Housing vs farmland: how to get the balance right?

The chances that England could ever run out of farmland are, for all intents and purposes, zero.

One of the most bizarre responses I often get when I argue for more housebuilding is that Britain shouldn’t build houses, because if we did, we would run out of farmland. This, the housing sceptics argue, would reduce food self-sufficiency, making us more vulnerable to external shocks. The argument is completely wrong on multiple levels. But given the frequency with which it comes up, apparently, it sounds convincing to a lot of people. So maybe it is worth addressing it.

First of all, it is, of course, true that land has multiple, competing potential uses. Apart from farming and residential housing, it can also be used for commercial purposes, for transport infrastructure, or it can be preserved in its natural state.

This is, however, not a unique feature of land. Most input factors have multiple competing potential uses. Take hops. Hops are a versatile plant. Apart from brewing, they can also be used for baking, for making herbal tea, herbal medicines, and even skincare products. How do we know how to allocate a finite quantity of hops between these different uses? How do we know whether we got the balance right? How do we know when it would be better to reallocate some hops away from baking, and towards brewing?

If you were an economic planner in North Korea, questions of that nature would be your daily bread. Fortunately, in Britain, we are not quite there yet. We don’t need a People’s Hop Commissar. We can simply let price signals do the work. Brewers and other hop-using producers bid against each other for hops. It is like a tug-of-war game, except that the players have no strength of their own: they can only channel the strength of their respective consumers.

If consumer demand changes, the bidding power of different producers also changes. If consumers decide that they want more beer, and less hop-based herbal tea, then that will strengthen the bidding power of brewers, and weaken the bidding power of teamakers. Some hops will get reallocated from tea to brewing.

Now let’s imagine that that reallocation mechanism was obstructed. Let’s imagine the government introduced a ‘hop use permit system’, under which each possible use requires a different permit. Let’s also imagine that this is not an even-handed system. Permits to use hops for herbal teas, baking and facial creams are issued liberally, but the number of permits to use hops for brewing is tightly rationed.

The result of this would be that changes in consumer demand could now no longer lead to a reallocation of hops, in the above-described way. Demand for beer could double, triple, quadruple or quintuple, but as long as the government refuses to issue more brewing permits, the pattern of hop use would not change.

All it would do is lead to a divergence of hop prices, depending on what you are allowed to do with them. Hops with brewing permits would become extremely valuable, even if hop prices in general remain constant, or even fall. The gap between the price of hops with brewing permits and the price of hops without them would indicate the extent to which hop use is distorted.

This is basically the situation we have, but for land use rather than hop use. Britain has multiple land prices, depending on what you are allowed to use that land for.

In 2014 (I have not been able to track down more recent data, but I’m more interested in the ratios than the absolute level), the average price of agricultural land in England was £21,000 per hectare. That’s £2.10 per square meter. That’s very, very cheap. It’s the price of a pint of Ruddles at Wetherspoons.

The price of residential land, on the other hand, was £1.96m per hectare if you exclude London, and £6m if you don’t.

Let’s forget London (although even in London, 10% of the land is agricultural, so it is definitely possible to convert agricultural land directly into residential London land), and go with the £1.96m figure. This still means that, on average, granting planning permission leads to a 93-fold increase in the value of land. Put differently, almost 99% of the value of a plot of land with a planning permit is explained by the planning permit.

That’s an England-wide average. Liberalising land use planning would not mean converting random bits of agricultural land in the middle of nowhere into residential land, but rather, agricultural land near existing population centres. Around London, the price of residential land can very easily be twice the national average, and in some parts, a lot more than that.

Prices are scarcity signals, and you don’t need to be an Enigma Code reader to decipher what these signals are trying to tell us. They are telling us that agricultural land in England – never mind other parts of the UK – is really not in short supply. Quite the opposite: England has a massive overabundance of farmland. That’s why it is cheap as chips. They are also telling us that residential land is in short supply.

None of this is surprising. England is 63% farmland. Even in the allegedly densely populated South East (without London), the figure is still 58.6%.

The chances that England could ever run out of farmland are, for all intents and purposes, zero. But since I’ve got nothing better to do, let’s do the thought experiment anyway. Let’s just assume that in the future, pigs will fly, cats will bark, and England will need more farmland. What would that mean in a liberalised land use system, in which farmers are free to sell their land to residential developers?

It would mean that the above-mentioned gap between the value of residential land and the value of agricultural land would drop like a stone, until it is no longer viable to convert the latter into the former. At that stage, no further conversions would occur. Not because it is banned, but because it makes no economic sense.

If you are a socialist, who thinks that “supply” and “demand” are a bourgeois scam, and that prices are really determined by capitalist class power structures – fair enough. I’m not expecting you to be convinced by any of the above. But it is amusing how quickly some people on the political Right, who claim to despise “socialism” in the abstract, suddenly adopt the mindset of a North Korean central planner when it comes to land use.