Thursday, 24 November 2016

The (New) Northern Powerhouse Strategy

Posted by Neil Lee, Geography & Environment and SERC


The headlines from yesterday’s Autumn Statement were mainly about the grim economic forecasts, post-Brexit. But there were also some significant developments around the Northern Powerhouse (see my paper on the topic). There had been concerns that this agenda was going to end when George Osborne, who led it, left the Treasury.

Yesterday’s announcements suggest there is life in the agenda yet. While there was little new money, the government did publish a Northern Powerhouse strategy – a cheap way to confirm ongoing interest.

The strategy suggests some shift in focus. Under Osborne the Northern Powerhouse had four "ingredients" - transport, science and innovation, devolution, and culture (the poor relation). The new "strategy" seems based on: connectivity, skills, enterprise and innovation, and trade and investment. Culture is now justified mainly as an attempt to attract and retain skilled workers.

The focus on skills and education is important. SERC research has highlighted the importance of skills in regional disparities, but skills were - as I argued earlier this year - missing from earlier iterations. IPPR North released a sobering analysis of the problem faced and a review has been conducted. The success of these policies will have long-term implications. [Updated: As Alex notes here, there was no mention of skills in Hammond's actual statement.]

Second, the initial focus on innovation has broadened out to include enterprise. While few people are against enterprise, many firms are not the wealth creator politicians imagine (see Alex and Paul’s work here) and there are cautionary tales about the creation of lots of poor quality start-ups in lagging regions. The focus needs to be on quality, not quantity.

Finally, one critique of the Northern Powerhouse has been that it is a political brand rather than a genuine economic strategy. But the branding element is now an explicit goal of the policy (see this whizzy video), with the aim of using the Northern Powerhouse branding to attract trade and investment.  Given the state of the post-Brexit economic forecasts, let’s all hope this works.

Thursday, 3 November 2016

Fear of Fracking: house price reactions to fracking in Britain

Posted by Steve Gibbons (LSE, SERC); Stephan Heblich (University of Bristol, SERC); Esther Lho (Duke University); Christopher Timmins (Duke University, National Bureau of Economic Research) 



Earlier this month, the government gave approval for exploratory drilling and hydraulic fracturing – ‘fracking’ – for shale gas at two sites in Lancashire. This follows a similar decision for North Yorkshire earlier in the year.

Some will see these as landmark planning decisions marking the way to a low-cost energy future for the UK, with shale gas becoming a major new source of energy in countries across the globe. For others, particularly those who live locally, they will be seen as leading to potential environmental catastrophe. These fears are fuelled by many reports from the United States about the risks associated with shale gas extraction by fracking – water contamination, earthquakes – plus concerns about the local impact of traffic and extraction infrastructure.

Our recent research investigates whether these fears affect what people are prepared to pay to live in areas affected by fracking, by tracing out the impacts of shale gas licensing and exploration on house prices in England and Wales.

Although commercial shale gas development has not yet taken place in the U.K., exploration licenses have been offered since 2008 and many exploration wells have been drilled. Our findings suggest that this licensing and exploration in itself had little or no impact on house prices throughout most of England and Wales. See the map below for licensed areas.


Note: The map shows blocks that were licensed for gas exploration in the 13th round in 2008 (red) and previous rounds (blue). Grey shaded areas have shale gas potential according to the British Geological Survey (BGS).

The one exception is the one site in the UK where exploratory fracking for shale gas has taken place (shown as a red dotted area in the North West on the map). Here we find that prices fell by up to 5% after fracking commenced. A specific trigger for this was the occurrence of two highly publicised earthquakes in 2011 which were linked to the fracking.

What happened is illustrated succinctly in the Figure below, which plots the trend in adjusted house prices at quarterly intervals up to and after the earthquake event in 2011. The solid line represents the earthquake zone, while the dashed lines show trends in other licensed areas and where licenses specifically mention shale gas. In this picture, prices are scaled relative to the beginning of 2011. Clearly there was quite a marked fall in transaction prices in the months after the fracking and earthquake event.



These earthquakes were minor and would not have caused personal injury or damage to property. So the most likely explanation for any impact on house prices is that the earthquakes reminded people of the potential risks, and so reduced demand for homes in the vicinity.

The implication is that there are ‘psychological costs’ associated with fracking, which should be compensated. An existing industry Community Engagement Charter already recommends payments to local communities by drilling and exploration companies, of around £100,000 for exploration, plus 1% of revenues during extraction. The government has recently consulted on a new Shale Gas Wealth fund that proposes using 10% of revenues from shale gas to fund payments with a maximum of £10 million per site, to communities and individuals affected by extraction. But aggregate costs per site implied by the house price reductions are far in excess of these – over £100 million!

