Booming Birmingham and the Need for Rebalancing

For all those worrying about London's 'booming' economy and the urgent need for rebalancing, here's a fascinating lesson from history (sent to me by a colleague* and taken, I believe, from Birmingham 1939-1970. History of Birmingham Volume 3 by A. Sutcliffe and R. Smith):

---
Birmingham itself was second only to London for the creation of new jobs between 1951 and 1961. Unemployment in Birmingham between 1948 and 1966 rarely exceeded 1%, and only exceeded 2% in one year. By 1961 household incomes in the West Midlands were 13% above the national average, exceeding even than those of London and the South East. Although employment in Birmingham's restricted manufacturing sector shrank by 10% between 1951 and 1966, this was more than made up during the early post-war period for by employment in the service sector, which grew from 35% of the city's workforce in 1951 to 45% in 1966. As the commercial centre of the country's most successful regional economy, Central Birmingham was the main focus outside London for the post-war office building boom. Service sector employment in the Birmingham conurbation grew faster than in any other region between 1953 and 1964, and the same period saw 3 million sq ft of office space constructed in the city centre and Edgbaston. The city's economic boom saw the rapid growth of a substantial merchant banking sector, as major London and international banks established themselves within the city, and professional and scientific services, finance and insurance also grew particularly strongly. However this service sector growth itself attracted government restrictions from 1965. Declaring the growth in population and employment within Birmingham to be a "threatening situation", the incoming Labour Government of 1964 sought "to control the growth of office accommodation in Birmingham and the rest of the Birmingham conurbation before it got out of hand, in the same way as they control the growth of industrial employment". Although the City Council had encouraged service sector expansion during the late 1950s and early 1960s, central government extended the Control of Office Employment Act 1965 to the Birmingham conurbation from 1965, effectively banning all further office development for almost two decades.

Up until the 1930s it had been a basic assumption of Birmingham's leaders that their role was to encourage the city's growth. Post-war national governments, however, saw Birmingham's accelerating economic success as a damaging influence on the stagnating economies of the North of England, Scotland and Wales, and saw its physical expansion as a threat to its surrounding areas – "from Westminster's point of view was too large, too prosperous, and had to be held in check". A series of measures, starting with the Distribution of Industry Act 1945, aimed to prevent industrial growth in the "Congested Areas" – essentially the booming cities of London and Birmingham – instead encouraging the dispersal of industry to the economically stagnant "Development Areas" in the north and west. The West Midlands Plan, commissioned by the Minister for Town and Country Planning from Patrick Abercrombie and Herbert Jackson in 1946, set Birmingham a target population for 1960 of 990,000, far less than its actual 1951 population of 1,113,000. This meant that 220,000 people would have to leave the city over the following 14 years, that some of the city's industries would have to be removed, and that new industries would need to be prevented from establishing themselves in the city. By 1957 the council had explicitly accepted that it was obliged "to restrain the growth of population and employment potential within the city."
---

[* update: my colleague tells me that he, in turn, got this from Jon Neale at Jones Lang Lasalle]

Foreign Buyers and the London Property Market

I'm increasingly puzzled by reporting of the London housing market and the role of foreign buyers. Is it true that London's house price growth is being driven by demand from foreigners attracted to the market by the low value of the pound?

There seem to be two versions of this story going around.

1) The low value of the pound is encouraging foreigners to buy lots of prime London property (i.e. housing worth more than £2m) driving up prices across London as a whole. The first part of this argument appears to be underpinned by the data - foreigners are behind half of the £2m+ home sales in London. But let's put these figures in to perspective using numbers from the land registry (taken from p. 13 of the latest HPI report). In January 2013 there were 77 houses worth more than £2m+ sold in London. Foreigners are buying a little more than half of these - let's say 40 to be generous.The total volume of house sales in January 2013 was 6,465. I am not an expert on housing markets, but I struggle to understand how around a half of 1% of London housing sales are driving the entire market. Once we look at increases, note that foreigners already accounted for nearly 50% last year so we are talking about perhaps 8 additional purchases per month. In contrast, Council of Mortgage Lender numbers show a 15% increase in first time buyers in London in 2012. That's an additional 6,000 buyers per year. Even with less money, you'd expect those 6,000 to be a much more important source of demand than the new foreign buyers. In short, I can see how foreigners are driving prime, but I'm not so sure that this drives the rest of the market. Which brings us to the next version of the story ...

