Why is the government turning shops into homes?

Economists often fear the law of unintended consequences when making policy recommendations, where policies can have unexpected effects elsewhere or even make the original problem worse. Chancellor Philip Hammond could have used this policy in his recent Budget and made an attempt to solve two of the UK’s long-term economic problems at once – problems involving housing, and high street shops.

With nearly a net 6,000 stores closing in the UK in 2017, and a net decline of 1,700 stores, the typical UK high street is not only declining, but it is also changing. Clothing and department stores are slowly being replaced by cafes and coffee shops, and while the current trend is for retailers such as New Look and House of Fraser to simply close stores rather than close altogether, the recent failures of Poundworld and Bargain Booze highlight the unpredictable nature of business in towns and cities around the country. A common culprit is business rates, a tax paid by businesses based on the rental value of their properties, and an area where relief for small businesses was announced in the Budget.

Demand for urban living is on the rise, and with empty retail units unattractive due to high rates, a solution emerges in converting shops to centrally-located homes

Pair this with the current housing crisis in the UK. The Royal Institute of Chartered Surveyors describes it as ‘an undersupply of housing in the UK over the past four decades’; a useful simplification of dozens of different housing policies. Coupled with rising demand for housing, especially in the south east, this has led to rapidly rising house prices relative to incomes. In 65% of UK postcodes, a person aged between 22 and 29 can expect to spend more than 30% of their income on a 1 bedroom home, with this figure rising above 50% around London, Brighton, Oxford and Bristol. Demand for urban living is on the rise, and with empty retail units unattractive due to high rates, a solution emerges in converting shops to centrally-located homes.

Those close to the Chancellor suggested prior to the Budget that he was planning on relaxing planning restrictions to make this easier. Mentioned by the Prime Minister in a speech in March, this idea would focus on reducing the need to submit planning applications for a ‘change of use’ from commercial to residential. There is a historical precedent for this – in August of 2013, then Communities Minister Brandon Lewis proposed a similar idea, arguing that the plans would “increase the footfall in the town centre”. By increasing the supply of housing available, especially in urban areas, the hope is that prices will (eventually) fall and become more affordable for first-time buyers. However, there are plenty of other factors to consider besides this simple economic argument.

A nimble tweak to planning rules will not solve a perpetual housing crisis – and could even make it worse

Rebecca McDonald, an analyst at the Centre for Cities, argues against the idea, explaining “At best the policy will be ineffective; at worst it will harm the economies of stronger city centres”. The unintended consequences of this idea would affect both retailers and house hunters. Property developers won’t be interested in areas with many empty stores as these often aren’t attractive places to live and thus prices may already be low compared to other areas in the country. Inequality in house prices, such as the north-south divide, would only worsen. In cities such as London and Oxford, developers have an incentive to convert even occupied business space into housing, exacerbating the decline of the high street. Finally, care must be taken to make sure that these are homes that buyers do want to live in. Commercial properties often lack outside space and natural light, and the businesses replaced by the housing may be the very businesses that residents want to be able to use, especially if it is an essential service or convenience store.

This idea is a good policy when drawn up in the mind of a politically-minded minister, yet when carefully analysed by experts in the field the unintended consequences of such a policy become clear. A nimble tweak to planning rules will not solve a perpetual housing crisis – and could even make it worse.