it were, will, if markets are working well, provide an incentive for
other land to be converted into housing. This process will continue until no economic rent
remains associated with housing land. The existence of economic rent is the result of excess
demand for housing land, relative to a shortage of supply, but in a perfect market, such
imbalances will not persist into the long run.
The problem with this analysis is that markets do not work perfectly and therefore they are not
efficient. The major areas of market failure are externalities, costs associated with uncertainty
and under-investment (Cheshire and Sheppard, 1989; Bramley, 1993; 1998). In the context of
land and housing, market failure stems particularly from the spatial fixity of property, resulting
8
in each piece of property and plot of land being relatively unique. There are high transaction
costs, for example, particularly the costs of information. This prevents price from acting as a
signal for decisions which will result in the perfect market outcome where social and private
costs are equal, because market imperfections mean that decision makers lack knowledge of
relative prices. The existence of external costs and benefits, defined as those that are not
captured within the market system, means that the prices produced by the system do not reflect
the full resource costs of goods and services. Therefore decision makers again cannot make
decisions which in a perfect market would result in an outcome where social and private costs
are equal.
4. The potential role of price in planning for housing – how it might be used in practice
Price has three inter-related roles in the context of planning for housing. It is an input into the
planning process, an output of that process, and a measure of the wider outcomes of the
system as a whole. Price is an input into planning decisions with respect to the decision to
develop, the economic viability of one site compared to another, and it provides an implicit
measure of the social valuation of development on a particular site in terms of the impact on
individual house prices. Price as an output of the implementation of planning decisions provides
a direct measure of value. The planning decision to use housing as a form of urban regeneration,
for example, has a part in determining the land and house prices that emerge at the end of the
process. Thus if prices have risen, this reflects the relative success of the decision in terms of
urban regeneration, whereas if they have not, or if they have risen more slowly than prices
generally, this reflects the lack of success of this policy. Finally, price as a measure of the
outcome of the interaction between planning and the market provides evidence of whether the
system is constrained or not. For example, rapidly rising land and house prices in the south east
suggests that the problem of affordable housing is exacerbated. On the other hand, it also
suggests that there is economic rent available which implies that planning gain in the form of
affordable housing will be easier to negotiate in the south east.
In practice, there are at least six ways in which price could be used in planning for housing.
Price could be used to estimate the economic concept of the opportunity cost of developing
housing on brownfield rather than greenfield sites as part of urban regeneration policies or the
protection of the countryside. Building houses on brownfield land is more expensive in market
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terms than building on greenfield sites despite the cost of service provision, largely because
greenfield land lacks the constraints of developing in an already built-up urban area. Even on
brownfield sites in rural areas, such as disused airfields or gravel extraction pits, the costs of
bringing the land forward into alternative uses are often prohibitive. Therefore the difference
between the cost of brownfield development and producing the same development on a
greenfield site is an indication of the implicit additional value that society is placing on planning
policies such as urban regeneration or countryside protection. Using price in this way is purely
as additional information. It would not necessarily alter the planning policy or the decision to
develop in one way rather than another, but it would provide a different way of looking at the
decision and in some cases might even change that decision.
Prices can be used to estimate the degree of market segmentation in an area and therefore the
impact of planning constraint. For example, it has long been assumed within the planning
system that relatively tight constraint on development in a pressured part of the county can be
offset by additional land release elsewhere (Jackson et al, 1994). The movement of land and
house prices in the two areas over a period of time will show whether this is in fact the case. To
some extent, every house is a substitute for another house, but equally, there is a strong sense in
which every house - every location - is unique. To take an example from an earlier case study of
the Cambridge sub-region (Monk and Whitehead, 1999), it is likely that tight constraint in South
Cambridgeshire will not be fully offset by additional release of housing land in Fenland, despite
the fact that both areas are relatively close to Cambridge and Fenland in particular has
experienced recent transport improvements. Land and house prices in South Cambridgeshire
rose faster than those in Fenland, suggesting that the greater constraint on supply bid up the cost
of housing (although land and house prices also rose in Fenland following the additional land
release, suggesting that some of the unmet demand from South Cambridgeshire was diverted to
Fenland). Here again, price is used purely as additional information in an administrative
planning system.