2) It's not prime buyers, but total foreign demand that is pushing up prices. The data suggest that foreign buyers bought around £3bn worth of property in the London housing market last year. That's an increase of 25% from 2011 or around £0.75bn. This sounds more substantial until you think about the total value of property transactions in London. With average prices around £350,000 and average monthly sales around 7,500 a back of the envelope suggests total value of around £31bn. So the increase in foreign sales amounted to around 2.5% (0.75/31) which might make more difference than the prime property numbers (although presumably it includes them). That said, those extra 6,000 first time buyers mentioned above accounted for around £1.2bn (assuming an average first time sales price in London of around 200k - CML reports those numbers a little confusingly). And, of course, first time buyers aren't the only source of domestic demand.

In short, if I had to put my money anywhere, I'm inclined to think that domestic sources of demand (including from first time buyers) are much more important in understanding the overall London property market than a small number of rich foreigners.

[NB - I confess to pulling together these back of the envelope numbers pretty quickly; I have to say that they fit with my priors but I'd be very happy for pointers to a more careful analysis]

Some Evidence that School Budget Cuts can Harm Standards

BBC has coverage of the Reform report suggesting that there is no evidence that school budget cuts will harm standards.

That's simply not true. SERC research by Steve Gibbons and co-authors suggest that, at least for urban schools, there is a link between spending and outcomes. You can read an old blog post summarising the evidence here and the original paper is here.

Victory for Neighbourhood Plans (sort of ...)

Residents of Thame, in Oxfordshire, have voted yes to their neighbourhood plan (the first of two areas to do so - the other is St James near the Centre of Exeter).

Is this a victory for neighbourhood planning? Yes, according to Don Foster MP (minister for localism): "After all Neighbourhood Planning is part of the Liberal Democrat agenda; one of the new community rights introduced by our Government to give people more say over their area and putting communities in charge of setting out the homes, shops and amenities they want". Looking at the details of the Thame's plan, the surrounding debate and the referendum outcome it's hard to disagree with (most of) that assessment. Faced with unpopular plans for 775 homes all on one site, Thame Town Council have come up with a plan that uses a number of dispersed sites and that was supported in a referendum (by a 76% vote on a 40% turnout). You can gripe about the turnout (and there may be local political details of which I am completely ignorant) but taken at face value that looks like giving communities more say over the location of homes, shops and amenities.

That said, this is only a partial victory. If, as Don Foster suggest, this is about putting communities in charge or setting out the homes, shops and amenities that they want, then I think Thame Town Council might beg to differ. After all, the 775 home figure was forced on them by South Oxfordshire, they appealed against this total, lost and then had to come up with a plan to meet the total imposed on them (this is, of course, how neighbourhood plans are supposed to work). Whether the resulting housing is something they 'want' certainly seems open to interpretation.

Will this do much for affordability? Don Foster implies so: "In both cases plans by local people to boost house building in their areas were approved" (my emphasis). I don't see this - in Thame at least - where the neighbourhood plan makes zero difference to the number of houses that are planned to be built in the area between now and 2027. Will 775 new homes be enough to do much about affordability? Given Thame's population of around 11,000 this equates to about 10% population growth over a 14 year period (being generous - I've no idea what happened while all this planning was taking place). That's unlikely to do much for housing affordability in Thame or for housing affordability more generally if most neighbourhood plans (if passed) stick to the limits imposed by higher level authorities.

It's good that neighbourhood planning has ended up allowing the residents of Thame more say over where housing will go in their local community. But let's not exaggerate the benefits either to local communities in terms of building the housing they want or to housing supply in terms of increasing the total number of homes.

The West End Commission

The final report of the West End Commission was published yesterday. As one of the commissioners, I'm not in a good position to provide unbiased comment. It's certainly been an interesting process and both the evidence we received and discussions within the group highlighted the many complex issues that need to be addressed if the West End is to continue to flourish.

