Housing policy is correctly considered a national disgrace in Britain. Whilst the Barker report of March 2004 was rightly criticised as Barking Mad, it has at least had the benefit of igniting a debate about policy that has actually been flawed for much longer than John Prescott’s tenure as Deputy Prime Minister.The free-market minded may have bridled at the Stalinist overtones of an unelected technocrat publishing a report issuing a state target of 120,000 new houses to be built per annum in order to bring the rate of house price inflation down to the European average (what ever happened to all those lessons of the 1980s about not “bucking the market”?). The rot, however, sunk in much earlier with the 1947 Town and Country Planning Act.Countryside campaigners love the act because it set up Green Belts. But established in a time when state planning was very much in vogue, whether for heavy industry, exchange rates or the health service, it also established the principal that it was the government’s job to “decide” how many houses needed to be built. Just as in other areas, state planning has been a total failure. As Alan Evans and Oliver Marc Hartwich point out convincingly in a recent international comparison of UK housing policy, houses in Britain are older, pokier and more expensive than in many similar countries. New houses in Germany are nearly half as big again as those being built in the UK, despite a similar population density.More significantly the rise in prices, caused by the failure of state policies to match supply and demand, has meant prices increasing at around 2.4% per annum, more than double the average European rate of 1.1%. Whilst that feels good to those of us that own houses, it is actually a fool’s paradise. Young people are priced out of the market, people are forced to commute long distances, and for many the only prospect of owning the kind of house they would really like is to wait for their parents to die (by which time they too will probably be thinking of downsizing).There is of course a genuine balance to be struck between policies that will allow young people onto the housing ladder and protecting the character of our towns and countryside. But current policy fails to do either.Let’s take what Barker proposes for the South East. She advocates an additional 120,000 houses per annum. As this has been accepted by the government, the South East Regional Assembly has now adopted a plan of 29,000 houses per annum to be built in the South East between now and 2026. Will this work?Of course not. It will fail and fail miserably. An additional 29,000 houses in the South East, according to Barker’s own figures, will only make the smallest of dents in the rise in house prices. New housing accounts for only 1% of the total stock of houses, so it is not hard to see why the effect will be so neglible.But if these houses were all to help young people and “key workers” get on the housing ladder, there might be at least some justification. They will not. The vast majority of them will be sold at commercial rates and therefore of no use buyers currently priced out of the market. What the new houses will do, however, is put at risk the countryside that is vital for one of the most congested parts of the country. We should not forget that land once built on virtually never returns to being countryside. So central planning, however well-intentioned, not only fails in its central objective. It also does real and lasting damage to the environment.A good analogy is the set of roadworks now being completed on the M25. The section around Heathrow has been increased to 10 lanes. Presumably in 20 years time economic growth will again mean the need for further lanes. So what will the government do? Increase it to 20 lanes? And then 40 lanes? Of course not. In the end, rather than constantly increasing supply, you have to allow the market to ration demand.That is why the best approach to the affordable housing problem is not to increase supply, but look at schemes to help key workers and young people price themselves into the market. Here the government has made a start, but much more radical policies could have much bigger impact. We should decentralise pay rates for workers such as doctors, nurses, teachers and the police so that they can be paid in a way that reflects their local cost of living. We should allow tenants in social housing schemes to part-buy or buy their homes just as we allowed council tenants to buy their own homes.Most of all we need to recognise that the system of centralised planning, set in place by the 1947 Town and Country Planning Act, needs to be scrapped in favour of allowing local councils to have the final say in planning policy for their area. If it is combined with a fundamental reform of the structure of local finance allowing local councils to raise and keep their own revenue, you start to get the right incentives for a coherent planning policy.In Germany, for example, this power is devolved to the lander. Being locally accountable they fight hard to protect the character of their towns and countryside. But they balance this against the need for housing for young people, and the recognition that new inhabitants bring more revenue to the area. Switzerland is another example of judicious planning by the local canton. If you want an example of where central planning has gone wrong, look at Ireland where there is a glut of low quality housing that has not only done serious damage to the countryside but also completely failed to stem to rise in house prices.There are two very strong arguments as to why the local route is best. Firstly because there is an enormous democratic deficit in housing policy. Housing allocations for each region are decided by unelected regional assemblies. If developers appeal against planning refusals made by local authorities, the final decision is made by a quango in Bristol which works to national housing targets. So despite living in one of the oldest democracies in the world, people can do nothing but watch in silent fury as their street, neighbourhood or countryside is ruined. The second reason is because planning decisions are often finely balanced and need to be closely attuned to the needs of the area they affect. Far from being “nimbys” most people in the South East of England are acutely aware of the problem of affordable housing. But deciding how to strike the right balance is best left to the people who live in the areas that face these challenges. In the US this means different localities adopt different “zoning policies” to account for local needs. In the UK this could mean a much bigger drive to attract housing in less economically vibrant parts of the country, and more affordable (as opposed to commercial) housing in the South East. Central planning has failed. It’s time to find another way.