Price is most obviously a measure of economic rent, which is known in the planning context as
planning gain. It is clearly useful to planners to know whether there is a possibility of extracting
planning gain in the form of affordable housing from a particular site. Because planners resist
the idea of negotiating with individual developers in terms of prices and profits, they prefer the
use of targets for the total amount of affordable housing required which can then be divided up
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broadly between the larger sites in the local plan. They can then discuss with developers either
by asking them what they are prepared to offer and negotiating from there, or by stating what the
target is for the site, and negotiating from that starting point. Yet the potential for achieving the
target or desired levels of affordable housing is clearly very different in economically depressed
areas compared with areas of demand pressure. Comparative house prices and rates of change
would be an excellent indicator of the extent to which affordable housing negotiations are likely
to be successful.
Price is necessarily a measure of the economic viability of a proposed development in market
terms, which is why it is a fundamental tool for developers. Yet it is also helpful to planners, if
only as an additional indicator of what other, quantitative and qualitative measures will also
reflect. For example, if a proposed development brief for a particular site or, in the case of urban
regeneration, neighbourhood, is not economically viable, this will be reflected in a lack of
interest in the site on the part of developers. Using price in such circumstances would at the very
least save time, because who determines how long to wait before deciding that no development
is going to take place according to the proposed planning policy?
Price is already used to provide the context to planning decisions (Jarvis and Russell, 1998).
What is required is the extension of current use to enable greater comparisons between regions,
within regions, within districts, and at neighbourhood level. This requires improved data,
particularly in terms of land prices, but also house prices at the relevant spatial scale. At present
house price information is not reliably available below district level for the country as a whole.
While the small number of transactions makes this difficult for particular house types,
standardised or ‘mix-adjusted’ house prices could be made available by the Land Registry at
ward or post code level which could then be used as building blocks by planning authorities at
different levels.
Finally, prices can be used for monitoring and evaluation purposes, again at every level of the
planning system. Planners need to know how successful their policies are in practice, both in
terms of meeting stated objectives and in terms of cost effectiveness. Prices are a vital part of
this process.
In suggesting planners should use price, we are not interested in what impact planning decisions
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might have on private individuals in terms of the value of their property, although these are the
kinds of objections which the planning system constantly has to address and which rightly have
to be ignored when making decisions. We are, however, concerned about such matters as the
overall impact on house prices in the south east, for example, and about whether the allocation
of less land for housing than household projections would imply will simply bid up prices in the
south east, creating problems of affordability.
The discussion so far suggests that there are at least six key areas where price could potentially
be used in planning.
1. as contextual information providing evidence of market demand through changes in relative
prices
2. as an input to questions about the adequacy of land allocations and steering demand
3. as evidence of the market based opportunity cost of a range of decisions about location and
type of development
4. as an element in assessing the impacts of decisions elsewhere in the market
5. as an element in assessing the feasibility of suggested locations and developments
6. as an element in assessing the needs for affordable housing and the extent of potential
planning gain.
It seems clear that the case for using price in the planning system is a strong one. This paper has
identified the policy areas where price might be used; it now goes on to explore how this might
be done in practice using material gathered in preliminary case study research undertaken as part
of the DETR study.
5. Some case study examples by way of illustration
Previous research (Jarvis and Russell, 1998) has demonstrated that price is already used in the
12
planning system for broad contextual information. Its potential use in monitoring and evaluation
is simply a development of this, although the difficulties of interpretation and the problems with
data quality and availability cannot be ignored. Ideally, what is needed is a set of guidelines that
planners could follow and as their experience increased over time, so the data position would
improve. The case study research we undertook for the project involved extensive examples of
the use of price. Full details are published in Jarvis, Monk and Russell (1999). Here, we present
some examples in order to illustrate the role of price in different contexts, focusing on the local
level. We must emphasise that by the very nature of price, the same information can be used in a
variety of different contexts to explore different aspects of planning policy and implementation.
The first example applies to density policy on a brownfield site. The approach used here could
equally be used to evaluate the economic viability of a proposed development in an area of
urban regeneration, or to estimate the potential for planning gain in the form of affordable
housing, since these are all linked. In areas of low demand, there is often a need for development
to take place in order to assist with urban regeneration, yet the relative lack of demand and the
abundance of brownfield sites makes this difficult. There may be a desire on the part of planners
that development should be of high quality and low density, but this may not be economically
viable in practice.
