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.

Monday, 16 May 2016

You cannot regulate empty houses away

Posted by Christian Hilber (SERC & LSE), Paul Cheshire (SERC & LSE) and Hans Koster (VU Amsterdam) 


“Almost 57,000 homes in London stand empty…” writes David Smith in the Guardian on May 4th. This he claims is a significant cause of London’s housing problem and the “Key to this is tackling buy-to-leave investing.” The answer to this ‘problem’ is for the mayor to refuse planning permission and for Boroughs ”…to introduce planning restrictions …to prohibit the deliberate practice of letting properties lie empty.“ This is not a view unique to David Smith. For example, the well-known architect Lord Rogers in arguing against the desirability of permitting offices to be converted to housing to help with London’s housing shortage noted: “Why should we rush to convert office blocks when we already have three-quarters of a million homes in England lying empty.”

Leaving aside the fact that any housing market always needs empty houses if it is to run smoothly – people move house, they die or they need major building works – is this the solution, even if it is a problem? Is making planning permission more difficult to get or imposing additional conditions a feasible way of reducing the proportion of empty homes?

The trouble with interventions in the housing market is that however well-intentioned, they generate all sorts of unintended consequences. And sometimes achieve exactly the opposite of what was intended. The uncomfortable truth is that we need to understand how things actually work: not pass laws or regulate hoping to make them work the way we would like them to. One of our most recent research findings is that more restrictive local planning actually increases the proportion of vacant homes.

Of course by making housing even scarcer (which more restrictive planning achieves) it makes it more expensive. This generates an incentive to occupy it, so reduces vacancies. Unfortunately more restrictive planning also makes it more difficult to adapt homes to the constantly changing patterns of demand. Jobs grow in a locality, so demand for houses there increases; the local school gets better so the demand for family sized homes increases; people buy a car so want parking; they have fewer children or separate so they want smaller homes – the list is potentially endless. The result of this is that in more restrictive locations people wanting a home find it more difficult to match their preferences to what is available. So they have to search longer or further afield. The result of that is there are more empty houses.

These two effects work at the same time and in the opposite direction, of course. Which dominates and so whether more restrictive policies increase or reduce the proportion of homes that are empty net, is a purely empirical question. Our results for England, using data from 1981 and being careful to offset for reverse causation and other econometric problems, show that the net effect of more local restrictiveness is not just to increase the proportion of empty homes but to increase it substantially. A one standard deviation increase in local restrictiveness causes the local vacancy rate to increase by nearly a quarter. That is not all. Because it makes finding a suitable house locally more difficult it also increases the average distance people have to travel to work. The same increase in local restrictiveness causes an 8.5 percent rise in commuting distances.

So the Islington policy quoted approvingly by David Smith will in fact be likely to increase the proportion of empty homes in the Borough – not reduce it – and at the same time mean that people who work in Islington will end up commuting further. Roll it out over London as a whole and we would expect the same outcome. The absolute opposite of what the advocates of the policy wanted to achieve.

Friday, 6 May 2016

NHS walk-in centres are popular, but divert few patients from A&Es

Posted by Ted Pinchbeck, SERC 


Originally posted on the LSE Business Review, here.


In 2010 NHS Walk-in Centres were a valued feature of around 200 communities in England, but many of these facilities have since closed or are facing closure. My research may go some way to explaining why: less than a fifth of patients attending a centre would otherwise have attended an A&E, meaning the centres do little to relieve pressure at busy casualty departments.


The rise and fall of the NHS walk-in centre 

Walk in health services of one form or another feature in many healthcare systems, including Canada and the United States. In England, the first NHS walk-in centre opened in the late 1990s but only became prominent in the late 2000’s following a policy initiative that led to the opening of around 150 new facilities.

Offering extended hours and with no requirement for patients to pre-book or register, many new centres had proved highly popular with local residents with minor illnesses and injuries such as colds, eye infections, sprains and cuts. But despite this popularity, during the last parliament around a fifth of the facilities shut their doors, with a number of others, for example in Redruth, Hereford, and on Teeside, also currently at risk.


Taking sides 

Why the services should have closed in such numbers is not immediately clear: the scale of local opposition to some closures – for example in Jarrow, Worcester and Southampton – was intense. Their supporters argue they reach new groups of patients, provide easy and convenient access to care, and take pressure off other stretched NHS services.

