New Home Bonus

The coalition has announced plans to provide LAs with financial incentives to agree to new housebuilding.

In the area of housing, I am no fan of top down master plans (like the, now defunct, Regional Spatial Strategies). We need a mechanism that allocates land to housing where it is needed and that compensates affected local communities so that they support new housing rather than opposing it. Against this background the approach advocated by the government is a step in the right direction.

There are still important problems to resolve. The idea is that the scheme will give LAs incentives by matching council tax receipts for six years on any new homes. This will help resolve the problem that grant funding allocation (which is broadly proportional to population) takes time to respond to population growth. It will not address the problem that new homes may impose marginal costs that are considerably larger than the average costs of serving existing populations (for example, if they require communities to build new local facilities such as schools). Presumably, the intention is that the Community Infrastructure Levy will try to address this problem. Whether the combined incentives provided by the homes bonus and the levy are significant depends on the costs that LAs face - I don't know of any good evidence on this.

Assuming the resulting incentives are "significant" will this be enough to get houses built where they are needed? That's less clear for two reasons. First, house prices provide a strong signal as to where we need new housing but when looking across LAs council tax is not very strongly correlated with house prices. This means the incentives are not much stronger for LAs where there is the strongest demand for new housing. Second, the incentives compensate LAs but not the most directly affected local residents (the immediate neighbours of housing development). Traditionally, the planning system has tried to get around this problem by (mostly) ignoring the wishes of local residents. Quite rightly, the coalition government is trying to move away from this unpopular position. But giving more say to local residents means greater opposition to new developments and, as yet, the government do not have good mechanisms for addressing that problem.

Social Housing Swap Shop

Social housing is associated with three "mobility" problems relating to tenure (people are unlikely to move out to renting or owning), size (people have homes that are too big or small for their current needs) and geography (allocation is quite localised making it hard to get housing in another Local Authority and making it hard to move). The coalition government has been talking about how to tackle these problems.

In terms of size and geographical mobility, CLG have been talking about mechanisms to encourage swaps. I am retired with a big house near the city centre, you are a working family with a small flat in the suburbs. We are both better off if we can swap. It really is hard to see why anyone should object to this, aside from the fact that it may have relatively little impact on the problem (at some point early on in economics, students learn that one of the roles of money is to facilitate exchange because it removes the need for double coincidence of wants - i.e. we both have to want to swap).

Other proposals are more tricky. For example, giving people the right to ask to move must be good from the point of view of the person asking. But, the overall effect depends on the supply of social housing in different areas. In unpopular areas it means low occupancy, while in popular areas it means excess demand. How do you square the latter with the idea that Local Authorities should be allowed to prioritise "local people"?

Similarly, removing the job market disincentives created by social housing provision (and through the housing benefit system) would seem to be very important, but changing tenure conditions may well exacerbate that problem, not mitigate it. More generally, insecurity of tenure is (at least according to the anecdotal evidence) a major cause of considerable distress to many social housing tenants. That isn't to say that you shouldn't try to tackle these issues but it does highlight how difficult is the road ahead.

Mixed Communities

It will be interesting to see where the coalition government goes on "mixed communities" which were such a strong, centrally imposed, feature of the planning regime under the previous administration.

Those of us who questioned the evidence base for this particular policy prescription suggest that there are obvious costs that may offset the (hard to detect) benefits. One of these is that specialised communities (e.g. just for the old or young) are better able to offer local services people want. If that sounds a little dry, Firhall, the "child-free" village in Scotland provides an interesting example.

Development Control

My colleague Tim Leunig quoted in the FT last week raised the possibility that strong planning controls in the South East would force businesses to set up in the North. He suggests this might be good for the North, but not for the UK as whole.

I imagine that the coalition government would be quite pleased with this outcome given its emphasis on rebalancing. So it seems important to point out that this is the optimistic scenario. More realistically if a business that wants to locate in the Greater South East is prevented from doing so one of two things is likely to happen: (i) the entrepreneur goes off and does something else; (ii) the firm sets up outside the UK.

Businesses need to make a return on the capital that they invest. If they are forced to locate in places which are not suitable for their business they make lower returns. They either decide to do something else with their capital, or to invest elsewhere in the world where returns are higher. Assuming there is some lump of UK businesses out there which can be easily shifted around the country ignores this first order effect. Not a good thing when we need to generate more private sector employment in this country!

On Your Bike (Policy Exchange no Longer Insane)

It's interesting to see the government raising the issue of helping people move to take advantage of job offers, given the way they got their fingers burned when Policy Exchange suggesting something very similar sometime before the election.

I think the evidence on this is clear. Some places are better at generating job opportunities than others. For many years policy has tried to fix this by creating more job opportunities in places that are not generating enough employment. This policy has not worked very well. Therefore, it seems sensible to put more focus on helping people to move to jobs (rather than moving jobs to people). Two important caveats. First, it's important not to overstate the likely impact. Where you live is far less important a determinant of job market outcomes than who you are. Unemployment in London remains a big problem for those at the lower end of the labour market. Second, high house prices in better performing areas are a crucial economic barrier that prevent people from moving to take advantage of opportunities. It is still unclear how government intends to address the question of providing LAs with adequate incentives to address this problem.

Housing and the budget

John Muellbauer, of Oxford University (and a SERC affiliate) has a nice Guardian comment piece on housing.

John is one of the economists who did "see it coming" in the sense that he has been talking about problems in the housing market for a long period of time. Unfortunately, while the coalition government's decentralisation plans are surely welcome, it's still unclear (as John points out) what, if anything, they are going to do to provide appropriate incentives to LA's to allow residential and commercial development.

Well, that's one (brownfield) target met

In 1998, approximately 50% of development occurred on brownfield land (a figure that had been remarkably stable for long periods of time). The Labour government committed itself to a target of 60% of new development on brownfield land by 2008. The target had been met by the early 2000s. In 2005, 73% of new development was on brownfield land.

Brownfield land is expensive to build on. It is often re-developed at high density to meet national targets. Lots of it is in ex-industrial cities where demand for housing is low. Large pieces of land that become available (ex MOD of NHS sites) are some way from existing settlements (working against stated objectives on densification). Worse, as highlighted by the coalition government today, a large proportion of building on "brownfield" land has been building on private residential gardens.

In short, top down targets for brownfield land haven't delivered the kind of housing people want in the places where they want to live. They have also been terribly unpopular with local residents. If top down planning doesn't appear to be making anyone happy*, then you have to welcome today's announcement to localise decision around building on private gardens.

But, all of this comes with a very big caveat: It is still unclear how the coalition government is going to ensure local residents in popular places are offered sufficient incentives to say "yes" to new housing. Partly the existing brownfield target was met because not many houses were being built (and not just in the recession). Prevent building on gardens and supply falls further. Lower supply means higher prices and greater price volatility. We are promised more reform of the planning system, if we are not to make the same mistakes as the last government, it has to tackle the incentive problem head on.


*[I guess it makes planners happy - by some figures the sixth fastest growing occupation in the England in the past decade]