HS3 and a Northern Powerhouse

[Posted by Prof Henry G. Overman]

 I have finally had a chance to take a look at George Osborne's 'Northern Powerhouse' speech in which he suggests that a better connected collection of northern cities could take on the world. It's an interesting (and not entirely new) proposition. But would it work? Could joining up northern cities replicate London's success?

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 - agglomeration economies arising from scale and proximity help explain London's 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 for the Northern Way estimating the impact of quite substantial reductions in travel times between Manchester and Leeds suggests only modest economic gains.

In our work, we looked at the impact of a 20 minute reduction in travel time between Leeds and Manchester. We find that closer integration between Manchester and Leeds could be expected to have a positive effect on wages. Our largest estimate, for a 20 minute reduction in train journey times between Leeds and Manchester, has average wages increasing by between 1.06% and 2.7%.

These numbers come with some important caveats (discussed in more depth here). First, they are certainly not additional for the UK as a whole because a lot of this effect would come from the fact that Manchester and Leeds will be attracting activity that would have gone elsewhere (and not necessarily to London). Second, and related, the effects for an individual worker, with given and unchanging characteristics (often called place-based effects), are smaller at somewhere between 0.20 and 0.50 of a percent.

In short, joining up our Northern cities (particularly Manchester and Leeds) using HS3 would help, but it would be expensive and it's unlikely that it would be enough to provide an effective counterbalance to London.

It is also important to note that a project like HS3 to link cities may not be as effective as other interventions. For example, in the detailed report for Northern Way (rather than the more widely quoted summary) we tried to use the same methodology to compare the effect of a 1% reduction in travel times within Manchester or Leeds to the effect of a 1% reduction between those two cities. In all cases, within city reductions in travel times lead to larger increases in 'economic mass' (sometimes two to three times larger). As it is these changes in economic mass that underpin any estimated productivity effects, this tells us that a 1% reduction of within city costs would have a larger effect than a 1% reduction of between city costs. Of course, that doesn't tell us whether we should prefer one over the other - that would depend on the relative costs of achieving these cost reductions (which we didn't look at). But it does serve to reinforce the point that it might be difficult to replicate London's advantages from scale and proximity simply by joining up different cities. It also highlights the crucial point that we need to consider the alternatives before rushing headlong for the HS3 solution. I'd argue that this was a mistake we made with HS2 - best not to repeat it.

Of course, part of the attraction of creating a northern powerhouse by joining up cities is that it dodges a very difficult political problem. If balancing the effect of London requires, instead, 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

Spatial Inequalities in Commuting Times

[Posted by Prof Henry G. Overman]

My bus journey in to work this morning took 90 minutes for 5 miles (due to arrangements for the Queen's Speech). Usually it takes around an hour on the bus. I can run it in 40 minutes and ride it in 25 (my preferred modes of transport).

My reasons for mentioning this is that it got me thinking about my comments yesterday on transport spending across different areas. Towards the end of that piece I wrote as follows: "Why do we care about the balance of infrastructure expenditure per se? Surely we care about the provision of transport services, broadly defined. Is it fair to invest in areas with low congestion at the expense of investment in areas with high congestion just to ensure that expenditure is equal? Why should we invest equally in places with no or slow population growth at the expense of places that are seeing high and continued growth in population? Why do we need as much investment per head in towns with a population of 100,000 as we do in cities with populations of millions?"

Inspired by my journey to work this morning, I went and took a look at the National Travel Survey to find out just how large is the variation in travel to work times by region. I've copied and pasted them below (where I've also added times for the average business trip). The variations across regions are pretty striking. The average Londoner spends around 41 minutes commuting compared to 23 minutes in the North East. Assuming 252 business days and 30 days annual leave that equates to a difference of 7992 hours (or 5.5 days) per year. These numbers aren't perfect (I'd like to see them income adjusted for example) but they point to huge variations in journey times. I am not in an way suggesting that these figures are 'unfair' but they paint a very different (and arguably more informative) picture than that coming from the figures on transport expenditure per capita.