From the front page of the Evening Standard, you'd get the impression that the main recommendations were around a 24 hour tube service. In fact, that's just one small part of a much wider set of proposals - the most important of which relate to the need for a revamped governance structure. Without better partnership working across the local authorities, London mayor Boris Johnson and the government it's difficult to see how the range of complex issues facing the West End can be properly addressed.

This focus on governance fits with a wider debate around these issues instigated, in part, by the government's insistence that decentralisation needs to be accompanied by agreements that provide strong governance arrangements. This link is most explicit in the city deals process, but should also play an important part in the negotiations around implementation of the Heseltine 'single pot'. Of course, the government can insist all it wants, but the strongest incentive for better collaboration will come if Local Authorities directly reap the rewards of that collaboration. Without this link, local conflicts can all too easily dominate decision making at the cost of the considerable benefits that would arise from collaboration. Interestingly, on this specific issue, a number of recent government reforms have surprisingly little 'bite' for the West End - hence the commissions recommendation that partnership working would need to be reinforced by some kind of 'city deal' for the area. As noted by our chairman, Howard Bernstein: the success of proposals for the West End will depend on the course of these wider reforms.

How to Kill Nightingales and not Build Houses: Insist on building on Brownfields

Posted by Paul Cheshire, SERC and LSE

The planning system is supposed to safeguard amenity, our wild places and the environment. I have already exposed how it signally failed to protect the shifting sands of Menie from the Trump golf development. I also argued here that refusing to allow any development on Greenbelt land inevitably led to ever higher house prices, a more volatile housing market and to the loss of environmentally valuable or amenity-rich places such as ex-MoD land, grounds of former hospitals or recreation grounds (owned by government or the planning authorities themselves, who in cash-strapped times face a a grave temptation to develop).

These problems are nicely illustrated by recent worries about the future of the nightingale. Suddenly conservation groups have woken up to the imminent loss of the the most important breeding site for nightingales in England. Simon Jenkins (who is also President of the National Trust) rightly and powerfully lamented the coming loss - blaming it on "planners’ inability to tell a woodpigeon from a nightingale". The bitter irony is that he is tragically and dangerously wrong in his diagnosis. 

One might argue that among the culprits, the conservation groups themselves have inadvertently played a leading role in getting us in to this mess. We desperately need land for housing. Thanks in large part to the misguided campaigns of conservation groups our planning system has been systematically not providing such land for two generations, pushing house prices and rents beyond the reach of young people.

Why does this mean that conservation groups share in the blame? Because not only have they been the most vocal and influential lobbyists against relaxing the planning restrictions on land release by one iota, but they have enthusiastically supported ‘building on brownfields’. Apart from being no solution to the housing land crisis, brownfield land is very frequently amenity-rich. The tragic irony is that the nightingales chose to breed on ex-MoD land (the Lodge Hill site on Medway’s HooPeninsula). So it is exactly the type of land the National Trusts and the Royal Society for the Protection of Birds (RSPB) favour for development.

.

When the debate and lobbying against the draft National Planning Policy Framework was in full swing about back in 2011, the CPRE, RSPB and National Trust joined forces to campaign against any relaxation of planning restrictions. No building on the Greenbelt! Build only on Brownfield sites! were their cries. The case of the nightingale provides just one example of the unintended consequences.

Worse, perhaps, is that the true enemy of our threatened wildlife like the nightingale is not housing but agricultural intensification, boosted by rising agricultural land prices. Back in 1969 (in an article with John Bowers) I argued that as farmland becomes more expensive, so every scrap is used more and more intensively and the wild things are forced out. But the reason farmland prices have been rising so extravagantly (11,000 percent in the past 60 years, according to the Telegraph) is no longer mainly agricultural subsidies (as it was in 1969), it is the handy 100 percent tax avoidance value of farmland that the very rich use to pass on their money to their heirs. There is now more bio-diversity in back gardens than on English farms.

