Is Help to Buy 'working'?

Back in 2012, I proposed the following two step method for assessing housing policy initiatives:

1. How many people are likely to be affected?
2. If the policy affects relatively large numbers of people, what's the likely impact on the housing market?

If you want to solve the housing crisis you need the answer to (1) to be 'lots' and the answer to (2) to be 'does not increase house prices, but increases supply'.

On (1): Currently Help-to-Buy has assisted 7,313 people. This is not a lot.

On (2): If Help-to-Buy ends up helping a lot of people, it will increase demand, rather than supply. This will push up prices making housing less affordable.

In other words, if Help-to-Buy does 'work' it won't 'help'.

Is there a London Housing Bubble?

The latest figures showing London house prices up 17% in a year can only fuel speculation about whether London is experiencing a housing bubble.

Tim Harford and Simon Wren-Lewis have both provided thoughtful commentary on this in the last few weeks (as, I am sure, many others). I don't have anything much to add to the debate on whether there is a bubble. As Tim Harford makes clear, I'm not sure how we'd know. But, to some extent, it seems to me that all this debate about whether or not there is a bubble deflects attention from the more fundamental point: highly inelastic housing supply leads to both high prices and greater fluctuation in prices.

Indeed, the last time my colleague Paul Cheshire looked at the figures, the volatility of the UK housing market as a whole exceeded the volatility of the most volative metropolitan market in the US (at the time, LA). The recent housing market problems in the US may have changed the relative volatility for a few metro areas short term - but with London growing at 17% it won't be long before we reclaim our 'crown'.

Highly inelastic housing supply adds to volatility because any increase in demand gets translated in to rapidly rising prices.  Whether that demand comes from income growth, lower mortgage rates, easier borrowing, foreign buyers or some other structural shift, the result is large increases in house prices. This, in turn, tends to feed back in to demand as people come to expect capital gains. When structural factors shift in the opposite direction, or expecations change falling demand now translates in to falling house prices. Result - high volatility.

Even in Simon Wren-Lewis view of the world, where the underlying shift in demand reflects low expected yield on other assets (rather than a bubble), it's still the highly inelastic markets that will see the large capital inflows. At the very least, if supply was more elastic, this inflow of capital would lead to increased housing supply, lower longer run rents and more affordable housing.

Is there a bubble? Who knows? But let's try not to have arguments around that question detract from the far more fundamental question of what we can do to try to increase housing supply in the parts of the country where demand is high.

Building Reliant Robin Houses adds to our Housing Crisis

Posted by Paul Cheshire, LSE and SERC

We all know there is a housing crisis. The latest data show that on the best measure of affordability (the price of a house mid-way in the price range relative to earnings mid-way in the range), the national position is half 1997 levels and not a lot better than at the worst point in 2007.

The debate about causes is full of myths, many self-serving - such as the claim that weare in danger of concreting over England. As I showed in a recent article, the reality is that Greenbelts cover more than 1.5 times all our built- up areas put together. Surrey has more land for golf courses (2.65%) than for actual houses (2.06%).

The most important reason for the crisis is that we have been drastically restricting the amount of housing land since 1947. Furthermore the recent changes embodied in the National Planning Policy Framework,  far from increasing the take of ‘Greenfields', seem to have done the opposite. House completions have increased from the catastrophically low levels of 2009 but housing starts – what is in the pipeline – have fallen by nearly 10% and planning applications are flatlining.

There are problems of market failure, and land markets fail more than most. So they need regulation, which is what planning should do. But effective regulation also needs to be informed by an understanding of how markets work. The problem is that our planning system seems to proceed as if it could entirely suspend the laws of supply and demand.

It is not just that restricting the supply of something when demand is rising (in this case land when incomes and population have been rising) causes the price to go up. But if you persistently build Reliant Robins and people prefer VWs, then VWs become a luxury good and unaffordable.  Roughly speaking, that is what we have been doing with housing supply. We have not just been restricting the supply of land to build them on but we have persistently been building the wrong sort of houses in the wrong sort of places.