Table 1: Site example: use of price to assess site specific economic viability for an allocated
brownfield site in an economically disadvantaged urban district
Price, cost and density data
Parameters
NOTIONAL CAPACITY
Site Size = 3.6 ha.
Nos. dwellings = 100
Density = 28 per ha.
£64,411
DEVELOPMENT BRIEF
Site Size = 3.6 ha.
Nos. dwellings = 30
Density = 8 per ha.
£113,857
Inclusive build costs per
dwelling (£)
Land costs per dwellings (3)
£11,700
£39,000
Total land and build costs per
£76,111
£152,857
dwelling
Average adjusted price (1998)
£58,600
58,600
for existing detached dwellings
in the immediate area
Estimated price of new
£76,000
£76,000
dwellings in the immediate area
Notional shortfall per
(£111)
(£76,800)
dwelling
Sources: Halifax postcode data, 1998. Notional cost data provided by developers. Author’s calculations.
Table 1 gives some stylised facts about a particular site. This 3.6 ha. site on reclaimed former
mining land adjacent to the green belt in an economically disadvantaged urban district was
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identified for housing with a notional capacity of 100 dwellings (28 per ha.). A development
brief subsequently stipulated a density of 8 units per ha. in order to achieve high quality, low
density housing, retaining environmental features including trees and hedgerows. Development
costs and achievable sale prices compared with actual sale prices of detached houses in the area
suggest that while a higher density scheme would be viable, the low density scheme is not. The
site remains undeveloped.
In the example in Table 1, one indication that a potential viability problem exists stems from the
limited interest that has been expressed by developers for this site. The implications of the
development ‘cost/density/price’ equation illustrates that the development is not viable at the
density suggested in the development brief. The simple calculation presented here compares
average prices of new dwellings in the vicinity of the development site with the costs of
development. At the density specified in the development brief (8 dwellings per hectare), the
sale price is clearly far below the development cost per dwelling and a significant shortfall
would therefore ensue. If we compare this with the cost equation using the notional site capacity
of 100 dwellings, the shortfall becomes almost negligible. This illustrates that decisions
surrounding the viability of a development site rest, explicitly or implicitly, upon a complex
mediation between site capacity, market preferences (as indicated through prices) and
development costs.
The second example concerns the use of price in relation to density policies at the site specific
level. Table 2 shows that between 1993 and 1997 the average price of a flat/maisonette
increased 3.8% per annum in the ‘search area’ (immediate vicinity of site) whereas in the wider
postcode area the average price of a flat/maisonette increased by 8.4%. This suggests that a large
high density new development may have modified house price increases in the locality, by
helping to meet market demand. The time series available here is certainly not sufficient to be
able to claim that this difference in relative prices can be attributed to the new high density
development. What it does demonstrate, however, is the way that micro-level price data can be
used to analyse relative shifts in prices between house types and density levels in relation to
overall changes in the housing stock and flow across the district.
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Table 2: Use of price to assess site density policy in a highly constrained, high demand,
urban district.
Site details:
This 6.6 hectare former industrial site was developed in 1995/6 with a mixture of 85 semi-detached houses and
378 flats. The existing dwellings in the locale are predominantly Victorian terraced with some post war local
authority housing. Each new dwelling cost approximately £29,000 to develop (land, build and site costs) and
sold for an average price of 54,300 in 1996. At 70 dwellings per hectare, this site constitutes a higher density
development, with concomitant lower priced dwellings, relative to the adjacent residential area.
Planning objectives
The development site contains dwellings aimed at the lower end of the market with average dwelling densities
which are high for the local area. Further, average dwelling densities have increased across the case study district,
from 40 per hectare in 1989 to 49 per hectare in 1994. It is important to monitor the impact of this on the local
area.
