Target the planning laws not the one per cent

About 40 per cent of the stated wealth of the UK – more than £3 trillion – does not exist. It is a terrible illusion. For the US the figure is about 12.5 per cent of total wealth, or $10 trillion, and growing fast.

The “assets” in question are what planning or zoning restrictions have added to house prices. They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions.

Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder.

In Capital in the Twenty-First Century, Thomas Piketty writes that the answer to rising inequality is a global tax on wealth. A far better way to start would be building more homes. That would turn the false wealth of planning restrictions into the real wealth of houses and flats in places where people want to live, improving living conditions and creating jobs along the way.

Britain's incredibly restrictive laws not only protect rural land, they make it hard to redevelop in cities, and costly even to try. The US – and coastal California in particular – is catching up fast. Zoning laws define neighbourhoods as low-density housing, now and forever. With housing supply almost fixed, any increase in demand drives up prices.

Drastic

The results are drastic enough to be visible in the national accounts. In Britain, the “rebuild cost” of the housing stock has been static at about 100 per cent of gross domestic product for the past 25 years. The implied value of the land they stand on, at £3 trillion, has doubled from 100 per cent to 200 per cent of GDP.

In the US, the value of residential land used to be negligible relative to GDP - about 10 per cent in 1950, with little change until the 1970s. New York and San Francisco were already big cities at that time. But then, as the regulatory barriers went up, land values began to accelerate. They are extremely cyclical but on the current trend stand at 60 per cent of GDP.

You might think the rise in house prices reflects a natural scarcity of land. Britain is a small island; San Francisco sits on a narrow peninsula.

However, the best available studies suggest that the vast majority of this rise in urban house and land prices reflects not natural scarcity but planning restrictions.

A clever 2005 study by American economists Edward Glaeser and Joseph Gyourko compares the price of an extra square foot of land attached to a house (a slightly bigger back yard, perhaps) with the average price of a square foot of land under a house in the same city. If the problem is a natural shortage of land, the two prices should both be high because it is profitable to build on the back yards until the two prices converge.

That is not what happens, however. In the cities of coastal California, the average price of urban land is 10 times the price of land in a back yard because zoning laws make it impossible to turn one into the other.

In Los Angeles, the price of the extra square foot on the garden was $2.60 while the average price of urban land was $30.44. In San Francisco, the back yard land was worth $7.84 per square foot, versus $63.72 on average for the same lot.

The ratio of these two figures - as much as 10 to 1 - suggests only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions.

Paul Cheshire and Christian Hilber at the London School of Economics applied the same trick to British and European offices in 2006, with terrifying results. For the well-heeled West End of London, the cost of planning restrictions was eight times the cost of actually building an office.

In Birmingham, it was 2.5 times the cost of building the office. This was not because land in the West Midlands is desperately scarce but rather because the land you are allowed to build on is scarce.

The desire to preserve open space and familiar, low-density cities is quite natural - but it is time to wake up to the enormous cost. Planning rules may seem like harmless bureaucracy. They are not. These rules have added billions and billions of dollars to the price of housing, money that must be paid to those who already own houses by those who do not. If we want to make society fairer and more equal, just let people build.– (c) 2014 The Financial Times Limited