	Commuting	Business
Region of residence:
North East	23	37
North West	25	35
Yorkshire and The Humber	25	38
East Midlands	23	35
West Midlands	25	40
East of England	29	43
London	41	44
South East	30	41
South West	23	37

Local Transport Expenditure

Lots of coverage for the Transport Committee's latest report on local transport expenditure.

I've had a quick read through of the report. Some of it makes sense. For example: there's been lots of change in funding schemes so it would be a good idea of DfT makes sure this isn't delaying delivery or reducing accountability. They also make the point (which I have made before in the context of Heseltine) that: "It is questionable whether bidding for pots of central government money that will be allocated via rules set by central government amounts to genuine devolution." No arguments from me there.

But the headlines all pick up on the recommendation that transport outside London should be funded better: "The under-funding of transport projects outside Greater London in recent years cannot be allowed to continue. Ministers must use the new funding arrangements, via the Local Growth Fund, to ensure that there is a fairer allocation of funding to transport projects beyond London, and not just in city regions, City Deal areas and current enterprise zones. No area across our nation should be second class in relation to the allocation of transport infrastructure funds".

The evidence for this under-funding comes in two parts. The first part quotes Baroness Kramer on actual expenditure - London gets about twice as much public expenditure per head as the rest of the UK (part of which is due to cross-rail). This figure is probably misleading because it compares a specific city to a set of regions. If you took, say, expenditure in Manchester it would be interesting to see how much closer it got to the London per capita level. No matter, because the second part of the argument uses the incredibly misleading IPPR North figures which talk about disparities in future funding streams of £2,500 per head in London to £5 per head in the North East. No adjustment would make those look equal.

Regardless of the exact amount, let's take at face value that there is some spatial unevenness in public expenditure in transport spending per head. The transport select committee implies that this is a bad thing and that the government should be seeking a more equal distribution. This begs the question, "why should funding be more equal"? The answer to that can come in two parts - either the current allocation is inefficient or it is inequitable.

In terms of efficiency a big part of the disparity between total and public expenditure (which would be larger than the two to one figure that I reported above) comes about because private sector expenditure goes disproportionately to London and the South East. Government doesn't have much control over those private sector flows but it's clear that public sector expenditure is more evenly spread. Taking a narrow view of the economic returns on public sector transport investment this suggests that it might be efficient to have it more concentrated, not less.

Of course, government doesn't take a narrow view. It thinks about the social returns as opposed to the private returns that drive private sector investment. Might the social returns be larger outside of London and the South East justifying a more equal distribution? Again, the answer is probably no from an economic cost-benefit point of view - the wider economic benefits that are captured in transport appraisal tend to occur in more dense, productive places. In contrast, on a project-by-project basis it's almost certainly the case that there are some London schemes that look poor value for money relative to non-London schemes and vice-versa. But I haven't seen any evidence that this is true on average (which is what we should focus on if we care about shares of expenditure).

We could construct an efficiency argument for greater spending outside of London and the South East if we thought that this was vital for improving economic performance (or for turning economies around). But as Ed Glaeser has observed, places which have seen declining or low population growth usually have relatively high per-capita infrastructure stocks. [As evidence of this, note that journey times and congestion levels are significantly lower outside of London and the South East]. If this is the case, then further investments in transport will experience decreasing returns and won't do much to increase growth. To put it another way, if the problem comes from structural change, poor educational outcomes and skills that are no longer needed - why should increased transport investment provide a solution? Transport may be an issue in some of the more successful economies outside London and the South East - Manchester, Leeds, etc - but surely not everywhere?

If the efficiency arguments are weak, the equity arguments aren't great either. Why do we care about the balance of infrastructure expenditure per se? Surely we care about the provision of transport services, broadly defined. Is it fair to invest in areas with low congestion at the expense of investment in areas with high congestion just to ensure that expenditure is equal? Why should we invest equally in places with no or slow population growth at the expense of places that are seeing high and continued growth in population? Why do we need as much investment per head in towns with a population of 100,000 as we do in cities with populations of millions?

Worrying about the efficient and equitable use of transport expenditure is incredibly important. I'm certainly not arguing that we currently have it completely right. But simply asserting that we must have more equal expenditure does nothing to help us figure out whether and how we should be changing the current balance of funding.

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.