Index of real house prices (before and after new build), index 1990=100
Search Area1
1991
1992
1993
1994
1995
1996
1997
1998
SITE
Terrace
121
108
100
n/a
n/a
102
124
n/a
Semi
101
102
100
n/a
87
98
118
n/a
Flats
135
110
100
n/a
78
85
103
n/a
Wider Postcode2
1991
1992
1993
1994
1995
1996
1997
1998
Terrace
n/a
n/a
100
104
103
101
134
136
Semi
n/a
n/a
100
116
95
101
124
130
Detached
n/a
n/a
100
106
100
83
105
122
Bungalow
n/a
n/a
100
80
70
115
n/a
122
Flats
n/a
n/a
100
109
103
101
120
140
Source: 1 Bespoke house price data from the VOA for a specific site and for the area immediately surrounding the
site. 2 Halifax postcode level house price transactions data.
15
Our third example takes a 10 ha site in a northern ‘shire’ district which was allocated for
residential development at a density of 15 units per ha. The planning objectives for the site
included the maintenance of existing medium density in the area and provision of affordable
housing units on site. Average development costs and sale prices of comparable dwellings
indicate that, at the proposed density, the development is not viable and affordable housing is
not possible. Increasing the density, and hence sales revenue, changes that position.
The example presented in Table 3 illustrates how price, together with cost and density
information might be used to determine a viable site capacity in terms of the mix of private and
affordable ‘low-cost’ housing. Price information might also be used to compare alternative sites
with respect to the capacity of each to yield an element of affordable housing or a preferred mix
or private and social housing. The example presents notional price, cost and density data for the
site, suggesting that, at the proposed density of 15 units per hectare, development of the site is
not viable. In order for a site of this size and location to yield an element of social housing a site
density of approximately 20 units per hectare would need to be considered.
Table 3: Use of price to indicate site capacity for affordable housing for an allocated
greenfield site in a highly constrained, lower demand rural district
Site details
This 10.1 hectare site comprises grade 2 and grade 4 agricultural land in a northern ’shire’ district. It is
situated adjacent to a new residential development and a canal side conservation area which provides a buffer to
the nearby motorway. The site is as yet undeveloped.
Planning objective
The site is allocated in the Local Plan with a stated capacity of 150 dwellings at an average density of 15 units
per hectare. The aim is develop new housing in keeping with the low-medium density housing which is
typical of the district as a whole. At the same time, an element of low price affordable housing is sought on this
site. There is some dispute between planning officers and local developers with respect to the extent to which a
mix of private and social housing can be achieved on this site with the current stated capacity.
Price, cost and density data
Parameters
Site Size = 10.1 ha.
Site Density = 150
(15 units per ha.)
Site Size = 10.1 ha.
Site Density = 200
(20 units per ha.)
Inclusive land and build costs
per dwelling £
154,000
117,500
(land value = £700,000
per ha.)
Sale price per dwelling £
205,000
155,000
Average sale price for detached dwellings in the immediate area = £127,917
Total Cost Indicators for 65 sq.m 3 bed dwelling (as a benchmark for cost of social housing provision) =
£65,200
Source: 1998 Halifax postcode data, Land Registry bespoke data, notional cost data provided by developers.
16
With improved price information, affordable housing negotiations would be more transparent,
and the residual aspect of developers’ calculations would become clear. In this example, a higher
density enables the inclusive cost per dwelling to fall below the average sale price in the area,
leaving a margin for affordable housing. However, because this increased density is above
average for the surrounding area, the achievable sale price is likely to be somewhat lower,
especially if the site included an element of affordable housing. At the planned density, it would
not be possible to achieve affordable housing on site.
Our final examples are concerned with the local level, where there is a need for planners to
determine the wider neighbourhood impact of particular types of development. We present two
examples below, one in an area of high demand for housing, the other in an area of economic
restructuring and lower housing demand.
High demand area
A 0.54 ha former industrial site in a central urban location in a district experiencing high
housing demand was developed at a density equivalent to 40 units per ha, in line with the
surrounding area of Victorian terraced and post-war local authority housing. Each new
dwelling cost approximately £62,000 to build, and sold for an average price of £101,000 in
1996. Sale prices for housing in the immediate vicinity of the site as well as those in the
wider surrounding post-code area show that the value of the Victorian terraces which the
planning brief was keen to preserve appear to have been enhanced by this high density, high
quality development.