Houses do not move about. So demand is local - primarily where there are decent jobs. But also the evidence shows that as people get richer they try to buy more space (VWs rather than Reliant Robins) with a bit of garden and somewhere to put their VW.

We may wish to persuade people to use cars less and revive the prosperity of declining parts of the country.  But it is insanity to try to achieve those objectives by refusing to allow houses to be built where there are jobs, where they are most expensive and without reasonable space. When lobbyists for the Greenbelt claim there is an ample supply of brownfield sites, not only do they fail to recognise that brownfields are a legal concept including some of the highest quality amenity land in Britain but not much of it is where job prospects are good. 

This is true even within southern England. Corby in Northants has a brilliant record ofbuilding houses. Daventy in Northants does not. Corby has the most affordable houses in Northants while Daventry the least. The unemployment rate in Daventry is less than half that in Corby (link). A similar tale can be told of Lancashire comparing Preston and Ribble Valley; or Watford compared to Three Rivers in Hertfordshire; or Aylesbury Vale compared to Chiltern in Buckinghamshire.

All over the country more houses are going up where they are already least unaffordable and where unemployment is high relative to surrounding areas. London illustrates this perfectly. Not only are we concentrating new building on the land most exposed to flooding and rising sea levels in the East Thames Corridor, but as the table below shows, we are building them where they are already least unaffordable and where job prospects are worst.

London Boroughs: The builders versus the non-builders

	Mean % addition to stock 2004-12	Affordability Ratio (median house price/median earnings	Unemployment Rate 2012/13
4 biggest builders1	14.57	9.98	11.35
4 smallest builders2	2.11	15.07	6.75

¹ Islington, Hackney, Southwark & Tower Hamlets       

² Kensington & Chelsea, Merton, Bexley & Sutton

And it is not just across broader areas that there is this focus on building houses in the wrong places. It is within cities too. In my new book with Max Nathan and Henry Overman, I give a striking example. In 2009, the West Midlands Regional Spatial Strategy was being discussed in a public hearing. When the local planners were asked why the plan was not allowing building in more suburban areas, at lower densities, the answer was that if sites like that were available developers would just ‘cherry pick them’.  In plain English that means that developers would try to build the sort of houses people wanted to live in the places they wanted to live. So obviously we should not let them do that.

All this means that we have far too many Reliant Robins and not nearly enough VWs in our housing stock. Except when it comes to housing, housing Reliant Robins are even less mobile than the real things. Not only are our houses inferior in terms of type and space, they are in the wrong places.

Rental contracts

[Posted by Prof Henry G. Overman]

I've been incredibly busy with the new What Works Centre for Local Economic Growth so haven't had as much time as I would like to engage with policy debates. However, Labour's call for a Commons vote on banning letting agent fees did prompt me to take another look at their plans on rental agreements. I confess to being slightly puzzled.

I've always had the impression that the letting agent 'industry' is a pretty competitive business (certainly judging by the frequency with which estate agents pop up in my neighbourhood). This must mean that fees are set at a level that would roughly cover the cost of providing the service to landlords plus a profit mark-up for estate agents. If you make landlords cover these costs, instead of them being paid upfront by tenants, they will simply increase rents to cover the cost that they now incur. I can't see that this does much to change the cost of renting.

The effects of three year tenancies are equally unclear. If, as Labour propose, you use them as a mechanism for capping rent rises then this transfers price risk from tenants to landlords. The way that landlords will compensate for this risk is by setting higher average rents at the start of the tenancy leaving the risk adjust rate of return unchanged. This is similar to the way banks charge higher interest rates for fixed interest rate mortgages - the higher average rate compensates the bank for the fact that it holds the interest rate risk. This will mean larger rental jumps for those at the end of three year tenancies. Regulating away this effect would require the government to fully determine rents (which isn't going to happen). So three year tenancies would appear to tradeoff short run rental increases for higher average rents and larger periodic rent increases. I have no idea whether this is preferable. I guess it might be if annual rent increases were currently very high - but they are not. Indeed, in 2012/13 the English Housing Survey showed average private sector rents decreasing (in contrast to social renters from local authorities or housing association who saw a 7% increase).