There is no need for affordable housing and nightingales to be in conflict. They are brought into conflict by two terrible policies: tax loopholes for farmland and not enough land available for housing because of urban containment policies and building on brownfield obsessions. We can and should have both wildlife habitats and houses. The problem is the blanket preservation from development of land whose value is mostly for avoiding taxes: intensively farmed agricultural land surrounding our big cities. 

To solve our crisis in the supply of housing land we need release just a tiny proportion of our greenbelts of the very lowest environmental quality. To put all of this in context, greenbelts cover an area nearly half as big again as all our developed land put together and we certainly would not need to build on ‘all of it’ – or anything remotely like - to make a big difference to housing affordability.

In fact, this can even be win-win. Providing houses where people want to live with the gardens people seek would improve the existing environment and increase bio-diversity! Intensively farmed land has a negligible - even negative - environmental value and is almost sterile from the point of view of wild life; take a look at the 2011 National Ecosystem Assessment. That is the sort of land we should be allowing houses to be built on. The vehement opposition to building on any intensively farmed greenbelt land fails to recognise it for what it is – almost worthless from a social, environmental or amenity perspective. 

Just a tiny fraction would solve our housing problems and take all the pressure off rare habitats like the Hoo Peninsula and other ex-MoD land. That may be legally ‘brownfield’ but is mostly a wonderland of semi-natural habitat. If you want to hear another iconic songbird – the skylark – visit a tank range. The public needs ex-MoD land to be preserved in its semi-natural state and as much access secured as is possible. We need this almost as much as we need more houses near jobs.

Diversity, cities and business performance: some new evidence from the UK

Posted by Dr Max Nathan, SERC, LSE and NIESR

Like many Western countries, the UK has become substantially more ethnically and culturally diverse. The 2011 Census makes this crystal clear. Since 2001, the foreign-born population in England and Wales has jumped from 4.6 to 7.5m. At the same time, the ‘white British’ ethnic group shrank from 87.5-80% of the population.

What are the economic impacts of these deep demographic shifts, and what do they mean for cities? Certainly, population change has been most striking in urban areas: notably, London is now a ‘majority minority’ city for the first time in its history.

Urban factors may also affect how ‘diversity effects’ play out at firm level. Although the public debate is still focused on migrants, jobs and public services, a number of academic researchers are turning their attention to the wider impacts of immigration, minority communities and population diversity. Globally, there are now studies exploring effects on firms’ productivity, innovation, entrepreneurship, or trade patterns; and channels that may influence house prices, or the mix of local goods and services.

There’s been little parallel UK research to date – but in a new SERC Discussion Paper (supported by LLAKES) I explore the links between the composition of 6,000 English firms’ ‘top teams’ and company performance. Unusually, my data allows me to look at both ethnicity and gender mix.

What might we expect to see? Owners, partners and directors set firms strategic direction. So the make-up of a ‘top team’ might generate production externalities through diversity (a wider range of ideas/ experiences, helping problem solving) and/or ‘sameness’ (via specialist knowledge or better access to international markets). These channels may be balanced by internal downsides  (lower trust) and external barriers (discrimination), so that overall effects on business performance are unclear.

Big cities might then amplify or dampen these channels. Agglomeration economies might help productivity, and firms may benefit from large, cosmopolitan customer markets. Alternatively, firms in cities might face more competition, or minority-headed businesses might face discrimination.

My results suggest a non-linear link between top team diversity and business performance, which is net positive for process innovation and net negative for turnover. Further tests on diverse and minority/female-headed firms find positive links for diverse top teams, negative for minority and female-only top teams.

Looking at the influence of urban areas, I find some evidence of complex amplifying and dampening effects. In London, for example, diverse firms are less likely to engage in process innovation; but overall, firms in bigger cities are more likely to.

My data make it hard to identify causal effects, so I interpret these results as pure correlations. The implication is that while diversity has internal and external benefits, penalties from being ‘too diverse’ probably result from external constraints. In turn, that suggests policymakers need to encourage corporate diversity, while taking discrimination more seriously.

In a companion paper on London firms, Neil Lee and I found strong links between firm-level diversity and innovation. This paper suggests diversity-innovation links for firms outside the capital too. Core city leaders should pay attention.

This post was originally published on the Squareglasses blog.