Friday 13 November 2015

Offshoring and the geography of British jobs

Posted by Luisa Gagliardi, Simona Iammarino, Andrés Rodríguez-Pose
Originally posted on VOX EU 

Offshoring has risen in all advanced economies in recent years. This column analyses the impact of offshoring trends in the UK, where offshoring in services has followed the abundant offshoring in manufacturing, by uncovering their spatial implications. The impact of offshoring in places more exposed to such trends has been significantly negative on routine occupations. On the other hand, when investment abroad targeted developing economies, the effect on job creation in non-routine occupations was positive. Offshoring trends and their implications Complaints and opposition to offshoring deals by multinational enterprises (MNEs) have risen in all advanced economies in recent years. Offshoring trends, especially towards lower-wage developing and emerging countries, have been brought under the spotlight as being responsible for the destruction of low-skilled jobs and the progressive deterioration in the economic fortunes of domestic employees at the bottom of the employment ladder. During the 2000s, analyses of newspaper articles on offshoring indicated that references to the subject increased steadily both in the US (e.g. Mankiw and Swagel 2004) and in the UK (e.g. Abramovsky et al. 2004).

Fears about job losses have been traditionally centred on manufacturing. However, recent data show that services – as they become more easily tradeable due to improvements in technology – may be subject to similar trends. Examples of such drifts abound. In 2006, Barclays Bank was the first UK bank to negotiate a framework with the unions over the outsourcing of jobs to low-cost countries. More recently, it was again a media target as a result of moving hundreds of back-office jobs to India. Other firms, such as Adecco (a UK labour recruiting agency) and British Airways, are among a growing number of British companies that have opened offices and/or call centres in developing economies, often facing the wrath of public opinion.

The implications associated to offshoring trends, especially with respect to their labour market impact in the home economy of the multinational enterprise, have also become a popular topic in the academic debate. However, most of the existing evidence has pointed to an overall modest impact of offshoring (e.g. Grossman and Rossi-Hansberg 2006, Robert-Nicoud 2008, Amiti and Wei 2009, Barba Navaretti et al. 2010). Countries relocating low value-added, routine activities abroad and retaining higher value-added activities at home are expected to gain from the rationalisation of their value chain, as job losses in routine occupations may be more than offset by new jobs in non-routine occupations.

Offshoring trends in Great Britain: New evidence 

Our work rests on the assumption that the distribution of benefits and costs across geographical segments of the labour market and occupation typologies in the UK is shaped by changes in the industry composition of offshoring. Differences in the industry mix of local labour markets mean sectors vary in their exposure to international relocation of production activities in both manufacturing and service industries. The spatial implications associated to offshoring trends are of primary importance, since the same forces that are likely to spur international convergence – i.e. globalisation of production – may also seemingly prompt subnational polarisation and divergence.

Figure 1. Routine and non-routine jobs in Great Britain, 1999-2008

Source: ONS/ASHE.

Our research has analysed the impact of offshoring trends by uncovering their spatial implications, a factor which was generally overlooked in previous analyses. The UK represents a particularly interesting case for analysing how offshoring alters job composition.

  • First, the country has undergone progressive job polarisation (Goos and Manning 2007), with labour market disadvantages increasingly concentrated in specific occupational categories. Routine occupations have declined rapidly over the past decades, whereas there has been a slight increase in the number of non-routine jobs (Figure 1). 
  • Second, labour market disadvantages were geographically concentrated even prior to the offshoring surge in the 2000s, with a strong spatial clustering at the extreme of the occupational distribution (Figures 2 and 3). Data from just before the turn of the millennium show that routine occupations were overrepresented in some parts of the UK, mainly in the midlands, the north and the northwest, Wales, and parts of Scotland. By contrast, non-routine activities were overwhelming concentrated in London and the southeast, with spikes in cities such as Aberdeen, Edinburgh, Harrogate, Manchester, and Bristol. 
  • Third, the UK also experienced sizeable offshoring especially towards developing and emerging countries (Figure 4), with a growing percentage of outward flows occurring in the service sectors (e.g. Abramovsky et al. 2004, Hijzen et al. 2005, Sako 2006).

