Why entrepreneurs should back planning reform

In April, legendary technologist Marc Andreesen declared that “It’s time to build”. A new White Paper “Planning for the Future” suggests the government is answering the call. While there is still a risk that the radical reforms to the planning system will be watered down as the White Paper becomes legislation, the plans have the potential to make a big dent in the UK’s housing shortage. If successful, it could have massive positive impacts on innovation and entrepreneurship.

Housing is a key issue for founders in Silicon Valley. Stripe founders Patrick and John Collison donated $1m to California YIMBY, a pro-development group co-founded by GitHub CEO Nat Friedman. In 2018 more than 120 tech leaders including Twitter founder Jack Dorsey, Salesforce founder Marc Benioff, and Linkedin Founder Reid Hoffman signed a letter in support of SB 827, an unsuccessful law that would have made it much easier to build near public transport in San Francisco. Yet, strangely, entrepreneurs in the UK tend to avoid the housing debate.

This is unfortunate, as restrictions on development are a major barrier to entrepreneurship and innovation in the UK. We have made it extremely difficult to build in places like London, Oxford, and Cambridge, which are our most productive cities.. According to the Greater London Authority’s Housing In London report, in the last two decades the number of jobs in London has grown by 40% and the number of people by 25%, but the number of homes by only 15%. As a result, rents are high and most young people’s only hopes of owning a home is through inheritance or moving away from the UK’s most productive regions. 

This has a knock-on effect on entrepreneurship in a few key ways. First, high rents push up labour costs making it harder to attract talent from elsewhere. We’ve priced many people out of the places where it is easiest to start a business in terms of access to contacts, capital, and knowledge. We’ve spoken a lot about how to lift sluggish productivity levels in the UK, but they all pale in comparison to increasing housing supply in London and the South East. A study from Enrico Moretti and Chang Tai-Hsieh analysed 220 US metropolitan areas from 1964–2009 and found restrictions on new housing supply cut aggregate US economic growth by more than a third between 1964 and 2009.

Second, this is particularly bad news for innovation. Another study from Enrico Moretti finds innovators are more productive when they move to tech clusters like San Francisco. Using advanced statistical techniques, he finds that if inventors couldn’t move to tech clusters the annual number of patents produced in the US would be 11.07% smaller. Restricting development around Oxford and Cambridge means fewer ideas for entrepreneurs to bring to market. As Stian Westlake once tweeted: “If you want to increase R&D, or improve "tech transfer", I strongly suspect that planning reform in Oxford, Cambridge etc would get you a better return on your political capital and £££ than ...most classic science & innovation policies.”

Third, a lack of development has also pushed up the cost of office space. LSE economists Paul Cheshire and Christian Hilber note that “office space in London is not just more expensive than anywhere else in the world; it is some three times as expensive as the next most expensive city in Europe, Paris, and more than three times as expensive as in Manhattan.” The problem isn’t isolated to London either. “Birmingham was the next most expensive European city after Paris, and Glasgow, Edinburgh and Manchester were all more expensive than Manhattan.” 

Some argue that planning isn’t to blame. For instance, the Town and Country Planning Association and Local Government Association both point to high rates (90%) of acceptance for planning applications and a backlog of a million homes with planning permission.

But their numbers are misleading. High rates of acceptance do not take into account the applications that are never made. The high cost of acquiring planning permissions deters all but the applications most likely to succeed. The acceptance rate for applications to McDonald’s Hamburger University is lower than the acceptance rate for Oxford, but it’s obvious that this tells us little about the relative ease of getting into either institution.

Similarly, developers ‘sitting’ on planning permissions are a direct consequence of the unpredictability of the planning system. As we saw with the Brexit debate around Just-In-Time manufacturing, small delays can cause havoc for supply chains. The risk of planning permission being withdrawn at a late stage makes it rational for developers to hold back projects to build up a pipeline. Without a pipeline, a developer may end up paying for materials, land, and labour they can’t use. This problem has forced many smaller suppliers out of the market as planning has become more restrictive. Thirty years ago small builders were responsible for 40% of new build homes, today it’s 12%.

The government’s proposal would remove the discretionary nature of the planning system by moving to a zoning approach where development is ‘by right’ opposed to subject to a lengthy approval process. It replaces protracted Section 106 negotiations for affordable housing with a simple flat-rated tax. It’s not NIMBYproof, but it’s a positive step.Entrepreneurs should root for it to succeed, because by making it easier to build in our most productive we can increase access to talent, cut office costs and boost innovation.