At the same time, commissioners closing centres argue they represent a poor use of funds as many attendees have minor conditions that have little need for medical attention, and those that do could readily be treated elsewhere. Some have cited the need to fund seven-day-a-week access to GP services as a more pressing priority.

While not the whole story, one important question in these debates is whether walk-in centres divert patients from attending busy hospital A&E departments. This may be desirable since crowding at A&E is associated with high mortality and can have knock-on effects by reducing the capacity for hospitals to carry out planned medical treatments. In addition, many attendees at A&E have low severity needs which could be safely treated outside a hospital setting. Treating these patients as emergency cases in hospitals is considerably more expensive than treating them in walk-in clinics.


Building the evidence: do walk-in centres divert patients from A&E? 

Until recently there was no conclusive hard evidence – from either side of the Atlantic – either way. When surveyed, around a quarter of patients attending walk-in centres say they would otherwise have attended a hospital A&E. However, academic research using statistical methods has been unable to detect any such effect.

My research provides new evidence that goes some way to filling this gap. Combining detailed information contained in hospital records with difference-in-difference statistical techniques, I provide credible estimates of how patients’ use of A&E departments changes in response to the opening or closure of a new walk-in centre close-by.

Two main findings emerge. The first is that walk-in centres do significantly divert patients away from attending A&E. The second, however, is that relative to the number of patients attending walk in clinics the effect is small, with calculations suggesting only around five to 20 per cent of patients attending a walk-in clinic would otherwise have gone to casualty. The implication is that they only make a small dent on the overall A&E figures.


Conclusions 

The research points to something of a dilemma for decision-makers. Easy access services such as Walk-in Centres are popular, which suggests they are valued by patients. The evidence suggests they do make a small contribution to relieving pressure at over-stretched emergency services, but with low diversion rates from A&E they may be an expensive way to do so. The cold reality of a chilly funding climate points to hard choices in allocating scarce NHS resources to best meet local demand. With this in mind, fights over the remaining centres look set to continue.

Thursday, 5 May 2016

Next London Mayor should work with Wider South East to rethink the green belt

Posted by Ian Gordon, SERC and LSE Department of Geography & Environment 


This article was originally published in the Centre for Cities’ Mayoral Elections 2016 blog series, in which experts from the worlds of business, housing, local government and academia discuss the big issues ahead of the elections on 5 May. 


Whoever becomes the next mayor must recognise the need to work with London’s neighbours to tackle the region’s housing shortages. 


Ahead of today's election, the various London mayoral candidates have been keen to emphasise their commitment to protecting the welfare of Londoners, present and future. However, one major issue missing from the mayoral debates so far is a recognition that this cannot be achieved by treating London as an island within the M25 – as both Ken Livingstone and Boris Johnson have done in their time in office. This isolationism is no longer sustainable given the threat posed by chronic housing shortages, as well as the size of the opportunities that an integrated regional approach to public investment would offer to both Londoners and their neighbours.

The incoming Mayor, taking over a strongly established GLA, has the chance to make their mark by recognising the crucial linkages between their turf and the Wider South East. Practically, this means taking serious account of how ‘cross-border’ economic, housing and labour market links will affect policy decisions. But it also means working more actively with representatives from the wider region to resolve shared problems and make the best of the joint potential of this southern heartland.

These themes emerge strongly in the final set of reports from the current Mayor’s Outer London Commission (OLC), but they have barely figured in the electoral manifestos of the leading mayoral candidates. Caroline Pidgeon has promised a specific dialogue with the rest of the South East about accommodating London’s household growth when brownfield sites in London ran out. But neither Zac Goldsmith nor Sadiq Khan have shown any more inclination than their predecessors to look beyond the borders of their electorate. In part, this is because these are not electorally appealing issues, especially given the sensitivities around the green belt. But with the housing crisis set to dominate the political agenda in the capital for years to come, the question of how London engages with its neighbours has become important to address.

This will not succeed if the Mayor is simply perceived as asking neighbouring regions to house those who they’ve failed to accommodate within the capital. Leaders from across the wider South East, who’ve held two preliminary summits with the current Mayor, are expecting London to do its bit in releasing extra land for development, but they have a wider agenda and are responding to the fact that the housing crisis is region-wide. Its common cause is the overall tightness of land supply across the South East, exacerbated by greenfield development quotas which have bitten most directly outside London.

The issue is shared because neither mayors nor planners elsewhere can ‘control their domestic borders’. Housing completions need to double to meet the estimates of housing need, but despite all the efforts currently proposed by the OLC and others, this is still unlikely. In that case, some of London’s projected population growth will simply get diverted into neighbouring sub-regions. But since capacity there is also limited, the likely knock-on effect will be for more local residents to look further afield for affordable housing – spreading London’s housing footprint even deeper into semi-rural East Anglia, Wales and the South West (if not to cities further north).

This would be a perverse and environmentally unsustainable outcome of ‘compact city’ planning policies. Instead, a much better idea would be to take a city-region approach – channelling growth into well-connected strategic locations closer to London, which would enhance both economic and environmental sustainability.

The OLC reports offer a series of recommendations for how the new Mayor can boost housing output from brownfield sites within London. However, this alone won’t close the supply gap, requiring new initiatives to bring other land into residential development. To address this in a sustainable way, the OLC recommends that the new Mayor should take a lead in ensuring strategic reviews of green belt are undertaken on a co-ordinated basis, both inside London and beyond. Another more specific proposal recommends a focus on the development of five Growth Corridors along major transport axes in and out of London, with an integrated combination of housing, employment and enhanced transport links.

As the Centre for London’s recent Manifesto for London also recognises, opening-up more land for development must be pursued in a controlled fashion that can command broad support. This may be best achieved through identifying specific well-bounded areas, with potential for dense development, to be excluded from the green belt – removing the fear of continual incursion into other areas. This should also be buttressed by ‘deals’ to enhance environmental quality across other nearby green belt areas, and to upgrade communications links.

Of course, these ideas are speculative – the point is that willing partners and public confidence will be required in order to find solutions to the housing crisis across the South East. As the most powerful political actor in the extended region, the Mayor of London could play a crucial leadership role in this process, by helping to negotiate deals with the government and to build habits of co-operation among regional partners.

But most importantly, the new Mayor must recognise that London simply isn’t a free-standing city-state, and that it can’t ‘consume its own smoke’ in accommodating its projected population growth. Securing a decent quality of life, both for Londoners and their South East neighbours, will require region-wide efforts to re-model a much-valued – but outdated – green belt for the 21st century.

Tuesday, 12 April 2016

Effectiveness of place-based policies: UK evidence

Posted by Elias Einiö and Henry Overman

First published on VOX EU 


Areas experiencing poor economic performance are often targeted by governments with programmes aimed at improving employment. However, there are concerns that any increases in employment come at the cost of reduced employment elsewhere. This column examines the displacement effects of one such programme in the UK. While employment increased within the targeted areas, there were comparable decreases in employment just outside the areas’ boundaries. These findings suggest place-based policies should focus on traded activities that are less susceptible to local displacement effects. 

Governments around the world target large amounts of money at areas experiencing high unemployment and poor economic performance. In the EU, regional policy accounts for around 35% of total community spending. On top of this, many national governments run extensive programmes aiming to alleviate deprivation in the poorest areas. For example, in the US, Kline and Moretti (2014) have estimated that around $95 billion is spent annually on spatially targeted economic development programmes by federal and state governments. 

There’s little doubt among economists that well-designed support programmes can increase employment in supported parts of the economy. However, the worry is that these improvements may come at a cost of reduced employment in the unsupported parts of the economy. Unsupported businesses may well suffer from the assistance provided to their government-supported competitors. This has long been a particular concern with spatially targeted policies that provide support to firms in some areas, but not others. What if these policies simply shuffle employment from one area to another? If that shuffling occurs at large scales (say from the South to the North of England) then this may be consistent with government policy objectives. But what if, instead, any displacement happens at small spatial scales? If that’s the case, governments may be spending considerable sums of money to achieve little additional employment at either national or local level. Add to that the potentially large inefficiency losses due to higher tax burdens (often considered to be around 40%) and in the worst case scenario spatially targeted interventions may even cause significant net welfare losses. 

While these concerns over adverse displacement effects are long standing, there is little causal evidence on whether they occur in practice. A number of recent studies have begun to address this gap in our understanding of the effect of these policies. For example, in their 2013 study of a French active labour market programme implemented using a large-scale field experiment, Crépon and co-authors (2013) showed that supporting unemployed job seekers increases their likelihood of finding a job, but at the same time reduces the employment prospects of unsupported job seekers in the same local labour market. In another study, Hanson and Rohlin (2013) looked at areas just outside successful Enterprise Zones (a US policy targeted at encouraging enterprise in declining areas) and compared them to areas just outside unsuccessful zones, finding substantial evidence of displacement (areas just outside unsuccessful zones do relatively better because they don't experience the displacement). In contrast, Ham et al (2011) find no evidence of displacement effects for three US place-based programmes when comparing a set of nearest ineligible Census Tracts (contiguous to the treatment area) to a set of second nearest ineligible Census Tracts.

In a recent study, we add to the available evidence by looking at local displacement effects with the help of extremely fine spatial data on employment and businesses in the UK. We examined spillover effects in local markets at the boundaries of areas supported by the Local Enterprise Growth Initiative (LEGI) – a UK programme that targeted deprived areas in 2006-2011. We observed that the programme increased employment on the LEGI-side of the treatment area boundary, but this came at the cost of comparable employment losses in untreated localities just on the other side of the boundary. The data also suggested that these effects vanish quickly when moving away from the LEGI boundary, pointing towards displacement in local markets. Moreover, none of these effects persist after the programme was abolished in 2011. Figure 1 provides a graphical presentation of our results. It shows growth rates for employment within 1km-wide bands constructed based on the distance from the nearest LEGI area boundary. The estimates are based on employment data at a fine spatial scale and allow for differences in area characteristics as well as unobserved trends in employment in the neighbourhood of LEGI areas. The figure reveals a striking pattern of effects at the LEGI boundary, with the area just inside the boundary seeing employment gains, while the control area just outside the programme area suffered from employment losses. This pattern of results suggests significant displacement of employment in a small neighbourhood around the LEGI boundary. When looking at unemployment, we find no displacement effects, which is unsurprising given that workers are free to cross the LEGI boundary and the programme appears to deliver no net job creation.

Figure 1. Displacement of employment at the LEGI boundary 



Notes: Difference-in-difference estimates by 1km-wide control and treatment rings from column 2, table 4 Elias and Overman (2016). The outcome is the log change in employment from 2004 to 2009.

Because similar businesses that are located close to each other often compete in the same local product or service markets, displacement effects at the boundary of the programme area are not unexpected. On the contrary, they are predicted by theory – hence the concerns of many economists about the impact of such spatially targeted programmes.

The bottom line from our results is that LEGI did little to increase employment in the most deprived areas of England. The direct impacts of the intervention on the target area is simply attenuated by loses elsewhere in the local economy. Although we are unable to identify these spillover effects at a wider spatial scale (national or global, for example), our study makes an important contribution to the debate by showing that such effects seem to be at play at small spatial scales, within local markets. Moreover, our findings support the view that even relatively large place-based interventions may struggle to ‘transform’ the local economy (given that even the displacement effects do not persist post-funding).

Our findings are especially worrying for area-based programmes that aim to help economically disadvantaged areas because the neighbouring areas that suffer from negative displacement effects tend also to be among the most deprived (given that deprivation is persistent across space). Fortunately, there are things we can do that may reduce the amount of local displacement. For example, LEGI tended to target non-traded services for which the local market is fixed in size. This is precisely the kind of situation in which we would expect displacement to occur. To give a specific example – as one hairdresser expands, it’s pretty likely that business at neighbouring hairdressers is going to be negatively affected because most people simply do not travel long distances to get their haircut.

In contrast, supporting traded activities is less likely to lead to local displacement because the business stealing effect will hit firms located elsewhere in the economy (or even abroad). Consistent with this, research by Criscuolo et al suggests that the UK Regional Selective Assistance programme (which only provides support to firms that do not serve local markets) does appear to generate additional employment that is not simply the result of displacement from nearby areas (resulting in an overall increase in local employment).

So we can do better. But reforming these programmes requires policy makers to take concerns over displacement seriously. Better evidence is, hopefully, one way that we can convince them to do so.