Figure 2. Spatial distribution of routine jobs across local labour markets (TTWAs) in the UK, 1999

Source: ONS/ASHE.

Figure 3. Spatial distribution of non-routine jobs across local labour markets (TTWAs) in in the UK, 1999

  Source: ONS/ASHE.

Figure 4. Outward investments abroad from the UK, 1998-2008 

Source: ONS/ASHE

Offshoring trends between 1998 and 2007 had important distributional consequences at both the spatial and individual level. The impact of offshoring in places more exposed to such trends as a consequence of their pre-existing industry specialisation was significantly negative on routine occupations. Whereas job destruction of routine occupations took place regardless of whether the offshoring was directed towards developed or developing/emerging economies, job creation in non-routine occupations only happened when investment abroad targeted the latter. In addition, compensation effects of job creation in non-routine occupations were strengthened in the long term, once efficiency gains linked to the geographical rationalisation of production had been capitalised. 


The results of our study have significant implications. Although efficiency gains coming from the geographical fragmentation of production activities may emerge, particularly over time, automatic compensation mechanisms acting through the increase in the demand of domestic skill intensity may not necessarily be able to eliminate the costs in the home economy. Specialisation following offshoring has in fact been mainly ‘functional’ within industry, rather than across the industry mix (e.g. Robert-Nicoud 2008, Crinò 2009). This implies that adjustments in industry structures within each local labour market may be rather slow.

Therefore, the consequences of offshoring are likely to be particularly severe in the short and medium term in specific areas with a high initial specialisation in routine activities. The extent to which such processes generate and reinforce hot spots of job market disadvantages for specific typologies of workers and in locations more exposed to offshoring trends has relevant distributional consequences.

The overall impact of offshoring thus poses important challenges to policy design and implementation. Initiatives targeting the mitigation of the negative consequences of offshoring are deemed necessary in regions characterised by greater risk of exposure to the relocation of production, and in these areas to specific categories of workers. Examples of these initiatives are income support schemes for specific vulnerable groups, coupled with both effective industrial policy interventions to reconvert and revitalise old industrial areas towards higher value added activities, and new approaches to training and skill upgrading programmes.


Abramovsky L, R Griffith, and M Sako (2004), “Offshoring of business services and its impact on the UK economy”, Advanced Institute Management (AIM) Research, November.

Amiti, M and S J Wei (2009), “Service offshoring and productivity: Evidence from the US”, The World Economy, 32(2), 203-220.

Barba Navaretti G, D Castellani, and A Disder (2010), “How does investing in cheap labour countries affect performance at home? Firm-level evidence from France and Italy”, Oxford Economic Papers, 62, 2, 234-260.

Crinò, R (2009), “Offshoring, multinationals and labour market: a review of the empirical literature”, Journal of Economic Surveys, 23(2), 197-249.

Goos, M and A Manning (2007), “Lousy and lovely jobs: The rising polarization of work in Britain”, Review of Economics and Statistics, 89(1), 118-133.

Grossman, G M and E Rossi-Hansberg (2006), “Trading tasks: A simple theory of offshoring”, NBER, WP 12721.

Hijzen A, H Gorg, and R C Hine (2005), “International outsourcing and the skill structure of labour demand in the United Kingdom”, The Economic Journal, 115(506), 860–878.

Mankiw, N G and P Swagel (2006), “The politics and economics of offshore outsourcing”, Journal of Monetary Economics, 53(5), 1027-1056.

Robert-Nicoud, F (2008), “Offshoring of routine tasks and (de) industrialisation: Threat or opportunity—And for whom?” Journal of Urban Economics, 63(2), 517-535.

Sako, M (2006), “Outsourcing and offshoring: implications for productivity of business services”, Oxford Review of Economic Policy, 22(4), 499-512.

Thursday 5 November 2015

Facebook or Wikipedia? ICT and Education: Evidence from Student Home Addresses

Dr Rosa Sanchis-Guarner, BA Postdoctoral Fellow at the IC Business School and CEP Research Associate 

The Government is currently investing over £1 billion to provide superfast broadband to 95% of the UK by 2017. Both the European Union and the US have similarly ambitious plans to increase access to broadband services providing download speeds of 30Mbps or above. These investments are justified as having positive impacts on individuals and businesses, ranging from higher productivity to more flexible working schedules.

One important justification is that better broadband will improve educational attainment. Students of all ages spend a lot of time online, and online educational resources are increasingly popular (YouTube or Wikipedia, or more recently massive open online courses - MOOCs). However, the existing evidence on the impact of broadband is far from conclusive as it is hard to assess the causal impact of broadband on socio-economic outcomes. In our recent paper we combine a rich collection of microdata with an original empirical strategy to study whether better broadband improves educational attainment. However, despite government investment in this area we find improved broadband has no causal impact on pupils’ achievement.

In order to understand the relationship between ICT and educational achievement we set up a simple theoretical model that decomposes the effect into two mechanisms: the impact of ICT on study hours and the impact of ICT on study-hour productivity. On the one hand, reduced ICT costs could have a positive impact on learning productivity as, with faster connections, students can access more online educational content per unit of time (i.e. Wikipedia). On the other hand, students might decrease study hours by spending more time online on other activities (i.e. Facebook). The net effect is unclear.

To test between these two hypotheses - Facebook or Wikipedia - we use English microdata that allows us to link administrative test scores for the population of primary and secondary school student to the available ICT at their home addresses. We focus on the impact of ICT on standardised (Key-Stage) tests scores for English pupils aged 7 to 16 years old during the period 2002-2008. To causally estimate the impact, we exploit a well-known feature of DSL-broadband technology – that the length of the copper wire that connects residences to the local exchange station is a key determinant of the available internet connection speeds. Capacity constraints at the individual telephone exchange stations lead to invisible and essentially randomly placed boundaries of station-level catchment areas that in turn give rise to substantial and discontinuous jumps in the available ICT across neighboring residences. Variation in available broadband speed stems from jumps in the length of the copper wire that connects residences to their assigned exchange station on the slower side (longer distances to connected exchange) relative to the faster side (shorter distances to connected exchange) of a given boundary segment. We exploit this feature across more than 20,000 boundaries in England in a spatial regression discontinuity (RD) design.

The jump in available ICT across exchange station boundaries is substantial. The average difference in residential distances to their connected exchange station between neighboring residences on different sides of the boundary is 725 meters, 2,250 meters when restricting the estimation to the top third of boundary segments with the largest mean difference in connection distances. These discontinuous jumps in copper wire connection lengths translate into substantial differences in the available ICT across space. We find that the average jump in the time cost of accessing a given amount of online content rises by 22 percent when moving from the slow side of a boundary segment to the faster side of the invisible boundary (47 percent for the top third).

When turning to the effect of available internet speed on test scores, our estimates suggest that even very large changes in the available internet connection speeds have a precisely estimated zero effect on educational attainment. Our robustness checks show that the estimates are causally identified: house prices, student socioeconomic characteristics and access to local (dis-)amenities are unaffected by the boundaries. Using the additional microdata on student time use and internet use to quantify the channels underlying this zero overall effect, we find that jumps in the available ICT have no significant effect on student time spent studying online or offline, or on their study productivity. 

Access to fast broadband has been claimed as important for educational success, and the lack of such connections identified as a drawback for the development of rural communities. Our research suggests a less negative scenario. Given the amount of funds committed and the bold claims made about superfast broadband investment, more robust evidence is urgently needed. Some of the future work of the CEP Urbanisation Programme will focus on providing such evidence. So get off Facebook, and watch this space.

Sunday 25 October 2015

Business Rates: Hoorah! But Watch Out for Housing!

Posted by Paul Cheshire and Christian Hilber, SERC and LSE 

At last we have had a serious and radical policy change that really can improve one element of our dysfunctional, policy-induced development morass. As we showed in our 2008 paper the move to convert Business Rates into a purely and transparently national tax largely removed the incentives for Local Authorities (LAs) to permit commercial development. This increased the costs of office space substantially more than any feasible level of business rates might ever have done. Because it just induced an even greater shortage of supply.

Now we have a radical government proposal to make Business Rates a local revenue resource. This is splendid news, given how we showed that the present reluctance of LAs to allow office development combined with the Alice in Wonderland complexity of our planning system, amounted to a tax on office space of up to 800% and, even in a struggling city like Birmingham, of 250%.

Cheaper office space means more jobs and a more competitive service sector. People may argue rents are only a small fraction of business costs but, as we recently showed in another paper, the exact location and selection of sites makes a big difference to total factor productivity - at least in retail. Giving LAs a real incentive to permit commercial development also means businesses – with the exception of retail, which is still straitjacketed by Town Centre First policies – will have a freer selection of sites and micro-locations.

Sadly, however, there is a down side to this positive policy change. We all know we have a real housing crisis. Housing starts in England continue to wobble around their post 2007 crisis level and are still about a quarter down on their immediate pre-crisis levels and at less than half the level every informed observer argues is the minimum necessary. Consistent with this, the latest English Housing Survey showed a continuing rise in age for first time buyers with the proportion of 25 to 34 year old owner occupiers falling from 59 to 36% over 10 years; and for the first time ever, more owner occupiers did not have mortgages than did. In other words all the evidence shows that house building is not significantly rising from what was a 100-year peacetime low in 2010, that the supply and affordability crisis gets worse and the redistribution of housing wealth to the elderly continues.

The only policies on offer to address this crisis are what might be called magic; there is more than enough snake oil in all parts of the political forest but since the Conservatives are in power let us focus on theirs. There is the ‘Starter Homes’ initiative, tweaked at the Party Conference, and the Housing Minister promising that 1 million houses will be built by 2020. Neither begins to address the fundamental problem. This is lack of supply: supply of land to put houses on and the supply of space building upwards could deliver (building above 7 stories is frighteningly difficult – see the map here).

So we have promises and hare-brained schemes that will hardly increase the net building of houses at all. Since they go together with boosts to demand via, for example, Help to Buy, in the absence of a radical change to free up land supply, demand side measures mainly increase prices. So given the radical change in incentives the new policy on Business Rate revenues represents, what should we expect to happen? Well obviously LAs – desperately starved of funds – will fall over backwards to attract commercial development. Since the supply of developable land for housing is in effect almost perfectly unresponsive because of our planning system and NIMBY pressures, this means they will divert land to commercial development and away from housing. This is despite government policy trying to transfer commercial buildings and land to housing! Economics and history show that if you tell people to do one thing but pay them to do another, they tend to follow the money. So a very good policy change from the perspective of the supply of commercial space threatens to freeze out even that little land available for housing. So the net effect will be to undermine the Starter Homes initiative (not so much a policy anyway – just political grandstanding) and help make housing yet more unaffordable.

The Government has shown courage to spur commercial development. It is now all the more important policy makers show similar – or even more – courage to tackle the housing crisis. Both the British tax and planning system are hopelessly inadequate to deliver enough new homes. Replacing the Council tax (and the stamp duty) with a proper local property (or better: land value) tax could create the necessary incentives for LAs to offset for the effects of the Business Rates Retention to reduce land for housing and could even lead to more housing construction net. And, on the margin, since better designed land and housing taxes would be both more equitable and improve the efficiency with which land was used, there would be additional benefits. Tax reforms alone, however, cannot solve the housing crisis entirely. The planning system is far too deeply flawed for that. The sad reality is nothing short of a radical overhaul of our planning system can have any real effect. Now that would create a lasting political legacy. There’s a thought for the current Government…

Friday 9 October 2015

The mothballing of SSI: Is all lost for Teesside?

Posted by Maria Sanchez Vidal, SERC and University of Barcelona

Three weeks ago, SSI Redcar decided to mothball its Teesside steel plant citing a recent drop in world steel prices. The plant is one of the last large survivors of an industry that has been declining for years. There are, understandably, big concerns about the effect of eventual closure on local employment. Many commentators worry that the job losses will extend beyond those working in the plant itself. The end result, we are told, could be the loss of 2,000 direct jobs plus thousands more from contractors and other firms in the supply chain. And these concerns aren’t just limited to a fall in future orders: SSI Redcar currently owes suppliers more than £10m.

According to our recent research, however, the long run consequences of SSI Redcar’s plant may not be as drastic as they seem at first sight. We analyse the effects of 45 large manufacturing plant closures on local employment in Spain. To estimate the impact, we compare the areas that experienced a large closure to areas that are similar in terms of employment levels and trends prior to the closure. The results show that, for each job directly lost in the plant closure, only between 0.3 and 0.6 jobs are actually lost in the affected industry. That is, for every 10 people laid off, at least four workers return to similar jobs in other local firms. In addition, we find no employment effects of the large closure on firms in other manufacturing industries or in the services sectors within the local economy. In short, the medium to long-run effects on overall local employment are likely to be smaller than the original direct job loss.

Of course, it’s bad news that a plant as large as SSI Redcar is under threat. However, at least according to our results, there is still some scope for hope. The UK steel industry is clearly facing a huge challenge and the closure will negatively affect an already weak local economy. But, once the local economy adjusts, the employment effects are unlikely to be quite as devastating as the media suggests.

Wednesday 30 September 2015

SERC Urban and Regional Economics seminar series, Winter 2015

Posted by Max Nathan (SERC)

Like true academics, SERC took the summer off and tried to do some writing. We are now back in action with our seminar series, which runs at LSE on Friday afternoons. Full details are here.

First up is LSE's new hire Felipe Carozzi, who'll be talking us through some new work on how anti-corruption programmes shape local (and national) election results. During the rest of this term we have papers from Frédéric Robert-Nicoud (University of Geneva), Sen Chai (Harvard and NBER), Siqi Zheng (Tsinghua), Olmo Silva (LSE), Michael Bikard (LBS), Steven Brakman (Groningen), Florian Mayneris (Louvain) and Maarten Bosker (Erasmus University, Rotterdam).

These seminars are aimed primarily at academics, and the discussion can get technical at points. But we regularly get government and think tank people in the audience too. 

Wednesday 29 July 2015

Five Facts about Buy To Let

Posted by Philippe Bracke, SERC and Bank of England 

Buy-to-Let (BTL) investors are taking on an increasingly relevant role in the UK housing market. In this post, I present some initial findings from my ongoing research on BTL. I use data from the England and Wales Land Registry and the Zoopla web portal to find properties that are advertised for rent shortly after being bought. I show that: 1) BTL investors prefer (a) London and (b) flats; 2) BTL investors are more likely to pay cash; 3) BTL transactions are faster; 4) BTL investors buy at a discount; and 5) BTL discounts are larger for (a) Northern regions and (b) big properties.

Data from Department of Communities and Local Government (DCLG) show that the stock of housing held for private renting has more than doubled in the past 20 years, from 9% of the stock in 1993 to 19% in 2013. Despite this expansion, we don’t know much about BTL, which is defined here as the activity of purchasing properties to rent them out (independently of whether the investment is financed with a BTL mortgage). There are some papers on the role of housing investors in the recent US housing boom (for instance, Haughwout et al, 2011) but none of them specifically on BTL, except for Molloy and Zarutskie (2013), who analyse US large-scale investors’ activity after the housing bust.

The data
I assume that flats or houses advertised for rent within 6 month of their purchase are BTL properties. To find them, I use rental adverts from Zoopla, the second UK property portal in terms of traffic, as provided by Whenfresh, a data company. A Bank colleague, Perttu Korhonen, has matched these data at property and transaction level with the corresponding sales in the England and Wales Land Registry. This work was described in a previous  Bank Underground post.

Using this definition over the 2009Q1-2014Q1 period, I detect more than 100,000 BTL transactions. These closely match the aggregate trend in BTL mortgages for house purchases computed by the Council of Mortgage Lenders (CML), so we have confidence in this constructed measure. The solid line in Figure 1 shows quarterly CML data over the sample period, whereas the red dashed line represents our subsample (restricted to BTL transactions funded by mortgages, to be consistent with the CML data).

Fact 1: BTL investors prefer (a) London and (b) flats
BTL investors target areas and type of properties with a large private rented market. Figure 2 plots the percentage of Land Registry transactions classified as BTL against the percentage of the housing stock privately rented (as reported by DCLG). The left-hand side chart shows that BTL activity is much more common in London than elsewhere. The right-hand side chart shows that flats are more likely to be sold to BTL investors than other types of dwellings (terraced, semi-detached, and detached houses).

Fact 2: BTL investors are more likely to pay cash
Land Registry data suggest that around 70% of property transactions are financed with a mortgage.  Among BTL sales, only 50% are so: a half of BTL transactions are paid through some other method, mostly cash (although a few large BTL companies may use standard corporate credit). This result is robust across property characteristics, sale year, and location. So, for example, it does not depend on BTL investors purchasing cheaper properties which are incidentally more likely to be bought with cash.

Fact 3: BTL transactions are faster
The time needed to sell a property can be measured by matching sale adverts in the Whenfresh/Zoopla data with Land Registry transactions. On average, going from online advert to completion takes 5 and half months. For all BTL properties (cash- or mortgage-funded) this interval is reduced by 2%, i.e. approximately 3 days. On top of that, all cash transactions (BTL and others) entail an additional 6% reduction in time-on-market, corresponding to a 10-day decrease.

Fact 4: BTL investors buy at a discount
The media often contain stories of BTL investors pricing other buyers out of the market. It is expected that additional demand from a group of buyers such as BTL investors will raise price on aggregate, although this general effect is difficult to isolate in practice. It is less clear whether a direct effect is also at work: are BTL investors willing to pay more for the same properties?
To investigate this question, I compare properties bought by BTL investors with properties bought by other purchasers, keeping all the observed features (such as number of bedrooms or postcode) constant. Crucially, I can further restrict my analysis to properties that had the same advertised price, but are sold to different types of buyers, one of whom is a BTL investor.
It turns out that BTL investors spend on average less than other buyers for equivalent properties: the baseline estimate shows a statistically significant 1% discount. Or, put differently, other buyers spend 1% more than BTL investors for the same properties.

Fact 5: BTL discounts are larger for (a) Northern regions and (b) big properties
The 1% aggregate figure may hide a wide range of different discounts. Some regions may be less attractive to BTL investors because they have smaller rental markets. Figure 3 shows that BTL investors invest in those markets only in exchange for larger discounts: in the North East of England, the average BTL discount is 2.2%, whereas in the South of England and in London discounts are below 1%. A similar analysis shows that flats are associated with a discount smaller than 1%, whereas semi-detached and detached properties – which more rarely host private renting households – sell to BTL investors at a 1.5% average discount. In general, big properties take longer to sell, which leads to larger discounts. But these BTL discounts are computed relative to other buyers, implying that BTL investors are better at translating a longer time-on-market into a price reduction.

Ongoing research
The evidence gathered so far suggests that the impact of BTL investors on the housing market depends on the cycle. In a market where properties take a long time to sell, BTL investors can play a helpful role as buyers of last resort and contribute to market clearing by accelerating transactions. In a market where prices are already going up, BTL investors obtain lower discounts and could put additional pressure on property valuations. We are still far from the last word on the effects of BTL, but the available micro data are greatly improving our understanding of this part of the housing market.

Originally posted on the Bank Underground blog. The views expressed here are those of the authors, and are not necessarily those of the Bank of England or its policy committees.

Tuesday 2 June 2015

Deep-rooted vested interests are to blame for our housing crisis

Posted by Christian Hilber, LSE and SERC 

The UK housing affordability crisis is a serious concern. A recent poll by Ipsos Mori found that 15% now mention housing as among the most important issues facing Britain, up from 5% in 2010.

The crisis is particularly acute in London and the South East, where housing is most unaffordable. In 2014, a year after the introduction of the governments Help-to-Buy in scheme, the price of the average dwelling in London increased by almost 26% to £400,404. Thats £82,190 or to really get a sense of what this means £9.38 every hour of the day and the night.

While many London homeowners and private landlords may be delighted to make more money from their houses than they do from their jobs, housing has become ever more unaffordable for young would-be-buyers, which is probably why, according to the same survey, 26% of Londoners think housing is an important issue, much higher than the national average.

Still, government figures show that the rate of home ownership peaked at above 69% nationally in 2002 but has fallen steadily to almost 63% in 2013, largely because fewer young people are buying homes. Other statistics show that in 1991, 67% of 25-34 year olds were homeowners but, by 2011, this had declined to 43%.

