People Rather than Places, Ends Rather than Means: LSE Economists on Urban Containment

“People rather than places” should be the focus of urban policy, according to Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom. (paperback, Edward Elgar Publishing, 2015 $39.95). The book is among the most effective critiques of contemporary urban planning thought,  characterized by such approaches as urban containment, compact city, and densification. The authors are Paul C. Cheshire, Max and Nathan and Henry G. Overman, all economists at the London School of Economics and Political Science. Cheshire has a long list of publications analyzing urban planning policy. The authors characterize the central thesis of urban planning’s misdirected priorities stating that:

"… that the ultimate objective of urban policy is to improve outcomes for people rather than places; for individuals and families rather than buildings."

They argue that there is a place for urban planning, but that it must be in the appropriate context.

"This is not to say that we should stop caring about what is happening in different cities and neighbourhoods but serves to remind us that improving places is a means to an end, rather than an end in itself." (emphasis added)

This theme is applauded and characterized as “revolutionary” in the Foreword by Harvard University economist Edward Glaeser, who posits:

"All policies need to be judged by the impact on people, not places."

Basic Economics

It has long been known that urban containment policy is fundamentally flawed, principally by its inconsistency with the fundamentals of economics, which leads to destructive housing affordability losses.

Cheshire et al begin with the basics:

“…there are some things on which nearly all mainstream economists would agree. Perhaps the nearest to unanimity one could find would be the proposition that if the supply of a good does not vary much as its price changes, and if the demand for that good rises proportionally more than incomes as incomes rise but is subject to cyclical fluctuations, then the price of that good will rise over the long run relative to other prices and its price will be volatile over the cycle.”

They remind us that this is: “…one of the fundamental elements of economic analysis with a history of research and application going back at least 200 years.”

The Problem

This denial of economic realities, rooted in human nature itself, sets urban containment policy up to inflict major consequences, when evaluated based on outcomes for people.

Urban containment’s forbidding or severely limiting house construction on the urban fringe has been associated with huge house price increases. This is particularly evident across the United Kingdom, which receives the principal attention from the authors. There house prices have doubled and even tripled compared to incomes. Obviously, being forced to spend more money on housing, people have less discretionary income to spend on other goods and services (and discretionary income virtually defines the standard of living and poverty).

Rather than improving the standard of living and reducing poverty, which are fundamental domestic policy objectives, urban containment leaves in its wake “rising real house prices, falling affordability and increasing price volatility.” The authors note that price fluctuations are significantly greater where restrictions on development do not allow the supply of new housing to sufficiently respond to increases in consumer demand. To this they add concerns that all of this is leading to greater inequality.

The problems with urban containment policy have long been known, not only to economists, but also to urban planners dispassionately examining the outcomes. On this score, the authors give well-deserved credit to a team of researchers led by the late Sir Peter Hall, one of history’s pre-eminent urban scholars. Hall led a team that was “…seriously sympathetic to the ideals of planning but who saw that the rigid policy of urban containment and the specific way in which the boundaries of the Greenbelts had been determined during the 1950s was perverting what they saw as the underlying purpose of town planning.” (See The Costs of Smart Growth Revisited: A 40 Year Perspective.)

According to the authors, Hall et al had become convinced that “Far from providing people with greener environments and garden cities, the planning system had developed in a way which produced higher densities and made housing space more difficult to acquire.”

Glaeser expands on this in the Foreword:

“…we must never forget that any time we say ‘no’ to new building, whether in the city centre or on the edge, we are saying ‘no’ to families that want to experience the magic of urban life. We also ensure that every other family that lives in the city is paying more for their own homes.”

Ignoring the Consequences

The authors suggest that the planning objective of a compact city may “be a planner’s dream but for ordinary people it is more like a nightmare." They further imply that urban planning establishment has been “tone deaf” on the consequences of urban containment policy, noting that it is well and good to:

“…argue that the costs imposed by the planning system are prices worth paying to ‘protect the countryside’ or achieve other policy objectives. However, it is not helpful for public debate to pretend that the costs we have documented do not exist; or even that they are negligible. Existing research shows that this is simply not the case; indeed research shows the costs are very substantial even if some are difficult to measure exactly."

