Thursday 28 February 2013

Council Tax increases

I know I am hardly the first person to point this out, but local government finance in the UK really is a mess (I was reminded of this by today's stories on council tax increases). I wonder whether the government realise that failure to sort this out has major implications for the extent to which any serious decentralisation can take place.

Take New Homes Bonus, for example. This is the payment that is supposed to provide incentives to local governments to allow more house building. At best, unfortunately, the NHB (double council tax for six years) offsets the direct costs to LAs of allowing more house building. So NHB removes the disincentive, but doesn't provide any positive incentive (which you tend to need to offset local objections). In other countries, this incentive comes from the fact that local tax revenues increases as population expands. In the UK, where council tax only covers, at best, about a fifth of local government expenditure that incentive is essentially non-existent.

Business rate retention has similar problems. The pro-growth incentives are dampened by the fact that periodically the system will be reset wiping out any increased revenues. That wouldn't happen if local tax revenues were more firmly linked to the local tax base.

I suspect that the government is about to run up against similar problems with some of the Heseltine proposals. It's great that the government is seriously considering moves towards a 'single pot' that would allow local authorities more flexibility over spending decisions. But some of these LAs will make bad decisions that end up costing money. With a different local tax system they would face strong pressures to deal with this failure because a good proportion of those costs would fall locally. Instead, under the existing system central government will almost certainly end up picking up the bill for LA failure.

In short, serious decentralisation almost certainly requires reform of local government financing to increase the importance of local tax bases. This, of course, has the potential to generate winners and losers - a very difficult proposition for government to deal with.

Tuesday 19 February 2013

Solving London's Housing Crisis

I see Richard Rogers had a piece in the Evening Standard last night calling for a greater focus on design and brownfield as the means of solving London's housing crisis. I confess to being deeply puzzled. In 1999 the Urban Task Force (chaired by Richard Rogers) advocated precisely this solution. The report received cross-party support and underpinned Labour's approach to urban and regeneration policy. For example, Labour introduced a 60% target for the proportion of development that should occur on brownfield land. Unlike most housing targets, this one was actually met with many Local Authorities achieving considerably higher proportions of development on existing sites.

The problem, of course, is that much of this brownfield land isn't in places where people want to live and is expensive to build on. As a result, private sector demand is low and costs are high. Public money filled some of the gap, but not all of it so we got low overall development levels. This shortfall in supply helped drive up prices (and created affordability problems), particularly in parts of the country where demand was high. Calls for continued brownfield development need to explain how we fix this problem in a world with far less public expenditure to go around. Sure, 'better design' (to the extent it drives down costs rather than increases them) will help but I can't believe the effects can be that large.

Next, come the same old arguments about better use of the existing stock. Yes, England has around 700,000 empty homes. But only 72,000 of these are in London and only 24,000 of those are long term empty (more than six months). Should we try to make better use of those 24,000 properties? Of course. Will they solve London's housing crisis? No. Likewise, empty flats above shops which "may [my emphasis] not be counted in official statistics".

These arguments are simply a distraction from the central issue - the appropriate role for the planning system in helping solve the housing crisis. Our research suggests that planning constraints play a large and significant role in driving up the prices of residential and commercial development. That's why I believe some relaxation of constraints is a crucial component of any credible solution to the housing crisis. That would include some building on low (amenity) value greenbelt land. But I would also like to see a relaxation of height constraints and more tall buildings in our relatively expensive cities (including London). An 'up and out' strategy, if you want. Note, that this is an argument about the kind of land released by the planning system and restrictions imposed. Not, as Richard Rogers would caricature it, a call for radical relaxation of planning restrictions and an abandonment of the green belt.

Richard Rogers thinks we can solve the housing crisis without resorting to such an 'easy solution' (sic). But given that existing planning policy is partly to blame for the housing crisis, more of the same seems like a very odd solution.


Wednesday 13 February 2013

Postgraduate fees: access all areas?

Posted by Dr Philip Wales, SERC

As the first cohort of undergraduates facing the new, higher rate of tuition fees go back for their second term at university, the debate over the impact of fees is starting to shift. Building on concerns about access to undergraduate courses, a growing chorus of academics, politicians and university groups have started to worry about the impact of fees on postgraduate higher education.

With good reason: Students from poorer backgrounds are under-represented in postgraduate study, and there is evidence that growing fees above undergraduate level may be a part of the explanation, according to new research published by SERC. Between 2003-04 and 2008-09, postgraduate fees increased by an average of 31.8%: from £3,232 per year to just over £4,261. In the face of budget cuts, the publicly-funded Research Councils have announced significant reductions in the number of supported Masters and PhD students, and there is mounting concern that higher undergraduate fees may feed into much larger increases over the next few years. According to the 1994 Group of Institutions, postgraduate fees rose 11% this year alone.

The findings, which I presented at the Royal Economic Society Annual Conference in March, at Cardiff Business School and at the LSE, draw on a rich new dataset of postgraduate tuition fees by institution, subject and time. Using micro-data from the Higher Education Statistics Agency (HESA), I find that a rise in postgraduate fees of 10 per cent leads to a reduction in the probability of students progressing directly on to a postgraduate degree of between 1.7 per cent and 4.5 per cent.

Progression to postgraduate study – which is crucial for those hoping to pursue academic careers or to access higher level professional positions – is heavily weighted towards students from higher socio-economic backgrounds. Students from managerial or professional backgrounds, for example, account for 60 per cent of those progressing, while students from the lowest socio-economic groups - routine occupations, never worked and long-term unemployed – account for no more than 4 per cent. 