Compensation to communities could prove to be very costly, if local objections to fracking are to be overcome by those who see fracking as the answer – at least in the short term – to securing Britain’s energy.

Monday, 17 October 2016

Do we value the London Congestion Charge?

Posted by Cheng Keat Tang, LSE Geography and Environment 


It may have gone unnoticed to many, but the London Assembly recently sought ideas on how to tackle congestion in the capital. One of the submissions from the London Chamber of Commerce and Industry (LCCI) calls for a radical rethink on the congestion charge and questions whether it is serving the purpose for which it was intended.

Although, contrary to some media reports, the LCCI submission does not advocate ‘ripping up’ the congestion charge, any hint of of removing the one congestion pricing system that has been successfully implemented in the UK will cause dismay amongst most economists. Congestion charging is, at least theoretically, an economically optimal way to reduce congestion, even if implementation can be practically and politically challenging. Greater use of road pricing was one of the policies advocated by the recent LSE Growth Commission report on transport infrastructure.

Of course there are many debates about how effective the London congestion charge has been in reducing congestion and at increasing the wellbeing of the capital’s residents. Surprisingly though, there is little rigorous empirical evidence on the question.

My recent research on the congestion charge addresses this gap by estimating the impact of the introduction of the charge and subsequent price hikes on traffic flows, and the consequent effects this had on house prices in the area – house prices being a useful metric of how much residents value the changes.

The headline finding is that the original congestion charge and the short-lived Western Extension reduced traffic. Homeowners valued these better traffic conditions in the western extension of the zone, where prices rose by around 4% when the congestion charge was implemented.

Background 


On the 17th of February 2003, London introduced the Congestion Charge Zone (CCZ) in Central London. A flat fee of £5.00 was levied on commuters driving into the zone between 7:00am to 6:30pm from Monday to Friday, excluding public holidays. The demarcated charge zone covered a total of 21 square kilometres and encompassed the financial centre (Bank), parliament and government offices (Palace of Westminster), major shopping belts (Oxford Circus) and tourist attractions (Trafalgar Square, Westminster Abbey, Big Ben, St Paul Cathedral) (See Map below). These are areas with the heaviest traffic flow. The rationale for the charge is not only to mitigate traffic bottlenecks and improve traffic flow and commuting time, but also to generate revenues to improve the public transport system.

Figure 1: Map of the Original Congestion Charge Zone (CCZ) & the Western Extension Zone (WEZ) (Source: TfL) 


Effects of the London Congestion Charge 


Is the charge effective? My research show that indeed it is. Relying on traffic data at a road level, I find that vehicular flow fell by 6% to 9% after the CC is first introduced in 2003, and 4% to 6% when the WEZ is implemented in 2007. Subsequent hikes, other than the initial increase in charge in 2005 (from £5.00 to £8.00), has a less discernible impact on traffic. This is understandable as marginal increases in the charge are less likely to dissuade drivers from commuting into the zone than its introduction. Commuters are now required to pay £11.50 to drive into the cordoned area when the CC is up. With less driving in the CCZ, air quality has also improved, according to others’ research. The implementation of the CC was associated with a 12 per cent reduction in air pollutants as such PM10 (Particulate Matter) and NO (Nitrogen Oxide) in the zone (Beevers et al. 2005). Roads are also much safer with a decline in accident and casualty counts (Green et al, 2016). The success of the original congestion charge led to the subsequent extension of the congestion charge zone to central west London (WEZ) in 2007 that covers Kensington and Chelsea borough - one of the most expensive and sought after estates in London.

How much do residents value these benefits?


So do homeowners pay for these benefits? To examine this, I restrict the analysis to properties very close to the congestion charge boundary (within 1 kilometre) to exploit the sharp discontinuity in traffic flow induced by the charge between roads just inside the zone and roads just outside (as drivers are deterred from driving into Central London). This ensures that properties in and out of the charged zone are almost similar other than being affected by the charge (or receiving the benefits from improved traffic conditions).

Comparing house price changes before and after the CC is implemented, my findings show that homeowners do pay for these benefits. When the WEZ was implemented, house prices rose by 4 per cent (about £30,000) relative to comparable transactions outside the zone. However, similar price increases did not occur in the original CCZ when it was introduced in 2003. There are several reasons for this. The initial introduction of the CC was not well-received by the residents. Many were unsure whether the charge was able to achieve its intended aims. Furthermore, based on census data, residents in the WEZ are more likely to own a car and drive more to work, stay further away from their workplace and earn much higher wages. All these factors could explain a larger willingness to pay to avoid traffic congestion.

Conclusion 


My findings show the effectiveness of the congestion charge and that homeowners appreciate these benefits by paying more for homes in the zone. Despite the success associated with the charge, it still faces vehement opposition from the public, who perceive it is as an extra tax. As a result, few cities are able to implement the charge, despite high levels of congestion. Some exceptions include Singapore, Stockholm, Gothenburg, Milan and Dubai. Having said that, for the charge to achieve its intended aims, drivers must be provided with a reliable public transport system to induce them to switch from driving.

References 


Beevers, Sean D, & Carslaw, David C. 2005. The impact of congestion charging on vehicle emissions in London. Atmospheric Environment, 39(1), 1–5.

Green, Colin P, Heywood, John S, & Navarro, Maria. 2016. Traffic accidents and the London congestion charge. Journal of Public Economics, 133, 11–22.

Monday, 10 October 2016

A housing failure: it’s not more rental stock we need; it’s more of the right kind of houses

Posted by Paul Cheshire, LSE & SERC 


The RICS recently called for a big boost to building houses specifically for rent because, they claimed, there will be an additional 1.8 million households looking for rental property by 2020. This misses the point and will not address the causes of our housing crisis. Our problem is not a shortage of rental housing; it is a shortage of housing - full stop. All houses are owned and occupied, vacant or rented and renting is a substitute for owning. As a result in the long run rents and prices tend to move more or less in step for a given type of house. But we have not only a shortage of houses but an unbalanced offer of houses. They are on average too small, not well enough designed or built, and in the wrong locations. That is cramped houses in places people do not really want to live. But because there is such a shortage both prices and rents have been rising consistently in real terms for two generations.

My LSE SERC colleagues and I have been generating the evidence of this shortage and identifying its causes for years now (see here, here, here or here). The uncomfortable reality is that the total unfitness for purpose of Britain’s planning system and how that interacts with our system of local taxes, seriously restricts the supply of new housing. This reality is somehow too disconcerting to confront. Politicians offer magic wands to build 1 million homes by 2020 or 55,000 a year in London but deliver no mechanisms to achieve it. They know that politically they cannot say they do not want to build more houses but they feel incapable of tackling the vested interests benefiting from both the causes of our desperate housing shortage and its results.

In 2014 my reasonably informed estimate was that the accumulated house building shortfall in the 19 years to 2012 was between 1.6 and 2.3 million homes. The problem is long term, not short term. We should not be London-centric but to illustrate with London: we were building around 75 to 80,000 houses a year in the GLA area in the 1930s; nearly 30,000 a year even in the 1870s. But since 1980 house building in London has only occasionally reached 20,000 a year. The only effect of raising ‘targets’ since 2000 – up progressively from 14,330 to now 55,000 – has been to increase the shortfall between promise and achievement. And given his policies Sadiq Khan will be no more successful at delivering on his targets than Boris Johnson was on his.

House prices have roughly doubled in real terms in every decade since the 1950 and since 2005 have risen by 47.4% But over this more recent period rents ‘only’ rose by 18.4%. This is not a ‘long period’ – the one in which we are all dead – but still the close link between prices and rents seems to have weakened.

Houses are a peculiar form of ‘good’ because they perform two functions at once. They provide a flow of housing services; they are places to live. But they are also investment assets. In a world of stable prices a sensible person would choose whether to own or rent on the basis of their circumstances and preferences. They might be young and mobile so want not to have the fixed costs of ownership. Their hobby might be do-it-yourself so they would want their own house to perfect. They might be scholars or inveterate travellers who did not want the ties of home ownership. From the investors’ point of view they might want something like a ‘bond’: a safe and secure asset, albeit not very liquid, providing a more or less guaranteed flow of income in the form of rents.

This world of stable real house prices is not an economist’s fiction. It is more or less the situation in Germany or Switzerland. Those countries have pretty sensible planning and local tax systems and they build enough houses to satisfy demand. Britain is, of course, different. We have a dysfunctional planning system and an almost equally dysfunctional system of taxes when it comes to land and housing. So both housing but even more land to build houses on, are in short supply and have been in increasingly short supply since we started to ration space by imposing Green Belts in 1955. Getting permission to build houses on a hectare of farmland on the northern fringes of London would increase its price from perhaps £20,000 to £12 to 15m: a clear signal of the loss of value imposed by not letting more people live where they really want to and could be most productive. So if you live in a world planned on British (as opposed to German or Swiss) foundations, a world in which the real price of houses nearly doubles in every decade, then of course you have a big incentive to be a home owner. Miss out at 25 and you risk permanent exclusion from the housing wealth ladder provided by our ever rising house prices. Home ownership as a tenure steadily rose from 32% in 1953 to around 70% in the early 2000s, but has now dropped back to less than 64%. For people born in the 1950s the homeownership rate nudged above 70% before they got to 34; in the past 12 years, however, homeownership rates for the under 34s have fallen from 59% to 34%. Younger people have been priced out of ownership, even become YIMBYs. This pricing out of ownership partly results from the ever rising price of houses relative to incomes but low interest rates have significantly offset that hurdle since 2007 because the annual mortgage payments fell with falling rates.

