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Submission to the All Party Oireachtas Committee on the Constitution

by Tom Dunne

School of Real Estate and Construction Economics

Faculty of the Built Environment
Dublin Institute of Technology
Bolton St.
Dublin 1

Tom Dunne is a chartered surveyor and Fellow of the Society of Chartered Surveyors, a Fellow of the Royal Institute of Chartered Surveyors and a Fellow of the Irish Auctioneers and Valuers Institute.

Early in his career he spent ten years working in one of the leading firms of estate agents and property consultants in Dublin. For the past twenty years he has been teaching property valuation to undergraduates and postgraduates studying in the fields of urban and property economics.

He is the head of The School of Real Estate and Construction Economics at the DIT and is a former Chairman of the Society of Chartered Surveyors, the leading professional body representing professionals in the construction and property industry in Ireland

School of Real Estate & Construction Economics

Scoil Estáit Réadaigh agus Eacnamaiochta Tógála
DIT
Bolton St.
Duiblin 1
Tel 402 3678/ Fax 402 3994/ email [email protected]

Friday, 30 May 2003

Introduction

Ireland, like many other countries with high rates of economic growth, is urbanising rapidly. There has been considerable emphasis on planning for this through the National Development Plan, the National Spatial Strategy, development guidelines and other measures. Through these the state intends that a proper planning process will lead growth rather than leaving it to market forces to drive development in what are regarded as undesirable directions. The latter it is feared will lead to unsuitable social, economic or physical outcomes.

Unintended results have flowed from the implementation, or flawed implementation of many of these policies and have given rise to the issues noted by the All party Oireachtas Committee on the Constitution in their recent call for submissions on a variety of problems.

All planning suffers from the deficiency that it is not possible to forecast accurately what will be the circumstances that will apply during the currency of a plan or what the outcome will be. Consequently all plans must be tentative and flexible to a greater or lesser extent depending on the accuracy of the information used in the formulation process and the dynamism of the environment in which the plan will operate. Overconfidence in the efficacy of planning and a lack of proper and efficient methods to provide for the necessary flexibility could be among the explanations for the perceived failures in planning. But also the legislative framework for the planning system could contain detailed flaws that mitigate against the plans prepared and operated under it.

This paper discusses issues around these and is intended as a contribution to the deliberations of the Committee.

To do this it considers the nature of spatial planning and its role in providing for the physical development that accompanies economic growth. It then goes on to analyse briefly the property market and to examine some of the characteristics of landed property as an economic good. From that it looks at the interaction between high house prices and the high price of development land and considers approaches to dealing with problems flowing from those phenomena. Finally it proposes solutions which would be easy to implement and would require only a modest change to existing planning legislation.

The argument underlying this paper is that the planning process is not sufficiently informed by an adequate understanding of urban and property economics. It also suggests that legislative instruments used to implement planning in Ireland and the use of many fiscal supports are flawed. It is these that give rise to high development land prices and the incapacity of local authorities to respond to and provide for the demand for infrastructure and services flowing from economic growth.

Planning and Spatial Economics

Problems of urbanisation are often discussed without a sufficient appreciation of the power of the economic forces that shape the built environment. Indeed it could be argued that inherent in the country's approach to physical planning is an assumption that economic forces can largely be controlled and directed to achieve such ends as balanced regional growth or shaping the development of Dublin. But these economic forces are not understood to a sufficient degree. Intensifying suburban development, increasing one off housing in the countryside and the continued growth of Dublin prevail despite numerous attempts at restraint.

Planning for urban land markets is surrounded by uncertainty due to a range of factors. First the data available to planners about activity in the market is particularly poor. Secondly urban land markets are notoriously volatile and prone to periods of great activity with high prices and other periods when property development is very risky and not profitable. These periods can last for a number of years. Hence the delivery of planning objectives can be frustrated by economic conditions during the currency of the plan, especially if the plan has been devised on unrealistic economic assumptions.

Thirdly, in a free market economy, nimble and opportunistic entrepreneurs will act, as they do in all markets, to seek profitable opportunities created by the planning process. Speculation can be seen as the cause of bad planning but it may just be a symptom of a bad plan or flawed legislation. Speculation is a characteristic of all free markets and planners need to recognise this reality. They also need to understand the motives of entrepreneurs and provide plans that recognise land and property speculation is an economic reality. The alternative approach of making the legislative and administrative framework hugely complex to deal with its worst effects will frustrate the delivery of the physical development needed for economic growth.

Consequently planning requires a proper understanding of the economic and business forces shaping our towns and cities. Policy makers who may not have sufficient understanding of these forces can propose solutions, which will be less than satisfactory, and in some cases exacerbate the problem. Many of the issues the Committee has asked for submissions on fall in to this area.

In the past, when devising spatial policy and addressing urban and housing problems, both economists and policy makers have not fully understood the economics of landed property and urban areas. As a result some approaches adopted to resolving difficulties arising from administrative instruments such as compulsory purchase orders and the fiscal treatment of development land and property, often made little sense if analysed using theories of urban and property economics.

Moreover spatial planners at both national and local level, politicians (particularly many local councillors) and others involved in the planning process, are not sufficiently familiar with urban economic theory to have an inadequate appreciation of the full effect of these on urban economies.