Table 4 below illustrates the way real price indices may be compared across geographical levels
(site specific, postcode, district), again using site-specific data provided by the VOA. The data
suggest that following the construction of a new residential development, house prices in the
’search area’ maintained a similar trend to that in the wider postcode area. Indeed, the value of
the neighbouring Victorian terraced housing which the local planning authority was particularly
concerned to preserve has increased relative to others in the wider postcode area. The
implication is that house buyers considered the impact of the new development to have had a
positive impact on housing amenity in the area.
17
The data also indicate that average annual price increases have been greater for both terraced and
semi-detached housing relative to other types. These dwellings represent the dominant house
type in the area. The slower rise in the average price of existing detached dwellings, relative to
other housing in the locality, suggests that these older dwellings are less of a substitute for new
build housing.
Table 4: Use of price to identify neighbourhood impact - high demand area
Site details:
This site relates to the development of 22 small (2 and 3 bedroom) dwellings on a former industrial site measuring
0.54 hectares in a central urban location in a district experiencing high overall housing demand. The housing
beyond the site ranges from Victorian terraced to post war Local Authority housing and inter war private housing.
The new development was built at an average density 40 dwellings per hectare, a density equivalent to the
surrounding area. Each new dwelling cost approximately £61,700 to develop (land, build and site costs) and sold
for an average price of £101,200 in 1996.
Planning objectives:
A planning brief drawn up in 1993 called for a high quality residential development to retain and enhance the
value of surrounding Victorian terrace housing. It was with the specific aim of preserving existing residential
amenity that this site was changed from employment to residential use in the last Local Plan review.
Index of real house prices (before and after new build)
Search Area1
1993
1994
1995
1996
1997
1998
SITE
Terrace
100
99
102
n/a
122
n/a
Semi
100
101
98
129
120
n/a
Detached
100
98
108
n/a
107
n/a
Bungalow
100
n/a
99
n/a
136
n/a
Flats
100
99
85
103
123
n/a
Wider Postcode2
1993
1994
1995
1996
1997
1998
Terrace
100
104
105
109
118
131
Semi
100
107
102
106
129
141
Detached
100
100
78
98
118
109
Bungalow
100
103
117
108
n/a
135
Flats
100
98
96
99
110
123
Source: 1 Bespoke house price data from the VOA for a specific site and for the area immediately surrounding the
site. 2 Halifax postcode level house price transactions data.
Low demand area
Another case study district has a large stock of pre-1914 terraced housing, largely poor quality,
such that new housing sells at almost twice the price of the existing stock. Comparing prices for
new and existing houses suggests that the relative value of the existing stock remains fairly
stable over time, at around 58% of the value of the new build.
Similarly, price can be used to evaluate the relative success or failure of area-based regeneration
projects and the extent to which this affects the rate of out- or in-migration. It can also be used to
determine the extent to which the negotiation of community gains can result from, or has
brought about, a significant improvement in the way as area is perceived, as reflected in the
18
relative acceleration and spread of higher house prices and land values.
Table 5 sets out an example which shows that new housing was consistently more expensive
than the existing stock over time. It illustrates how relative house prices can be used as a
contextual framework to inform urban housing provision and regeneration policies in terms of
the impact of new development on the wider neighbourhood. This approach also has the
potential to explore the opportunity cost of one type of development (density, mix, location) in
terms of another.
Table 5: Use of price to identify neighbourhood impact - low demand area
This case study district has a large existing stock of pre-1914 terraced housing, much of which is of poor quality.
New terraced housing is at a premium and sells for almost twice the price of the existing stock. Relative price
data will indicate whether the concentration of new housing at the affordable, higher density, end of the market
has the potential to undermine the value of existing terraced housing below that required to sustain levels of
dwelling turnover and maintenance. When district level real prices for new and existing terraced housing are
compared over a period of ten quarters the data suggests that the relative value of the existing stock remains
fairly stable at 58% the value of new build. Interestingly, a crude analysis of relative price change at the
sub-district level suggests a steady erosion in the relative value of the existing stock relative to new build in the
same local housing market. Whilst a longer time series would be needed before this trend could be qualified,
this exercise serves to illustrate the potential use of price data at the district level.