Will these measures help deal with 'rogue' landlords who use the threat of terminating tenancies to mistreat tenants? Possibly, but it is hard to know whether this is a big issue. Shelter have some figures that suggest that 12% of renters have not asked for repairs to be carried out in their home, or challenged a

rent increase in the last year because they fear eviction. As I've just suggested, on average the price effect of this doesn't seem to be very large. The repairs issue deserves further consideration - although note that this is the 'fear' of eviction that is claimed to be driving behavour. How big a problem is this in practice? According to Shelter: "One in 33 renters have been evicted, served notice or threatened with eviction in the past five years because they complained to their local council or their landlord about a problem in their home.

This is the equivalent to 324,172 renters every year". That sounds like a lot of renters but I can't figure out how Shelter have calculated this. The 1 in 33 figure suggests that around 230,000 renters (out of 7 million in England) have been threatened sometime in the last five years which is around 46,000 per year. That is still a lot of individually misery, but it represents less than half a percent of renters. Of course, the complaint rate is endogenous so perhaps a better indicator are Shelter's figures suggesting that 1 in 20 tenants feel they have rented from a rogue landlord in the previous 12 months. Although given the tendency for disagreements between tenants and landlords this presumably represents an upper bound. Even if they represent 5% of the sector, one might think that there are more targeted ways to tackle the problem.

Overall, then, it seems to me that the impact of these proposals is likely to be quite modest, involving slightly higher average rents, and less frequent, but larger price increases. In short, as with so many housing initiatives, no big deal and certainly not a solution to the housing crisis.

How Unbalanced is Infrastructure Spending?

[Posted by Prof Henry G. Overman]

Following BBC's Mind the Gap and my R4 Today discussion with Evan Davies and Ed Cox at IPPR North I've been thinking more about infrastructure spending and it's role in explaining urban economic performance in the UK.

As I discussed in a post last week IPPR North uses numbers for this that I think are misleading: "IPPR North's numbers which suggest we are set to spend £5,000 per person on infrastructure in London but only £250 per person in the North East. These figures are certainly striking, but they should be interpreted with considerable caution because they are far out of line with actual expenditure. Actual expenditure is reported in the Treasury's Public Expenditure Statistical Analysis Tables. According to those tables, in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head."

Following Ed's comment on that post I went back and re-read their 2013 update 'Still on the wrong track'. I remain to be convinced. Let me highlight three specific concerns (there are others) about the way in which these figures are misleading:

1) The £5,000 per head figure for London includes both private and public investment. If you look only at projects that involve the public sector as a funder the London figure is £2,500 per head. If you look only at projects where the public sector is the sole funder the figure is £770 per head. Of course, the figures for other regions drop too - the total for the North East is £250 per head, with some public sector or purely public sector it's £5 per head (presumably because there is no private sector investment in NE projects in the pipeline). I can see that the ratios don't shift much, but people who don't have time to think hard about these issues will focus on the headline number of either £2,500 or £5,000 per head for London. They will also tend to ignore any caveats about the role that private sector spending plays in driving these disparities. Which brings me to my second concern ...

2) Media coverage of these figures is highly misleading and this is misleading public debate. Here are three stories on the IPPR report - all courtesy of main stream media:

--
Transport Spending Skewed Towards London (BBC website)

The government spends more money on transport projects for Londoners than on those for the rest of the country combined, a think tank says. The Institute for Public Policy Research North says £2,700 is spent per person in London compared with £5 per head in the north-east of England.

Track changes: The North East is being Hobbled by Lousy Transport (The Economist)

Partly as a result, public expenditure on transport infrastructure projects is £2,595 ($4,340) per head in London but only £5 in the north-east, according to IPPR North, a think-tank.