References 


Crépon, B, E Duflo, M Gurgand, R Rathelot and P Zamora (2013) “Do labor market policies have displacement effects? Evidence from a clustered randomized experiment”, Quarterly Journal of Economics, 128(2): 531-580.

Einio, E and H G Overman (2016) “The (displacement) effects of spatially targeted enterprise initiatives: Evidence from UK LEGI”, CEPR Discussion paper, DP 11112. / Spatial Economics Research Centre Discussion Paper 191. 

Kline, P and E Moretti (2014) “Local economic development, agglomeration economies, and the big push: 100 years of evidence from the Tennessee Valley Authority”, Quarterly Journal of Economics, 129(1): 275-331.

Hanson, A and S Rohlin (2013) “Do spatially targeted redevelopment programs spillover?”, Regional Science and Urban Economics, 43(1): 86-100.

Ham, J C, C Swenson, A İmrohoroğlu and H Song (2011) “Government programs can improve local labor markets: Evidence from state Enterprise Zones, federal Empowerment Zones and federal Enterprise Community”, Journal of Public Economics, 95(7-8): 779-797.

Thursday, 3 March 2016

Could Abolishing the Stamp Duty Solve the UK Housing Affordability Crisis?

Posted by Christian Hilber (LSE Geography & Environment and SERC) and Teemu Lyytikäinen (VATT Institute for Economic Research)


First published in Disclaimer Magazine


In a recent article, the Economist argued that the current policy debate relating to the UK housing affordability crisis may focus too much on housebuilding. It may overlook a bigger potential source of supply: existing homes. The argument goes as follows: overcrowding has gotten worse over the last 20 years, but more than one-third of households have two or more spare bedrooms. The solution: abolish the Stamp Duty Land Tax (SDLT). This would boost housing transactions and lead to a more efficient allocation of housing. It would also encourage elderly couples to downsize after their children fly the nest. The Economist estimates that there are 16 million or so spare rooms. Allocating housing more efficiently would free up some of these.

Other Economists have branded the SDLT: it creates a mismatch in the housing market and can have adverse consequences on the labour market. The SDLT creates a disincentive for people to move house, in turn implying that the unemployed may be less flexible in their search for new employment. The consequence may be longer unemployment spells and higher unemployment rates.

There is convincing evidence for the UK, the US or Canada, that land transfer taxes - such as the SDLT - do reduce household mobility very substantially. But to date little is known about whether land transfer taxes mainly distort housing-related or job-related moves.

Some simple considerations suggest that the adverse effects of land transfer taxes may be confined more strongly to the housing market. To see why consider potential movers who compare the cost of a move with the corresponding benefit. The cost of the move - in the form of the transfer tax - will be independent of the nature of the move. However, the benefit associated with a move will likely vary widely depending on the type of move. Job-related moves and long-distance moves are typically more momentous and associated with larger benefits, typically happening regardless of the transfer tax. Housing-related moves and short distance moves, however, are often more incremental changes that are associated with smaller benefits that often do not outweigh the additional tax cost.

In a recent SERC Discussion Paper we test this prediction. Exploiting a discontinuity in the SDLT schedule (where the tax rate jumps from 1 to 3 percent), we isolate the impact of the tax from other determinants of mobility. What we find is intriguing. A higher SDLT has a strong negative impact on housing-related and short distance moves but does not adversely affect job-induced or long distance mobility. In other words: the distortions associated with the SDLT appear to be mainly confined to the housing market - not the labour market.

The estimated distortions in the housing market are not only significant in a statistical sense; they are also economically very meaningful. Back-of-the-envelope calculations imply that the welfare loss associated with the rate increase from 1 to 3 percent is between 36 and 47 percent of the additional revenue generated by the tax increase. The SDLT is a staggeringly inefficient tax because it creates very substantial mismatch in the housing market. There is a strong case for replacing it by another less harmful tax - ideally an annual local Land Value Tax or property tax. For the reasoning see here

Abolishing - or replacing - the SDLT would allow many more young families with children to live in more adequate housing space and elderly people to spend the monetary equivalent of a bed room or two on other things. And it could bring about a tremendous welfare improvement by means of a more efficient use of housing space.