Unsurprisingly, I find that first degree results make a big difference. Those earning firsts or 2:1s are over 10% more likely to do further study than those with 2:2s or below. But even after controlling for a wide range of other characteristics, there is worrying evidence of different participation rates among otherwise identical groups. Attendance at a private school prior to university significantly increases the likelihood of progression by between 0.9 per cent and 2.4 per cent. Men are around 3 per cent more likely than women to stay on.

The research makes the case for several important policy changes. Firstly, a systematic effort is needed to monitor all postgraduate tuition fees in the UK. The absence of a database of fees by subject, institution and qualification level has presented a significant barrier for research and is an essential pre-requisite for efforts to effectively monitor access above undergraduate level.

Secondly, there is a need to re-examine how public support for postgraduate study is allocated. The results suggest that students from poorer backgrounds are under-represented in postgraduate study and that the jump from undergraduate to postgraduate study presents an additional barrier. Policy makers should reconsider the funding arrangements for postgraduate study – and in particular, the extent of public support for students from low income backgrounds who aspire to study beyond undergraduate level.

Thursday 7 February 2013

Comparing prices and rents in Central London with new data

Posted by Dr Philippe Bracke, LSE and SERC 

As homeownership rates fall across the country, ‘Generation Rent’ seems here to stay. But beyond the media coverage, we know surprisingly little about the private rented sector – even down to the most basic issue: price dynamics.

The National Statistician's Review of Official Housing Market Statistics, issued in September 2012, has identified the lack of an official private rental index as one of the three major issues currently affecting housing market statistics. That ‘data gap’ makes it harder for policymakers to make effective decisions.

When official sources are inadequate, private datasets can be very useful. In recent research for SERC I analyse rental data from John D Wood & Co., a real estate agency. My main focus is on how prices and rents relate. The price-rent ratio – or its inverse, the rental yield – is an important determinant of people’s tenure decisions. And for investors, yields are fundamental to assess the viability of real estate investments.

Having access to individual rental contracts, as well as individual sales, I can compare prices and rents for properties with similar characteristics. I start by computing average prices and rents within “cells” of properties with homogeneous characteristics (eg, 2-bedroom flats in SW7). Using data for the period from 2004 to 2011, I identify two patterns:
  1. Bigger properties display lower yields (higher price-rent ratios): this applies to houses vs. flats, but also to big flats vs. small flats. 
  2. Properties located in more expensive neighbourhoods deliver lower yields.
These patterns are well-known among market practitioners. Moreover, they are not limited to these years or to Central London specifically: in the nineties, the Joseph Rowntree Foundation produced a report on rents and yields that highlighted the same stylised facts. However, these patterns have not been the subject of academic studies, so far.

Standard methodologies cannot take into account unobservable “quality” differences between properties. Results will be biased if, for instance, within a same cell properties for sale have higher quality than properties for rent. To overcome this issue, I run a more sophisticated analysis on a subset of the data. For each rental property in the dataset, I search the Land Registry (which contains all sales in England) and check when the property was last sold. If the property was sold less than six months before the beginning of the rental contract, I match its price and rent and compute its rental yield directly. Reassuringly, the results that I obtain with this subset of the data confirm the two patterns described above.

What explains these persistent differences in yields between properties of the same city? One reason could be unobserved costs. If transaction costs rise less than proportionally with prices, for instance, trading smaller properties becomes relatively more expensive. These extra costs would offset the higher gross yield for smaller properties so that ex-post returns are equalised. Or maybe ex-post returns are truly different: more expensive properties and exclusive areas display lower rental yields because they are perceived as safer, or, alternatively, investors expect to gain from pure price appreciation, not from rental income.

Our understanding of the private rental market is still in its infancy, at least for academics. But with an open-minded approach to data, we are starting to learn more.

Monday 4 February 2013

Strange Bedfellows - Neighbourhood Effects

In a post last week I mentioned Tony Travers' Evening Standard piece on the implausible alliances emerging on either side of the green belt debate.

Seems the same may be true of the arguments around neighbourhood effects. One of SERC's first policy papers challenged "the belief that mixed community policies can effectively tackle poverty or reduce income inequality, on the basis that residential segregation is essentially a consequence not a cause of income inequality".

Now, Max Nathan directs me to a recently published piece making similar arguments, but from a (rather) different political perspective: "This article advances a critique of the ‘neighbourhood effects’ genre in urban studies, by arguing that an acceptance of the ‘where you live affects your life chances’ thesis, however well-intentioned, misses the key structural question of why people live where they do in cities. By examining the structural factors that give rise to differential life chances and the inequalities they produce, and by inverting the neighbourhood effects thesis to: your life chances affect where you live, the problem becomes one of understanding life chances via a theory of capital accumulation and class struggle in cities. Such a theory provides an understanding of the injustices inherent in letting the market (buttressed by the state) be the force that determines the cost of housing and therefore being the major determinant of where people live. The article draws on Marxist urban theory to contend that the residential mobility programs advocated by neighbourhood effects proponents stand on shaky ground, for if it is true that ‘neighbourhood effects’ exceed what would be predicted by poverty alone, moving the poor to a richer place would only eliminate that incremental difference, without addressing the capitalist institutional arrangements that create poverty."

Full reference for anyone interested:
Slater, T. (2013), Your Life Chances Affect Where You Live: A Critique of the ‘Cottage Industry’ of Neighbourhood Effects Research. International Journal of Urban and Regional Research. doi: 10.1111/j.1468-2427.2013.01215.x. Abstract: