Can cheap credit explain the housing boom?

IPPR think so, and in their new report call for caps on mortgages and tighter regulation of lenders to avoid housing market bubbles.

In the US, in contrast, a paper from Ed Glaeser, Jo Gottlieb and Jo Gyourko, argues that credit market policies had very little to do with the US housing boom: "The evidence [...] casts doubt on the view that easy credit can explain the bubble. It isn’t that low interest rates don’t boost housing prices. They do. It isn’t that higher mortgage approval rates aren’t associated with rising home values. They are. But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced." [The more technical version of the paper is available here.]

Not clear to me, yet, how to square these two contrasting conclusions.

Protectionism and the High Street

In response to comments about the negative productivity effects that supermarkets suffer as a result of planning constraints someone points me to this debate about new supermarkets in Wells (Somerset) and asks: "Restrictive planning will increase the costs of supermarket development but if a supermarket isn’t built can you quantify how much money stays in the local economy?"

The BBC report spells out the estimated losses: "A planning report for the Conservative-run council concluded that if the supermarkets were given approval, there would be a 10% drop in trade which would have amounted to a £5m-a-year loss for the city centre."

I don't know anything about the accuracy of these specific figures but it's worth reflecting on the principles involved. I have already discussed the issues raised by supermarkets in terms of externalities (i.e. the unintended consequences - which may be positive or negative). I won't repeat those arguments here, but instead raise a slightly different issue which has some interesting parallels with international trade.

When new supermarkets open, the profits of existing retailers suffer but local consumers benefit. In the international context, for many reasons, policy makers have decided that overall, the benefits to consumers outweigh the costs to producers. This is why they have signed up to the WTO to ensure that local producers aren't protected by local governments. One of the benefits of signing up to the WTO is that it forces governments to ignore the lobbying activities of incumbents who have a strong vested interest in ensuring that new foreign firms do not enter their market.

For some reason, with local planning, the arguments (about benefits to consumers) are discounted and incumbents protected. Some of this may have to do with externalities, but I also suspect it reflects the very strong incentives that local firms have to lobby against entry (it may help to think Timothy Dalton's character in Hot Fuzz rather than Ronnie Barker in Open All Hours). Of course, we shouldn't forget that supermarkets lobby too and that the outcome goes in their favour in some places. In short, strong vested interests plus hard to quantify externalities make these decisions difficult. But it is interesting that in the area of international trade we have decided to deal with this by establishing clear rules in favour of openness, while in local planning the general trend appears to be protectionist.

Silicon Roundabout

Interesting piece in yesterday's FT talking about government policy towards Silicon Roundabout (aka Shoreditch, London). It's sceptical about the need for complex policies instead arguing that advantages go to places where smart people want to live and work.

I share this scepticism and am convinced that cities (or other 'clusters') do not need complex local innovation policies. Those of us who are sceptical about the capacity to develop such policies advocate spatial neutrality and a focuses on rewarding success as the best means of encouraging innovation in cities.

This doesn't mean there are no questions to address regarding innovation policy and cities. For example, if innovation policy focuses on formal R&D it may not apply to much of the innovation in cities that occurs in services through investment in intangible assets such as design. Far more important, however, are the implications of other policies which may negatively affect innovation in cities. For example, high rents limit proximity (which benefits innovation) and constrains entrepreneurs from starting new businesses.

I am also increasingly convinced about the need to focus policy on the things that may drive smart people out of cities. As the FT piece argues: "The fact that technological innovation is so cheap and accessible means it can be done wherever there are smart people able to do it. The advantage then goes to places where such people wish to live and work." In the UK addressing problems around urban housing, schools and health care would be close to the top of my list of things to address.

The Empty Homes Scandal

Communities Minister Andrew Stunell today launched two new online toolkits to help local councils tackle the 'scandal' of empty homes.

This issue last raised it's head in early 2010. Here is what I wrote at the time:

"Someone pointed out to me that the Lib Dems have been talking about empty homes: "There are over 760,000 empty properties across England which are no longer used as homes but can be brought back into use with some investment."

According to CLG, only around a third of these homes (c300,000) are empty for more than six months. The government target is for 240,000 new homes to be built per year.

The detailed figures are available here. [In 2009 they showed] that only 28,000 of these long term empty homes are in London, with another 36,000 in the South East. That is, in high demand areas, very few houses are empty.

Using empty homes will (sometimes) make sense. But it will not do much to solve Britain's housing problem."

I haven't had time take more than a quick look, but I don't think the differences across the country have changed much since then.

Should we give greater powers to City Councils?

The City Finance Commission has called for major reforms to the way councils are financed to help them drive growth and reduce their dependence on central government.

The commission calls for cities to be allowed to retain growth in business rates and council tax, for councils to be able to borrow against future local tax revenues and for a couple of trial councils to be given control of all employment, skills, adult education, health and housing spending.

It would be fair to say that I am not totally surprised by the conclusion: "Commission set up by Manchester, Birmingham [...] calls for more powers to be given to Manchester, Birmingham". Cynicism aside, I tend to favour more decentralisation of powers. I find the theoretical case (that it helps match local preferences to local provision) fairly compelling and their is some empirical evidence to suggest that this occurs in practice.

Similarly, international comparisons suggest that fiscal incentives from retention of local tax revenues probably does encourage development although I do not know of any systematic evidence. The crucial question here will be how much the Treasury will allow local councils to retain and whether the public can accept the "postcode" lotteries that localisation of resources will imply. The devil will be in the detail. 100% retention would be a problem because it will lead to local resources becoming unbalanced too quickly. 100% retention for a limited period of time, with periodic rebasing seems to create all kinds of timing problems (why agree to developments when you know that you are about to be rebased?). The most likely option is to allow some fraction of the increase to be retained but this obviously has implications for the strength of the incentives offered. Regardless of the details, the system needs to be transparent, long term and sufficiently simple that it can be explained to local voters.

While there is evidence on the benefits of decentralisation in terms of public good provision and the positive effect on development of appropriate fiscal incentives, there is no compelling evidence of a strong link between decentralisation of powers and improved economic performance. But there is no compelling evidence of a negative link either. In short, there are plenty of reasons to go for greater decentralisation but the idea that this would ensure greater economic growth isn't one of them.

Grim down South?

Prof. Danny Dorling (from Sheffield) has a track record of producing interesting maps for the UK. His "New Social Atlas of Britain" proves no exception.

A slightly nerdy confession - I like maps. This is partly an aesthetic statement, but also an analytical one. Maps provide an excellent way of summarising descriptive data to help inform further analysis. But I do think you need to be very careful in how you interpret them.

So, in an echo of their 2008 reporting of the impact of the recession, the Guardian reports the maps as showing "It's Grim in Kensington and Chelsea". If you are struggling to fit that with your own reading of the data, it's because the Guardian is performing a standard journalist trick of confusing levels and changes. On some criteria, conditions have deteriorated more in Kensington and Chelsea - ergo it's grim down south.

Standard fare, but I find the subsequent analysis more baffling (and worth quoting at length: "The atlas [...] reveals the places with the best environment records across the UK's 408 local authorities were Durham in north-east England, South Lakeland in Cumbria, Purbeck in Dorset, Broadland in Norfolk, and the Ribble Valley in Lancashire. "What is most interesting is how these rankings are changing," said Dorling. "The bigger picture shows that, when it comes to environmental sustainability and sociability in Britain, some of the richest areas are suffering while some of the poorest areas are winning out." Part of the reason, he said, was industrial decline, especially in places such as Barnsley, Doncaster and Rotherham. "This means there are fewer cars on the road, fewer people able to go out and get drunk, get into fights and commit a criminal offence. Of course, it also means fewer people are able to heat their homes so well."

So poverty lowers carbon footprints and means people resort more to social networks to help them cope with low incomes and joblessness? I imagine this silver lining will not do much to cheer poor households in these areas.

Housing: Starts up, completions down

DCLG released the latest housing supply figures yesterday. The news is mixed. Housing starts are up 22% (106,590 in the 12 months to 03/11) but from a very low base. Housing completions are down 7% (105,930). The fall in completions appears to reflect the sharp reduction in starts at the beginning of the recession. These numbers remain depressingly low relative to the number of completions that would be needed if England is to experience slower house price growth in the future.