The growing hurdle for the young would-be home owner has just been getting a deposit together; especially in the face of competition – prices have after all risen relative to rents – from the fortunate cohorts born in the 1950s or 1960s withdrawing equity to get a buy-to-let as a pension. The median landlord only owns one rental property but given what has happened to returns on other assets, if you want a bit of income, letting out has become seriously attractive. So would-be owner occupiers have been squeezed out by wannabe landlords whose incentive is the extraordinary low returns on those assets normally financing pensions and the capital gains they have made and expect to make from owning homes in a market like Britain’s. This pushes up house prices but increases the supply of rental stock.

The problem is that unless we really step up house building all we do is redistribute an almost fixed stock between alternative buyers: buy-to-let landlords or owner occupiers or just a few second home owners – British or foreign – who do not occupy their houses very much. We do not need to build more rental stock; we need to build more homes.

Friday, 19 August 2016

The UK planning system – Proposals for reform (Part 2)

Posted by Christian Hilber, LSE & SERC

 

Part two of a two part series, originally published in Planning and Building Control Today


In the first part of this article (published in July), I presented an argument saying that the UK planning system has serious flaws and delivers benefits only at excessively high costs, mainly hurting the young. In this second and final part, I outline what I believe make viable proposals for reform.

Three proposals for reform 


When I gave evidence to the Treasury Committee back in April of 2016, I was asked by the Chairman what I would realistically do to tackle the affordability crisis if I were in charge of government policy. My response was the sketch of a three-pronged policy.

My first recommendation was to transition from the current development control system towards a rule-based zoning system. This transition could be piloted in a ‘Special Planning Zone’ and later introduced country-wide. The aim would be to rationalise and simplify the allocation of land use and dramatically reduce planning uncertainty, thereby also removing the valuable ‘real option’ to hoard land and delay development. The basic idea would be that instead of requiring development control permission for any change of ‘use’ of any parcel of land, certain areas would be zoned for residential purposes and within those zones, there would be an automatic presumption of development as long as the owner of land can convey that building regulations are obeyed. Neighbours could object only if they can substantiate that rules are clearly violated. This could replace the current process that involves a lengthy public consultation and often complicated Section 106 negotiations. Simplifying the planning process would have the additional benefit that it would make it easier for smaller scale developers to enter the market, thus competition among developers, reducing possible cohesive ‘oligopolistic’ behaviour among large-scale developers and ultimately leading to more production of housing and smaller ‘abnormal’ profits.

Of course just changing to a rule-based zoning system does not in itself alter the incentives of local authorities to allocate land for residential purposes. My second recommendation was thus that any reform of the planning system should be accompanied by additional fiscal incentives at local level to allocate land for residential purposes (either via granting planning permission under the current system or, preferably, via designating land areas for future residential development under the proposed rule-based zoning system). As a general principle, local property taxes should be given significantly more weight in the tax system. This could be achieved in a revenue-neutral way via replacing the national Stamp Duty Land Tax (SDLT) – a terribly inefficient tax that significantly hampers housing-related and short distance moves1. Moreover, development induced increases in the tax revenue base should not be equalised away through the central government grant system.

The current council tax, which bears little relation to underlying property values, ought to be transformed into a proper annual local property tax – or better, even a local land value tax – with automatic annual revaluation based on location-specific price changes. The key advantages of a sizeable annual local property tax are threefold: • It would generate a permanent revenue stream that would incentivise local authorities to make more land available for residential development; • It would reduce the occurrence of underused or vacant housing and would generally ensure the optimal use of the scarce resource land; and lastly • Such a tax would impose a far smaller economic ‘deadweight loss’ compared to the SDLT.

On a related note, local authorities should also be allowed to introduce impact fees. Such fees are imposed on proposed development projects to pay for all or a share of the costs of providing additional local public infrastructure and services.

My final recommendation was that the central government ought to require the various enacting bodies – typically local authorities – to critically review major existing planning constraints such as green belts, height restriction areas, protected view corridors or conservation areas. They would need to justify for each such constraint that a market failure exists and that the benefits associated with correcting this market failure can reasonably be argued to exceed the opportunity costs. For the case of green belt land, for example, a guiding principle could be that the enacting body needs to justify preservation for the various sub-sections of the belt one-by-one on grounds of significant environmental or amenity value. If no such values can be established for particular sub-sections, especially if such land is nearby already developed high-demand areas with pre-existing transport infrastructure, a presumption for development ought to be enacted.

Vested interests and a glimmer of hope 


After I outlined my proposals to the Chairman of the Treasury Committee back in April, his comment was: “I wish you well at the polls with your three-pronged policy”. Clearly, his concern was that it would be difficult to gather majority support for my proposals. He certainly has a point, although in some sense that is surprising: If policymakers were to implement a variant of the above outlined proposals, they would be bound to make the society as a whole better-off. So, why is it so difficult to gather support for such reforms?

One reason is that the benefits of certain policies or settings are concentrated among a small group of individuals with strong vested interests (e.g. homeowners benefiting from a protected vista or living adjacent to a green belt), whereas the costs are diffused throughout the whole society (all residents facing higher housing costs). While the former group has strong incentives to influence policy makers to protect the status quo, the latter group is not capable of organising their interests in a cohesive way.

A second reason is incomplete or distorted information about the benefits and costs associated with certain policies or settings. For example, consider expanding families in London that managed to get on the owner-occupied housing ladder some time ago. The staggering capital gains on their leveraged homes may well make them feel significantly better off. Yet, they are in fact likely losers of the broken planning system for three reasons:
  • Compared to a ‘counterfactual scenario’ with more relaxed planning they live in artificially cramped housing; 
  • They are increasingly priced out from moving to larger more adequate housing; and 
  • They cannot realise their capital gains unless they move to a less desirable city with fewer planning constraints and lower house prices (or they leave the country altogether). 
 
The only real winners of the planning system are wealthy land and property owners who possess more property than they consume, elderly homeowners who are prepared to sell their houses, pocket the proceeds and move to a country with cheaper housing, and the children of wealthy parents once they eventually inherit property. The planning system cements wealth inequality, and the beneficiaries of this rising inequality have incentives to keep the system as it is.

Yet, there are glimmers of hope. There are signs that attitudes of the British public towards building more homes are changing, and are changing rather rapidly. The British Social Attitudes survey has shown a remarkable decline in NIMBYism in recent years. Opposition in England to new homes being built in the local area has declined by more than half between 2010 and 2014 from 46 to 21 percent. Similarly, support for local house building has doubled from 28 to 56 percent. Policy makers ought to take notice.

In fact, it appears policymakers already do take notice: the pre-Brexit Conservative government made some encouraging announcements (among less encouraging ones). The 2016 Budget explicitly mentions “moving to a more zonal planning system” as an objective and reducing planning related uncertainty appears to be a priority. The government also announced the full retention of the business rate by local authorities from 2020 thus providing fiscal incentives at the local level to permit commercial development. Sadly, this bold move may have the unintended consequence of discouraging local authorities from making scarce land available for private and social housing, thus potentially further worsening the housing crisis. However, it raises hope that the post-Brexit Conservative government will eventually follow with an even bolder move; to provide much stronger fiscal incentives to local authorities to permit residential development. That really could change the dynamics for the better – particularly for the young.

There are signs that the new Prime Minister Theresa May is serious about trying to tackle the housing crisis. In her last speech prior to taking on her new job, she stated the following: “Unless we deal with the housing [supply] deficit, we will see house prices keep on rising. Young people will find it even harder to afford their own home. The divide between those who inherit wealth and those who don’t will become more pronounced. And more and more of the country’s money will go into expensive housing instead of more productive investments that generate more economic growth.”

Theresa May appears to understand that lack of house building lays at the very heart of both, the country’s serious and worsening social divide and its economic crisis. She seems to understand that the stakes are high and bold action is required. This is encouraging from the point of view of those interested in affordable housing, especially the younger generation and the less wealthy. What is crucial, however, is that she and her ministers realise that demand-side policies such as Help to Buy won’t solve the housing crisis and the corresponding growing social and economic problems. In fact, more Help to Buy – notwithstanding its deceptive name – is likely to aggravate the country’s social divide and economic crisis. What is needed instead are bold reforms on the supply side – outlined in this article – that tackle the causes of the problem. This would require bold leadership that puts social welfare and social justice above vested and narrow party interests.