Cheshire et al express concern that the planning system is spreading beyond Great Britain. They continue: “…the British experience also provides some idea of what the future might hold for other countries as planning systems become increasingly restrictive.” Indeed that prediction is already being fulfilled with a vengeance.

This can be seen across Australia and New Zealand, where the housing affordability losses have been at least as severe as in Britain. In the United States the predicament is highly regionalized. We can see its impacts in Portland, as well as huge losses in housing affordability in California, Seattle, Denver and elsewhere. And in Canada there is Vancouver, with the second worst housing affordability among the major markets in the 11th Annual Demographia International Housing Affordability Survey, and Toronto, where house prices have nearly doubled relative to incomes since 2000, under the Places to Grow Greenbelt initiative.

They add a sobering assessment:

"The problem is it is utterly unviable in the long term. With every passing decade the problems would get worse, the wider economic costs would become more penalising, the economy and monetary policy more unmanageable and the outcomes – the divide between the property haves and the property have-nots – more unacceptable."

They add a perspective that should be appreciated by both students of history and politics:

"In our judgment there is no doubt that if things go on as they are then at some point there will be a system breakdown and perhaps serious social unrest."

Towards Resolution

Cheshire and his colleagues suggest that: “any useful and rational debate should attempt to rigorously quantify the benefits conferred by the system rather than just assert them as ‘fact’.”

More importantly, they offer workable solutions that can put urban policy back “on track” by seeking ends rather than means. Generally, they say that land use restrictions should be relaxed except where “there are amenity reasons not to do so.”

This would start with an understanding that the large urban containment policy land price discontinuities be recognized for what they are --- price signals that the demand for housing in an area is far greater than the supply.

According to the authors,

“…observed price discontinuities – the difference in market prices across boundaries of use categories – should become a ‘material consideration’ leading to a presumption in favour of any proposed development unless (a very important ‘unless’) it could be shown that the observed monetary value of the discontinuity reflected wider environmental, amenity or social values of the land in its current use.” (emphasis added)

This would make sufficient land for development available to serve the economic well-being of households: “there is a very large amount of land where the ‘wider’ values are negligible.”

A similar proposal was offered by the Productivity Commission of New Zealand in its recent report, which suggested setting a discontinuity maximum standard. When the standard is violated, land would be released.

Getting Urban Policy Back on Track

The authors say that “the economic and welfare – even environmental – damage done by Britain’s current planning system is overwhelming.” Moreover “the impact will get progressively more damaging over time.” The same damage can be expected beyond Britain, to the United States, Canada and wherever else urban containment policy is implemented, because of its fatal aversion to the realities of economics.

Cheshire et al describe the dilemma that the policy detour urban containment has created.

“The question is not will we reform it but when will we reform it and will that be before a catastrophic collapse? … The problem is that any radical reforms are politically unpalatable, but no alternative strategy will work.”

Forty years ago, Hall and his colleagues lamented the disinterest of economists in urban planning. Cheshire et al similarly noted that economists have “contributed very little to the development and evaluation of real-world urban policy.” That needs to change and Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom could be an important first step.

Wendell Cox is Chair, Housing Affordability and Municipal Policy for the Frontier Centre for Public Policy (Canada), is a Senior Fellow of the Center for Opportunity Urbanism (US), a member of the Board of Advisors of the Center for Demographics and Policy at Chapman University (California) and principal of Demographia, an international public policy and demographics firm.He is co-author of the "Demographia International Housing Affordability Survey" and author of "Demographia World Urban Areas" and "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life." He was appointed to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member. He served as a visiting professor at the Conservatoire National des Arts et Metiers, a national university in Paris.

Photograph: The Shard, London © User:Colin / Wikimedia Commons, via Wikimedia Commons