Transport Spending skewed towards London (The FT)

The think-tank calculated that Londoners received £2,600 per head compared to £5 per head in the northeast. Of all planned capital investment, it said, 89 per cent went to London and the southeast.

Ed Cox, director of IPPR North, said the government was failing to tackle the issue of regional inequalities in infrastructure. “Skewed spending benefiting London and the southeast is nothing new but as we head towards new announcements at the spending review, these figures will strike most people as deeply unfair.”

--

Any one reading these reports (especially the first two) would conclude that these figures tell us how existing public expenditure on transport is hugely skewed towards London. This is simply not the case. The best figures we have for the regional distribution of existing public expenditure on transport come from the PESA tables that I quoted above. To repeat, these show "in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head.

Of course, it's hard for IPPR North to control how the media use their figures. But here is Ed Cox, tweeting just before our R4 debate: "Looking fwd to discussing why London is doing so well with @EvanHD & @LSE_SERC on @BBCr4today tmrw - here's a clue pic.twitter.com/lBFywXqgor" If you follow the link you'll see that the graph uses the £5,000 per head figure. Further, at least to my reading, Ed is suggesting that these figures explain why London is doing so well. I find that confusing. How can future projections of differences in public expenditure on transport infrastructure, that are out of line with historical public expenditure, explain the role public investment plays in explaining the current economic performance of London?

3) It could be, of course, that historical expenditure from the PESA tables isn't a good projection of the future. For example, the historical figures showed an increase from £600 to £800 per head for London since 2008-09; while expenditure in all other regions is flat at around £300 per head. Perhaps the next set of PESA tables will show a huge leap in London to, say, £1,500 per head while the North-East drops to £5 per head. I think this unlikely - the pipeline is biased towards expensive projects that take a long time to build. Simply dividing by population then gives a very distorted figure of annual expenditure. But even a more modest continuation of past trends would see London's per-capita public expenditure pulling away from the rest. Whether this matters depends in turn on the extent to which public expenditure on infrastructure explains London's current economic performance. Pointing to future spending doesn't answer that question.


In short, these numbers are hard to interpret and they are being interpreted in ways that mislead public debate. They do not provide an accurate picture of how public expenditure has been distributed across regions in the recent past.  They do not tell us how much this has contributed towards the gap in economic performance between London and the rest.  Finally, it's not even sure that they provide an accurate guide to the regional distribution in future.

Decisions about public expenditure on infrastructure clearly matter for urban economic performance. I think the IPPR report raises an interesting point about the role of both private and public investment (where PESA only tells part of the story). I also agree that better future projections of the regional distribution of private and public infrastructure spending (that are consistent with PESA) would allow for a more informed debate. I'm afraid, however, that I don't see these numbers as they stand helping much with the latter objective.

Mind the Gap

[Posted by Prof Henry G. Overman]

On the Today programme this morning talking cities with Ed Cox (IPPR North) and Evan Davis - whose two part series Mind the Gap: London v's the Rest starts tonight on BBC 2.

You can listen to the debate here [about 2h 53m in].

The starting point - on which we all agreed - is that the geographic concentration of economic activity in London and the South East offers fantastic opportunities in terms of both work and play (as a result of 'agglomeration economies' arising from the benefits of physical proximity).

The points of disagreement relate to the extent to which this is sustainable and whether it would be possible to generate similar opportunities elsewhere.

On sustainability, Ed Cox specifically raises concerns about infrastructure - and points to IPPR North's numbers which suggest we are set to spend £5,000 per person on infrastructure in London but only £250 per person in the North East. These figures are certainly striking, but they should be interpreted with considerable caution because they are far out of line with actual expenditure. Actual expenditure is reported in the Treasury's Public Expenditure Statistical Analysis Tables. According to those tables, in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head. These headline figures are complicated by a number of factors. Many people from outside London use London infrastructure on a daily basis (because so much employment is based here). Also, more of London's spending is funded out of fares paid by people using the London transport system. For example, about 80% of the funding for railway services in London and the South East comes from fare payers, compared to only 40% for regional railway services. This document from the Scrutiny Unit provides further discussion. In short, there may come a point where the costs of London's infrastructure requirements become excessive relative to revenues (fares plus taxes) but it doesn't seem we are there yet.