Spatial economic analysis emerged as a distinct field of academic inquiry during the twentieth century and can be split into two fields, urban economics and regional economics. Urban and regional economics are important parts of the discipline of spatial economics. There is now growing interest in these fields in Ireland in other academic circles but many existing planners and other policy makers were educated when there was limited knowledge about these fields in Ireland. Internationally over the last decade there has been an increase in interest in spatial economics with the issues involved being brought to wider audiences.

An extensive literature is now available to assist with the analysis of problems of urban development, housing and property economics. This provides insights that may not be familiar to many who are faced with resolving the problems of rapid urbanisation. Indeed many economists whose principal focus and interest has been on other aspects of economics, may not be familiar with the particular methods of analysing urban and property problems identified in the literature on urban and property economics. The familiar tenets of economics have to be adjusted to deal with situations where markets work in a substantially different way than might be expected.

From the literature we learn that there is increasing interest in spatial economics and this parallels the need to better find solutions to the effects of rapid economic growth on our towns, cities and countryside. Some of the insights found in the literature on urban economics will be of assistance to the Committee in considering the issues set out in the notice seeking written submissions. The following draws on urban and property economic theory and should be of help to the Committee when considering the list of issues before it.

The Property Market and Landed Property as an Economic Good

The landed property market is not an efficient market in economic terms and has particular characterises that make it difficult to analyse using traditional economic criteria. This leads to problems implementing development plans, to high development land values and with access to housing and shelter.

It is crucial to appreciate that property markets are not easily understood and indeed work in ways that are economically idiosyncratic. There are a number of reasons for this. First landed property can be held as an investment and as a consumer good. Second each property is unique. Third, transaction costs are very high and fourth, the property market is not merely a market for land and buildings: it is best understood and analysed as a market in legal rights.

The consequences of each of these characteristics are worth exploring in the interests of understanding the issues before the Committee.

1 Property can be both an investment and a consumer good

Landed property can be bought both for consumption and investment purposes often necessitating finance to purchase as prices are high. Landed property is one of the three main investment media. Consequently capital values will be determined as much by reference to conditions in other investment markets as by demand for the use of accommodation. Hence there is a significant interaction with investment and finance markets. Of crucial importance also is the availability of finance on favourable terms.

Therefore the property market is best analysed as two markets with different influences on each. First there is a consumer market where demand and supply interact to ration space among competing users and determines rent levels. Second there is an investment market where the most significant influence may be sentiment in the equity and bond markets as well as the rate of interest on borrowings. In general it may be said that the investment market determines the capital values of existing property assets while the consumer market determines rental values. This duality has profound implications for policy makers looking at problems in urban areas.

Solutions to urban problems should have regard to the effect on investment capital flowing to the property sector compared with other assets in the investment market. It is entirely possible to create the conditions where too much investment money chases too little investment opportunity in the property market. It is easy to provoke a speculative bubble by unsuitable intervention with the benign intention to help people find a house, an office or a factory.

The tax treatment of property is hugely influential in determining the profile of investment in property markets. In particular the lack of taxes on residential property encourages people to store their investment wealth in houses. In Ireland the lack of local taxes on residential property, a unique characteristic of our tax code, keeps residential property prices here higher than they would be if residential property was taxed as it is in other countries.

In short, the urban land market is prone to speculative bubbles, which can be hugely influenced by government policy. The reverse of this is also true. It is just as easy to induce damaging slumps. Much of government policy in the past has acted in a pro-cyclical way and amplified the natural boom/bust cycle of the market.

2 Each property is unique

Partly because title issues are complex but also because of the heterogeneous nature of land and buildings, each property is unique. Price comparisons are much more difficult than for other goods bought and sold making valuation difficult. As a consequence the property market is far from transparent, a normal requisite for an efficient market.

Also, this characteristic makes it difficult to apply generic administrative approaches to solving urban problems. Solutions which involve applying a convenient administrative formula to individual properties will probably fail because every property affected can become an exceptional case due to particular unique features.

Government policy should aim to increase transparency in the property market by insisting on a simple system for land and title registration and making transaction prices public, as is the case in many other jurisdictions. Measures such as this would assist the efficiency of compulsory purchase procedures. They would also assist the process of analysing urban areas by giving the data that is needed to provide the information needed for good public policy.

3 Transaction difficulties and costs

Transaction costs for exchanging landed property interests are high. High levels of stamp duty compared to those charged for transferring other property assets add to this. Also, as the public has an imperfect understanding of what is actually bought and sold in the property market, legal and other professional advice is essential when property is being acquired.

Moreover, because the law surrounding landed property has roots deep in history and is surrounded by concepts that are archaic if not arcane, legal and other issues are complex and demand legal advice to sort out. This costs money. These factors impede the operation of landed property markets.

In order to help urban property markets work more efficiently, government policy should have an objective of reducing the transaction costs associated with the exchange of landed property. Measures should include reducing stamp duties and codifying and simplifying the law surrounding legal interests in landed property. Policy in this area should include a statutory legal requirement for the legal profession to use plain English as much as possible. Also all documentation surrounding compulsory purchases of land and the planning system should be written in plain English.

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