In a recent report, I showed that there is strong evidence that the planning system, as well as strong demand in some areas, is the main cause of this affordability crisis. Our planning system restricts urban areas with the use of green belts, with development control by local authorities and strict controls on height. There is also a lack of tax incentives at local level and a preponderance of not in my backyard behaviour, facilitated by the planning regime. This is largely why house building has been in decline or, some might say, in free fall since the late 1960s. We build about a third  of the homes each year today than we did in the late 1960s.


In short, the planning system does not allow the supply of homes to rise no matter how high prices rise, which essentially suggests that demand-focused policies proposed by the various parties are attacking symptoms but not causes of the problem.

For instance, the Help-to-Buy scheme already mentioned effectively stimulates demand and, since supply is so severely constrained, simply pushes up prices without stimulating construction, exactly as predicted when the policy was first announced. So rather than help, it has effectively priced out young would-be-buyers from the market so that Hinder-to-Buy would have been a more appropriate name for the policy. And its not alone in doing more harm than good.

There is today pretty much universal agreement among politicians that we have a serious housing crisis where the main losers are the young generation and there is also some consensus that the problem is one of supply. Regrettably, recognition isn't leading to action.

Fixing the planning system does not mean not having one. We absolutely need a system of land use planning to correct market failures. The planning system has an important role to play for example to ensure land-based public goods such as urban public parks or areas of outstanding natural beauty are adequately maintained or landmark buildings are protected.

In the absence of serious planning reform, political parties have resorted to announcing house building targets, as they seek to show voters that they will do something about the problem. But, again, these are of little use as prices already give developers, architects and builders the right signals of where and how much to build. Its the planning system that ignores price signals and tries to prevent residential development nearly anywhere. Were these price signals not ignored, we would build many more homes in more attractive areas. Wed have more high-rise buildings in town centres and more single-family homes further out.

More homes make housing more affordable. Thats a much better way to solve the crisis than with any government-set target.


So if the solution is so simple and obvious, why arent things changing? The reason is a powerful array of deeply embedded vested interests that make meaningful change difficult.

Homeowner-NIMBYs can protect the value of their homes by opposing almost any project that spoils their view or generates noise. Homeowners near green belts are even worse and best described as BANANAs: Build-Absolutely-Nothing-Anywhere-Near-Anything. They have particularly nice views to protect and particularly expensive houses that rely, to a certain extent, on keeping the green belt land off-limits from development.

What is more, a majority of voters still own their own homes, making the impetus for change even more sluggish.

So, is the only solution to wait for a socially explosive and economically traumatic situation that eventually triggers reform or even revolution? Possibly not, because there is an ever-growing group of young and not so young would-be buyers who have a strong interest in genuine reform and who may become more politically powerful over time.

Among the other groups that may begin to push for change are the aspiring and expanding families that have just about managed to get on the housing ladder. This group is crucial because young home-owning families are clear losers of the broken planning system, even though they often dont realise it.

They should be in favour of genuine reform for two reasons: because they live in artificially cramped housing and because they are increasingly priced out from moving to a larger home that would be more adequate for the growing family. Trading up becomes expensive and the problem is only made worse by the stamp duty.

Elderly homeowners should also have an interest in change. Many may well be sitting on large capital gains accumulated since the 1960s and 1970s when homes were still affordable. But realising those gains will be difficult if they want to remain in the same communities where they may have built strong ties over the years.

The only real winners of the broken system are elderly homeowners who are prepared to sell their houses, pocket the proceeds and move to a country with cheaper housing. For those who stay put, its mostly the children that inherit property who will eventually benefit, leaving children of people who rent at a relative disadvantage. The broken planning system cements wealth inequality and the proposed inheritance tax reform makes things even worse.

Why does no party not one propose genuine reform? Politicians of all stripes back away from meaningful change out of fear of being demonised by the vested interests.

Still there is hope. Many commentators and secretly many politicians now understand the real cause of the crisis, which suggests public opinion may soon turn away from the vested interests. The polls certainly suggest a softening and even this Financial Times poll shows that almost 72% of its readers would back building on the green belt. Once public opinion warms up to the idea, a well-thought through reform could even become a vote-winner. Now theres an idea for the next election.

This article was originally written for Disclaimer Magazine. View it here