There is no denial that – despite changing social attitudes – implementing supply-side reforms entails a political risk. Any potential reforms are further complicated by the fact that Brexit (apart from attracting much of the political attention) is likely to significantly adversely affect the real economy in the short-run and thus house prices. This may (further) reduce incentives of developers to build new homes. It may also, in the short-run, weaken political pressure to impose effective supply-side reforms, implying an economy eventually recovers. If however Theresa May turns out to be a bold leader willing to take a political risk and enact meaningful supply-side reforms, then there is real hope. Real hope particularly for the young generation and those less wealthy. Real hope to move towards a ‘One Nation’ society that is less defined by social divide. If she also manages to limit the adverse long-run economic consequences of Brexit, then there is real hope for a more prosperous future for all.

This article builds on, and is in small parts, identical with my oral and written evidence to the Treasury Committee. 

References

Hilber, C. and T. Lyytikäinen (2015) Transfer Taxes and Household Mobility: Distortion on the Housing or Labor Market? SERC Discussion Paper, No. 187, October.

Tuesday, 19 July 2016

The UK planning system: fit for purpose?

Posted by Christian Hilber, LSE & SERC


Part one of a two part series, originally published in Planning & Building Control Today


There is no denial: the UK faces a serious housing affordability crisis. This crisis is not a short-term phenomenon, not the result of a financial bubble. The crisis has been brewing over several decades. Over the last 45 years, house price growth in the UK has been faster in real terms than in any other OECD country and has far outstripped earnings growth. Normally when demand is rising, construction booms as well and that eases price growth. This has not happened in the UK; construction of new housing has been decreasing more or less steadily since the late 1960s from 353k units in 1968 to 118k units in 2014, leading to a very substantial and ever growing housing shortfall. Not only that; newly built homes are also about 40 percent smaller than in similarly densely populated European countries.

In the Greater London Area (GLA) the problem is particularly acute. To illustrate this, the average house price in the GLA has gone up by £65.2k year-on-year since March 2015. The latest average household income estimate for the capital for 2013 is £51.8k. Put differently, last year, the average London homeowner earned more from capital gains than a renter from working all year long. It is therefore no surprise that young adults without wealthy parents are increasingly priced out from getting onto the owner-occupied housing ladder. Renting in the private sector is similarly unaffordable, so the young – even the highly skilled – increasingly have no other option but to stay at their parents’ home longer or leave the city. Consistent with this, the share of those employed in inner London working in professional scientific, research, engineering and technology jobs has fallen since 2011, hurting the capital’s productivity. The housing affordability crisis is an economic as well as a social problem.

Tight local planning constraints push up house prices 


Longstanding UK evidence, summarised in the Barker Review (2003) , demonstrates that housing supply is extremely unresponsive to changes in demand. That is, if real earnings and population grow over time, construction hardly responds, causing house prices to rise markedly in order for the housing market to clear. Long-run supply constraints are the only plausible explanation, but what kind of constraints? Barker suggested that the rigid planning regime may be a likely candidate. Others hypothesised that geographical and physical constraints are to blame.

In a recent study – published in the March 2016 issue of the Economic Journal – my co-author, Wouter Vermeulen, and I rigorously tested these conflicting hypotheses. Employing methods that allow us to establish causal effects rather than just correlations, we explored the impact on house prices of three different types of local supply constraints: (i) planning induced constraints, (ii) scarcity of developable land and (iii) topographical constraints.

Our evidence is strongly supportive that the planning regime in England is the main cause of the excessively high house prices, particularly in the GLA and the south east of the country. Our estimates imply that house prices in England would have increased by about 100% less in real terms between 1974 and 2008 if, hypothetically, all regulatory constraints were completely relaxed. More pragmatically, if the south east (the most tightly regulated English region) had the regulatory restrictiveness of the north east (less regulated but still restrictive by world standards) house prices in the south east would have been roughly 25% lower in 2008 and perhaps 30% lower in 2015. Topographical constraints also matter in a statistical but not in a quantitative sense. Finally, the effects on house prices of constraints due to scarcity of developable land are mainly confined to highly urbanised areas such as the GLA, but in these locations they are economically important. In a nutshell, house prices in London would still be fairly high by world standards even if regulatory constraints were relaxed, but housing would be substantially less unaffordable than today.

Tight planning constraints do not only push up house prices. In conjunction with business cycles they also amplify price volatility, thereby creating systemic risks. Moreover, regulatory constraints tend to be tighter and more binding in more desirable places such as the GLA, Oxford or Cambridge, implying that housing is built in the ‘wrong’ places; far too little housing is produced in the most successful, most productive cities where demand is strongest. Evidence for the United States suggests that lowering regulatory constraints in high productivity cities like New York, San Francisco and San Jose to the level of the median US city would increase production by about 9.5%. The ballpark figure may be similar for the UK.

Weighing the benefits and costs 


Planning induces both benefits and costs. There are considerable potential benefits in the form of correcting market failures such as monopoly power, externalities and lack of provision of public goods. For example, planning has the potential to solve the holdout problem in land assembly for transport infrastructure. It may prevent excesses of urban sprawl and may protect important views on landmarks and historic buildings. Planning may also ensure the provision of public parks as well as the preservation of natural habitats and cultural heritage.

The trouble with the UK planning system is that it often prevents, contains, preserves and protects even if no market failure is apparent, and with complete disregard to any costs that may outweigh the benefits of the intervention. One example to illustrate the point about market failure is London’s green belt. The green belt contains areas of outstanding natural beauty that ought to be protected. However, it also contains heaps of intensive agricultural land with little environmental or amenity value near existing developments with transport infrastructure. There is a strong case to permit housing on such land.

An example to illustrate the point that the planning systems disregards costs is the view corridor to St. Paul’s Cathedral from King Henry the VIII’s Mound in Richmond Park. This corridor was established in 1710 – when the St. Paul’s Cathedral was by some margin the tallest building in the country and the economic costs of view corridors were negligible. The protected vista frames the cathedral through a special gap in a holly hedging from a distance of over 16 kilometres. While this view is certainly enjoyable for those living nearby or for hikers, it arguably imposes an astronomic and ever growing economic ‘opportunity cost’: the protected vista prevents the construction of any tall building throughout the corridor that would obstruct the view. Worse, it also prevents tall construction in the backdrop of the cathedral, limiting development around Liverpool Street Station, one of the most productive hot-spots on earth. The protected vista, through limiting supply, raises housing costs of all Londoners and adversely affects the capital’s productivity.

Key flaws in the current system 


More broadly, three key flaws can be identified in the UK’s planning and tax systems. The first is the fact that the UK operates a so called ‘development control’ system, which is inherently geared towards containing development. In contrast to a rule-based zoning system – in use throughout most of the rest of the developed world – the UK system stipulates that any change of ‘use’ of any parcel of land requires development control permission granted at local level. Permissions are granted by local planning authorities, which invoke a consultation process that gives significant weight to NIMBY pressures.

The trouble with the development control system is, apart from giving weight to NIMBYs, that it is complex, substantially increases the cost of the development process and creates a great degree of uncertainty during the planning stage. The lengthy and uncertain process delays and significantly reduces the viability of projects. The viability is further threatened by Section 106 agreements that require complicated negotiations between local authorities and developers and imply a further degree of uncertainty for the latter.

The second key flaw – the lack of fiscal incentives at local level to permit residential development – relates to the first one. Local authorities that grant development control permission retain little tax revenue. This is made worse because of the central government grant equalisation system, which in the medium-term more or less eliminates any revenue gain for local authorities that permit more development relative to those that are more restrictive. Any increase in the local tax base is effectively equalised away by the central government. In other words, local authorities derive few benefits from permitting development, yet they face the costs of additional infrastructure that development makes necessary – local roads, schools and the like. These costs are rarely met fully by the central government. Worse, local residents bear the main burden associated with increased local congestion or pressures on public services such as local schools. This increases local opposition often beyond those neighbours who are immediately adversely affected.

The third key flaw of the UK planning system is the fact that since the Town and Country Planning Act of 1947, residential development has increasingly been prevented ‘in all directions’: The larger British cities are surrounded by enormous green belts that are effectively sacrosanct from residential development, thus preventing growth in a horizontal direction. (Moreover, green belts prevent the delivery of the type of housing – single family owner-occupied homes – that is most desired by large fractions of the population, but is arguably in shortest supply.) Height restrictions and view corridors prevent physical development in a vertical direction. In fact even digging below ground is often not a viable option to gain living space. Height restrictions constrain tall buildings in nearly all high-demand UK cities, particularly of course large parts of London. In addition, protected view corridors prevent construction of tall buildings in some of the most productive inner city areas. Lastly, preservation policies (e.g. Conservation Areas and Listed Building designations) limit redevelopment of existing structures at higher density or better adapted to current preferences. It is this combination of rigid policies ‘in all directions’ that explains why supply is so incredibly unresponsive in many British cities. If desirable cities such as London cannot grow physically over a longer time period, and as long as demand – mainly real earnings – grows and expectations are positive, house prices must rise markedly. (Brexit may change this. However, if prices fall as a consequence of a fall in real earnings, housing may not become more affordable.)

Why Help to Buy does not actually help to buy 


The fact that housing supply in the UK is so extremely unresponsive also has important consequences for the effectiveness of housing policies, including the Government’s flagship policy Help to Buy (HtB). The various HtB schemes are intended to stimulate housing demand and their aim is to generate new housing supply and higher homeownership attainment. However, in a setting where housing supply does not respond to demand side stimuli, the only direct effect of the policy is to increase house prices.

The effect of HtB on house prices has not yet been rigorously quantified in academic research. However, house price and construction statistics seem strongly suggestive that HtB did not have the intended effects. According to Nationwide, following the announcement of the first HtB schemes, house prices in London shot up by 25.8% between 2013q2 and 2014q2. A residential building boom failed to emerge and homeownership attainment continued to decline. The Government may have been well intended in helping young households to get on the owner occupied housing ladder, yet it has likely achieved the opposite. How is this possible? If the HtB subsidies indeed had the main effect of raising prices and through that the required mortgage deposits, this arguably made it even more difficult for young liquidity constrained households to afford a decent home, despite HtB. This proposition is consistent with evidence from the US, which reveals that the capitalisation of mortgage related subsidies into house prices decreased homeownership attainment in tightly regulated cities. To make things even worse, the HtB schemes may also have created a systemic risk in that the Government (and indirectly the taxpayer) assumes most of the risks associated with the guarantee schemes, with the remaining risk being assumed by the marginal homebuyers—those who stretched themselves to obtain a loan and could not have obtained one in the absence of the scheme.

In the second part, Christian Hilber, will offer three proposals for reform and provide a glimmer of hope for those interested in more affordable housing.

Friday, 1 July 2016

Brexit and the Location of Migrants

Posted by Felipe Carozzi, SERC & LSE

The results of the recent vote to leave the EU have come with a plethora of cross-sectional and spatial analyses, provided by the different British media outlets and their data journalists since Friday morning. We have learned about the generational profile of voters, the poor results of the stay campaign on traditional labour strongholds, the wide difference between results in large cities and small towns. While it is often hard to give a clear interpretation to these correlations, it is natural that we build our narratives and explanations of what happened on Friday with these elements.

I found one pattern particularly striking, the apparent negative correlation between the fraction of not born in the UK and the leave vote share. This correlation is depicted (once again) in Figure 1 for districts in England and Wales only. You can surely find it elsewhere (for example, here).




What is remarkable about this correlation in particular is that it seems to contradict the notion that the Leave vote was largely motivated by concerns about migration, symbolized in the claim that leaving would allow the UK to “regain control of its borders”. If fears of excessive migration fuelled the leave vote, wouldn’t we expect a positive correlation in Figure 1?

Of course, several candidate explanations for the observed negative relationship are available. Migrants may have sorted into more migrant-friendly areas. Or anti-immigration voters may harbour that position precisely because they are not acquainted with migrants. Or maybe a large fraction of the foreign born population had already acquired British citizenship and disproportionately voted to stay. Still, the robust negative correlation seems surprising in light of the centrality the debate about migration occupied during the campaign.

The apparent paradox is at least partly dispelled if we look at changes rather than the levels in the fraction of migrants. When we turn to the proportional change in the fraction of residents not born in the UK in the 2001-2011 inter-censal period, things start to align with anecdotes indicating that migration was indeed a key element leading to the Leave victory. Figure 2 shows this correlation for districts in England and Wales. We see that the correlation is now positive, indicating that places that experienced a larger relative increase in migration between 2001 and 2011 disproportionately supported the leaving the EU.



I will not make causal claims on this correlation, I know better. But if you wanted to argue that the leave vote was driven by concerns about migration, and felt perplexed about the widely circulated negative correlation in Figure 1, then the second figure may help understand things a little bit better. 

Technical note: Both correlations are robust to excluding London. I have also estimated a regression of the Leave vote share at the district level on the fraction of migrants in 2011 while controlling for the fraction of migrants in 2001. The coefficient on the first variable is positive while the coefficient on the second is negative, with both being statistically significant. Results are robust to including region fixed effects and flexibly controlling for population. For a rigorous analysis of the effect of immigration on voting behaviour by residents, see for example the work in Barone et al. (2016) for Italy, which carefully explores the causal links at play. Remarkably, they do not find an electoral response to migration in large cities.

References
Barone, G., D'Ignazio, A., de Blasio, G., & Naticchioni, P. (2016). Mr. Rossi, Mr. Hu and politics. The role of immigration in shaping natives' voting behavior. Journal of Public Economics, 136, 1-13.