Monday 17 August 2009

New homes are too small

CABE are talking about new homes. According to a new survey they are too small and CABE are suggesting that it is all the fault of developers: "Housebuilders often protest that people won’t be able to afford houses with more space. In fact, the barrier is the profit margin that publicly limited companies feel obliged to make. By building the smallest homes in Europe, they’re not giving people the choice. Homebuyers deserve well designed homes that allow them to choose how they live."

The solution, according to CABE chief executive Richard Simmons?: "We need local planning authorities to ensure much higher space standards before giving developments the go-ahead"

I am completely baffled by this. We have a planning system that strongly restricts the supply of land for housing (especially in places where people want to live). This drives up land prices - upwards of £8m per hectare in the most popular parts of the South East - which, in turn, tends to reduce the size of houses (because you have to buy the land before you can build on it). Additional land use regulation - in the form of density requirements and brownfield restrictions further compound this effect (the former directly; the latter because remediation costs mean that you need to get a higher return per unit than if you build on greenfield). In other words, our land use planning system unintentionally generates huge incentives to build small houses with small gardens. [i.e. "Rabbit hutches on postage stamps"]

And somehow the solution to this is to have yet another piece of the planning apparatus which refuses planning permission unless developers build houses of a minimum size? It clearly won't solve the problem. But, if even partially implemented, it would presumably mean less houses and higher house prices. Not sure that this will help in meeting government objectives on "affordability" ...

Friday 14 August 2009

Devolving public expenditure cuts

I see that my colleague Tony Travers, writing with Simon Jenkins, is calling for greater devolution to local authorities as a way of effectively implementing cuts to public expenditure.

They suggest two principles. The first concerns true delegation of responsibility which they argue leads to experimentation at the margin. What they don't point out is that it also leads to greater competition amongst local authorities, something which economists generally argue is a good thing.

The second principle is that devolution must not disadvantage poor areas. They argue that this can be achieved through redistribution of local revenue. Unfortunately, this is a very narrow interpretation of "must not disadvantage poor areas". If, however, you take a broader definition this leads down a long slippery slope to opposing any differences across places because "postcode lotteries" are unfair.

Focusing instead on poor people helps avoid this problem. My local authority might decide to increase local taxes rather than, say, cut funding to my local art gallery. My love of art and my vast disposable income (this is a hypothetical example) mean I can live with this. In the neighbouring authority poorer households decide they would rather forgo the art and prefer to see their taxes cut.

More generally, when expenditure is devolved the overall pattern more closely represents local preferences. In turn, this closer link between preferences and local expenditure increases the incentives of people to live with others who share their preferences. As these preferences are likely highly correlated with income or education we get more segregation. We end up with some local authorities housing mainly poorer households and providing the kind of local services that they want. Other communities are richer and provide more (or maybe less) local services. These differences make all individuals better off, but you might never guess this by looking at the effect on poor areas.

Wednesday 5 August 2009

Community Cohesion

CLG has been talking about the economic benefits of community cohesion. It is suggested that new figures show that increasing cohesion by 1 per cent across the country can potentially save up to £530m in reduced crime.

This figure is arrived at by pulling together two numbers. One is on the costs of crime (I haven't looked at this in detail). The other is on the correlation between crime and some measures of cohesion. The correlation comes from data on 20 areas (effectively 40 wards out of England's approximately 8,000). Crucial assumption number one is therefore that these areas are representative. A 0.5% sample is unlikely to achieve this. That aside, the crucial thing is whether or not these numbers capture a causal relationship from cohesion to crime.

Concluding that the relationship was causal would require us to rule out the possibility that the correlation was not just picking up some other characteristics of neighbourhoods that are correlated with both crime and measured cohesion (say, for example, the income level of the neighbourhood). At the very least, we would want to rule out some of the more obvious possibilities. Unfortunately, the original research didn't do this so we have no way of knowing what causes this relationship. Research that is more careful suggests that it is very difficult to attribute any differences in outcomes that we care about to the causal impact of these kind of community variables.

Cohesion is a bit like motherhood and apple pie. What reasonable person could be against it? Spending public money to achieve it may well be a good thing. But, whatever the claim, this research doesn't help improve our understanding of the wider economic benefits of doing so.