But can abolishing the SDLT resolve the British housing affordability crisis? Probably not. Abolishing (or replacing) the SDLT will likely result in a more efficient allocation of space, with fewer underused or unused rooms. But it may not generate any (or much) new supply in the form of new housing units. Consider a stylized world with 50 small flats and 50 big houses and 50 empty nesters and 50 households with children. Initially the match is bad so that half of the units are misallocated. Now relocation costs are reduced significantly - not to zero because there are other moving costs apart from the SDLT - and the match becomes nearly perfect: the empty nesters move to the flats and the young families relocate to the larger houses. The existing housing space (rooms) will be used more intensively, but the reform would not create any new housing units, ‘just’ a better match.

In reality we have of course immigration and new households form each year, so more and more people need to be housed and, as a consequence, demand pressure increases over time. Moreover, housing is to some extent ‘malleable’. Even the existing British planning system allows some sub-division of housing units. In our stylized example, some of the large houses may be subdivided into flats and this would permit Adam Smith’s ‘invisible hand’ to house some newcomers (migrants or newly formed households) into the housing market. In such a setting, indeed abolishing the stamp duty could help - to some limited extent - alleviate the severity of the housing affordability crisis. But it could certainly not solve it.

Does the policy debate in the UK focus too much on housebuilding? The Economist argued that even if the government succeeds in spurring on house builders, prices may continue to gallop upwards because (1) “Britain is bad at putting houses where they are most needed” and (2) even if new developments are added in overheating parts of the country, “this may fail to tame prices” because according to a recent LSE London report new development may actually increase the value of housing in their immediate surrounding areas.

Britain is currently bad at putting houses where they are most needed. This is because the British planning (and tax) system is seriously flawed. It gives very few incentives to local authorities to permit any development at all, thus ultimately causing the housing affordability crisis. This is reinforced by NIMBYs trying to prevent any new development in their backyard, because it could adversely affect their views, lead to congestion or threaten their asset values. NIMBY pressures will be greatest in the most desirable - high demand - places. The only local authorities that have some real incentives to permit development are those with high unemployment rates. Commercial development may generate jobs and even residential development will temporarily create local construction jobs. So, construction takes place in economically disadvantaged - low demand - areas where new housing is least needed. The right conclusion however should not be not to focus on housebuilding. The right conclusion ought to be to fix the planning and tax systems, so they can provide the right incentives to local authorities to build housing where it is most needed.

The second argument put forward by the Economist - that new development locally may increase prices locally - is not necessarily incorrect but very misleading. If a new development brings in new infrastructure and boosts the local economy through extra spending on shops and services, this may indeed cause house prices to increase locally (this is what the LSE London report suggested). But the Economist muddles up two effects. The first effect, the supply effect, all else equal unambiguously lowers house prices. The second effect, more amenities and better infrastructure, all else equal will unambiguously increase local demand for housing and thereby increase house prices locally. It is well possible that the latter effect in some instances outweighs the former because additional amenities and better infrastructure draw in demand from elsewhere. But to conclude from that that more supply increases prices is wrong - or at least very misleading in the sense that it muddles the two effects. Moreover, and importantly, what this very “partial equilibrium” argument ignores is the fact that new supply locally - while increasing demand locally - will reduce the demand pressures elsewhere in the region. So a local development will marginally reduce prices, not necessarily in the location itself, but in the wider surrounding areas. Such an effect on wider surrounding areas triggered by one local development will likely be very small, possibly too small to measure empirically. However, thousands of local developments in overheating areas will likely reduce demand pressures in these overheating areas very substantially, helping to reduce house prices notably, and arguably even more importantly house thousands of households in desirable places. The Economist reached the wrong conclusion (that too much focus is on housebuilding) because it ignored this “general equilibrium” argument and neglects the fact that new houses in high demand places would bring huge benefits even if their impact on prices were limited.

The SDLT is a very inefficient way of collecting revenue. Abolishing or replacing the tax could improve the match of people and dwellings noticeably, but it would be unlikely to create many additional housing units - by means of subdivision - and it would be unlikely to affect prices much. The uncomfortable truth is that, to solve the housing affordability crisis, policy makers won’t get around fixing the broken British planning system. This is a big and complex political endeavour but one with huge returns for generations to come.