Land Use Planning as Risk

Planning has long been recognised by developers as a kind of risk, in the way that it delays the development process and adds uncertainty to the feasibility of a project beyond the technical aspects such as construction methods.

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Cheshire (2005) explained that land use planning policy on urban containment in the UK has restricted the supply of land for all land use classes. He also explained how zoning in the US has restricted the supply of land for housing. Both led to inflated land prices rapidly as compared to housing prices. He based his reasoning on data of prices of land and properties for different uses. This raised an interesting observation that both certain and uncertain planning systems can increase prices.

Due to the existence of market failure to a certain extent in the land and property markets, there is a need for the provision of public goods and for the Government to step into the market to reduce externalities. However, Cheshire argued that planning, particularly in

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demand carries a lower weight. In terms of supply of land, planners are concerned with land released by government rather than land available for development in the market. If landowners anticipate that the supply of land will be restricted in future, they will withhold putting their land up for sale in the market in anticipation of higher future land prices (Evans (1983); Neutze (1987)). On the demand side, the planners¶ projection of say housing demand are based on household formation rather than on the increase of household income. Cheshire cited a large number of µhedonic studies of housing markets¶

which supported the argument that housing land prices are income elastic rather than a function of household formation.

A side issue is that the increase in land prices is much more rapid than the increase in house prices because houses are composite goods and attributes for houses can be substituted. For instance, developers can decrease the average flat size of each unit to increase the supply of flats. More floors can be added to a building, or detached houses can be sub-divided into semi-detached, terraced houses or even flats. Evans (2005) thus argued that planning, through restricting supply, would raise prices and densities.

Cheshire contended that relaxation of land use planning regulations would be necessary to eradicate the risks associated with land and property price distortions in some cases. In line with the deregulation of the capital and labour markets globally, it is anticipated that loosening of planning regulations on the supply of land is possible in the long run. This is

partly to provide cities with an edge in the competition against other cities under globalisation by lowering one of the major production costs - land costs. It is also partly due to the need for a better grip of national monetary policy. Rising land and house prices will lead to wealth effects increasing asset prices and local consumption, and loosening the government¶s impact on the real economy by setting the direction of interest rates according to the housing market rather than the wider economy.

Less restrictive planning policies, nevertheless, would increase risk for current and prospective property owners as well as investors. It is an unpriced risk which professionals engaged in the real estate investment and development industry are not aware of at the moment. Gibb (2003), when discussing the KRXVLQJ PDUNHW DOVR FRPPHQWHG WKDW ³D

relatively strict planning system does imbue the housing system with a degree of certainty

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market.

Cheshire (2005) anticipated that there would be constraints and obstacles to such

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homeowners and voters affecting the planning policies of government have a powerful influence on the decisions of Government on any relaxation of planning restrictions.

Bramley (1993 and 2005), on the other hand, in relation to estimating supply elasticity argued the notion that planning restricts supply is only assertion in some published studies

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planning, supply of housing land would not be completely elastic. They also contended

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works by Bramley and Watkins confirmed µthe low supply elasticities and estimates that system-wide changes in land release would impact on house prices with an elasticity in the range 0.15 to -0.30. It is therefore concluded that planning might in practice have been

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do give rise to slightly more land release, but mainly because developers apply for more