Way back when I was a student at Reading, Cheshire and Sheppard (1989) stated definitively that “high land prices do not cause high house prices”. I’m no economist but you still hear or read about housing experts casually stating the reverse – high land prices cause high house prices.  You can sort of see why. The logic is that the planning system restricts land supply and therefore increases its price.

In reality, the transmission mechanism of land use regulation to land prices is much more intricate, indirect and partial. It is house prices and (non-land) development costs that are the key driver of land prices. The amount that a housing developer will pay for land is a product of the value of the houses that they can build on it and the cost of building them (excluding land) with a normal profit. This is fundamentally how land prices are formed.  So, broadly, the causality runs the other way.

Of course the planning system is a partial determinant of housing supply and, therefore, house prices. Other determinants of housing supply also include construction costs and sector capacity, financing costs and, of course, demand. There are also numerous determinants of housing demand (income, employment, population change, property taxes, monetary policy, mortgage availability etc.) that also affect house prices and, consequently, land prices.  Maybe I’m making too much of this point – does it matter?

I think it’s better that these zombie arguments don’t keep being used to argue for de-regulated land markets. Often you need to diagnose the right cause before prescribing the right cure. By all means, make the case that, all else equal, increasing housing supply should lower house prices and that to increase the housing supply, there may need to be more land supply – if lack of suitable sites with planning permission is the reason for low housing supply. My sense is that lack of suitable sites with planning permission probably is a major part of the housing supply problem but, given land banking activities of the house builders, there are commentators who would contest this argument. Some would even contest whether there was a housing supply problem in the first place.


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