Price data for new and existing terraced dwellings
Index/ year
1993
1994
1995
1996
1997
Real price index for existing
204.37
n/a
151.80
135.60
117.83
terraced housing
Real price index for new
NEW
274.62
254.65
terraced housing
BUILD
RPI price index, 1985 = 100 (1997/8 = Q2 data)
Source: VOA bespoke site specific data.
In this low demand area there is thus a tension between maintaining the existing stock in terms
of full occupancy and regenerating the area through new housing development. What price is
telling us here is that this gap between the private value of the new housing and the pre-1914
terraces is not sustainable even though over a period of time the size of that gap at district level
has remained stable. The price differential reflects market valuations and takes no account of the
social value of continued occupancy of older, poorer quality housing. Once prices of older
property fall further, vacancy rates will start to rise and the area will no longer be able to sustain
the regeneration initially brought about by new housebuilding.
7. Conclusions
In conclusion, this paper has tried to address what at times appears to be a great divide between
planners’ views of the relationship between planning and the market, and the views of
19
economists. Recent changes in the planning system at national level together with a new
emphasis in government policy more generally concerning incentives, monitoring and
evaluation may be changing this, so that a modified, ‘market indicators’ approach is emerging,
albeit one in which price only provides information - it does not provide an incentive or act as a
rationing device. Here, we have attempted to explore the theoretical and empirical aspects of
the relationship between planning and the market and argued that because price reflects this
relationship it should not be ignored. Price as a measure of market values is a useful input into
planning decisions, while price as an outcome of the impact of planning policy on the market is
an indicator of the effectiveness of planning decisions.
However, for planners to use price in the ways suggested here requires incentives. Policy
statements at national level, including those contained in PPG3, which appear to require
planners to use price, are insufficient. The revised PPG3 only asks for price data explicitly in the
context of affordable housing:
Local plan policies for affordable housing should: define what the authority considers to
be affordable in the local plan area in terms of the relationship between local income
levels and house prices or rents for different types of households; (PPG3, para. 15).
There is already an incentive for planners to use house prices and rents in this context because if
they do not use price, they may not achieve as much affordable housing from the development
process as they need. In other planning policy areas, even a requirement to use price, for
example, as part of monitoring and managing, may be insufficient. Planners are unlikely to use
price in any consistent or systematic way without an incentive at least as forceful as that
operating in affordable housing negotiations. In any case the data are not readily available at the
right scale and in an appropriate form. 
In other areas of public policy, the use of price information is unproblematic. Indeed, along with
other indicators, it would be part of assessing best value. Cheshire and Sheppard (1989) open
their evaluation of the planning system and its impact on housing by discussing other forms of
government intervention and the way that they are assessed using cost benefit analysis, which by
definition involves both market and shadow prices. Obvious examples in the context of planning
include the siting of the third London airport and the fourth terminal at Heathrow. Only in
planning is the use of price considered inappropriate, presumably because if price became a
material planning consideration, it is feared that trafficking in planning permissions might
20
become commonplace.
Yet planners are already using price (Jarvis and Russell, 1998; Jarvis, Monk and Russell, 1999).
This is partly because of the incentive notably in the context of affordable housing negotiations.
In many cases, planners have to collect their own data, or rely on local data provided by the local
authority’s research department. Thus price is not being used in a consistent way at all levels
within the planning system. Effectively, this means that planners are being done a disservice,
because they ought to have better tools to assist them in policy development, decision making
and implementation.
The research presented here is preliminary. Further research is needed to show the value of
using price at all levels in the planning system. Particularly in relation to the provision of
affordable housing, the re-use of urban ‘brownfield’ land, the regeneration of town and city
centres, and the operation of rural ‘exception’ policies in the context of policies designed to
protect the countryside and promote environmental goals, very little is currently known about
how price could assist in practice. This paper has attempted to go some way towards beginning
this process, but further work is clearly required. The widespread adoption of price requires not
only major improvements in available data but also more detailed information on the use of
price in particular planning contexts. Such information would best be gained from conducting
further research in a variety of case study areas.
Acknowledgements:
This paper is based on research undertaken by Helen Jarvis, Sarah Monk, Wendy Russell Barter
and Christine Whitehead for the Department of the Environment, Transport and the Regions.
We are grateful for comments from the Advisory Group and others.
21
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