Our second point of disagreement concerned the extent to which it would be possible to replicate London's success elsewhere in the UK. Crucial to answering this question is the role that scale and physical proximity play in driving London's success. The evidence suggests that these are pretty important - strong market forces, working via agglomeration economies explain London's success, and this is much more important than any bias on behalf of government. Don't get me wrong, I'm not arguing that there is no bias - England is a very centralised economy and that may distort the overall balance of expenditure. But we need to realise that strong market forces, rather than biases in public expenditure, are the driver of London's economic success.

Once we recognise this, it has fundamental implications for what a more balanced UK economy might need to look like. If creating similar opportunities to London requires similar scale and physical proximity, could we get anywhere near this by 'joining' up our Northern cities through greater infrastructure investment? I remain sceptical - not least because our work estimating the impact of quite substantial reductions in travel times between Manchester and Leeds suggests only modest economic gains. Joining up our Northern cities would help, but it would be expensive (remember those subsidy figures above) and it's unlikely that it would be enough to provide an effective counterbalance to London.

If balancing the effect of London requires somewhere 'big and Northern' that raises the very difficult question of where that place might be? Politics being what it is, I can see why many people (myself included) would prefer to dodge that particular question.

Evaluation in Government

[Posted by Prof Henry G. Overman]

Just before Christmas, the National Audit Office published its long awaited report on Evaluation in Government. I was part of the LSE team that contributed to that report, specifically in terms of assessing the quality of evaluations. I thought I’d highlight both the report (for those not aware of it) and some of our central findings.

The team – Steve Gibbons, Sandra McNally and I – looked at 35 UK government evaluations covering active labour markets, business support, education and local economic growth (including regeneration). We picked these four because policies in these areas are targeted differently (e.g. some at firms, some at individuals) – which then helps illustrate how evaluation deals with some crucial methodological issues. These are also areas where external perception of quality varies markedly – and where our team had considerable expertise.

We were asked to highlight the strengths and weaknesses of evaluations, to assess the robustness and the usefulness to policy makers and to suggest improvements. We used the Scientific Maryland Scale to rank studies – the same tool that will be used in the systematic reviews of the What Works Centre for Local Economic Growth.

What did we find? First, the quality of evaluation varies widely both within and across these four policy areas. For example, we found evidence of high quality evaluations in the areas of active labour markets and education. In contrast, evaluations in the areas of business support and local economic growth were considerably weaker. Second, that quality range really matters for policymakers. On the basis of the reports we saw, we judged that none of the business support or local economic growth evaluations provided convincing evidence of policy impacts. In contrast, 6 out of 9 education reports and 7 out of 10 labour market reports were good enough to have some confidence in policy impacts.

How can policy evaluation get better? We think that using a control group (or a counterfactual) should be considered a necessary (although not sufficient) requirement for robust impact assessment and value for money calculations. Business support and spatial policy evaluations, in particular, could make better use of use administrative data and improved evaluation techniques to construct these counterfactuals.

We also make some more technical recommendations about how to handle policies where people can opt in; improving inference (i.e. how certain we are about the effects of policy) as well as the interpretation of impact estimates (do they apply to everyone ‘treated’, or just a subset?). More care should be taken to distinguish between the analysis of programme delivery (processes) and the assessment of impact and value for money (outcomes). Finally, every impact evaluation needs a technical appendix written for a specialist audience.

Overall, our verdict is mixed. We found a lot of very good evaluations; and many others that could be easily improved. For other areas, notably evaluations of business support and spatial policies, the picture is more worrying. Of course, these are also some of the hardest kinds of policies to evaluate robustly, but they are also central elements in many councils and LEPs’ growth strategies. We'll be tackling these issues head on through the work of the What Works Centre for Local Economic Growth.

[A version of this post first appeared on the What Works Centre for Local Economic Growth blog]