Tuesday 31 May 2011

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.

Friday 27 May 2011

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.

Thursday 26 May 2011

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.

Wednesday 25 May 2011

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.

Tuesday 24 May 2011

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.

Monday 23 May 2011

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.

Friday 20 May 2011

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.

Thursday 19 May 2011

Supermarkets in a different class?

According to the BBC, Bristol City Council and the London Assembly are calling for a new supermarket classification in planning law.

The argument is that the impact of supermarkets on their local areas are different from smaller independent retailers. For example, supermarkets require frequent deliveries from heavy goods vehicles. Putting supermarkets in a different class would allow the land use planning system to manage these externalities when a firm wants to open up a new store.

Clearly there needs to be a mechanism to manage externalities from development. But I would make a few points. First, the growth in "metro" type stores has been partly driven by planning restrictions on out of town developments. So, restricting out of town development means the externalities of frequent deliveries are felt in city centres. Second, delivery to stores followed by sales to consumers is a mechanism of distributing groceries to consumers. If supermarkets don't do this then some other mechanism would be required. What is that alternative (e.g. larger independent stores with more frequent deliveries) and are the externalities any different? Third, if the planning system is changed how could we be sure that change of use decisions would only be used to manage the externalities created by supermarkets rather than allowing particular groups to block development that they don't like?

Wednesday 18 May 2011

Cash for planning permission

The RTPI is 'appalled' that the government is proposing to amend the planning act to give weight to financial considerations in planning applications.

Their main concern is that this change would mean that money from the New Homes Bonus could outweigh other factors (e.g. views of the local community or environmental impacts) when making decisions about planning permission. But why shouldn't financial considerations sometimes outweigh other considerations? Isn't planning about balancing a whole range of costs and benefits? If a local authority was faced with proposals for a very financially rewarding scheme that was environmentally sound, but opposed by local residences shouldn't it be able to still decide in favour? Isn't that why we have local democracy and a planning process, to try to balance competing needs?

The details of the argument may well revolve around whether these considerations apply at the point of drawing up the plan or of granting permission on individual applications. But as with their objection to including price signals as material considerations, you get the impression that the major issue for many planning professionals is that they want the planning system to behave as if the local economy and public finances are irrelevant.

Tuesday 17 May 2011

Should we "Save the High Street"?

The government have asked Mary Portas to carry out a review aimed at halting the decline of the High Street. The review will look at the problem of empty shops and clone towns. Labour agree with the coalition and have, for example, been talking about changes to planning law to stop local 'dominance' by multinational retailers.

Writing a couple of weeks ago, I observed that the Tesco Riots had led to another round of supermarket bashing. Just as that dies down, the high street review looks set to reignite the debate. There is a serious issue to consider here - high streets generate 'externalities' that individual shoppers do not take in to account when making their decisions. Some of these externalities are positive (e.g. the sense of community generated) while some are negative (e.g. extra congestion from having people drive in to the centre of town). Market forces don't deal well with externalities so it's possible that policy makers should intervene. What worries me, however, is how incredibly one sided debates about this issue have become. Reading much of the commentary you would think that intervening was essentially costless and that everyone agrees out of town shopping and clone towns are bad.

Clearly, however, this is not the case and there will be substantial costs to pay to further support the high street. Supermarkets offer cheaper prices, more diversity and convenience. So regulating them further will increase costs of living and reduce choice. Indeed, SERC research estimates that existing planning restrictions may already reduce retail productivity by 20%. If saving the high street requires further restrictions these costs will rise. High grocery prices hit the poor harder than the rich so the impact of this may also be regressive. Tax subsidies to support the high street (as proposed by some) are not costless either. What expenditure should we cut (or which taxes raise) to fund this? If the proposal is to somehow pass these costs on to supermarkets then that raises prices with the regressive impact just highlighted.

These costs may be worth paying. But the public debate too often ignores them. I am no media expert, but my major worry is that the commentary around this issue mainly reflects the concerns of the better off who have strong preferences for independent retailers (and disposable income to take advantage of them) . Let's hope the review takes a more balanced approach to identifying the costs and benefits so that we can properly decide whether the latter outweigh the former.

Monday 16 May 2011

Manchester: Top of the (northern) league

The double success of Manchester City and United at the weekend had journalists groping around for something to say about the wider implications. In these circumstances, linking football success to the wider economy appears to provide a ready made solution.

So, in yesterday's Observer, we read: "The success of the two clubs cements Manchester's position as the powerhouse of the north." In practice, of course, the link between football and economic success is pretty tenuous. In fact, if anything, any causal effects are likely to operate in the other direction. Anecdotes suggest that it is easier to attract big name stars to some places than others - Manchester's lively nightlife may well help the clubs in this regard. The Observer story also suggests that Manchester's improving economic environment may have helped secure the massive outside investment that City currently benefit from.

I remember similar stories about Hull a couple of seasons ago, Blackpool last season (although annoyingly couldn't find the links). Happily Norfolk radio provide a good example for one of this season's championship promotion sides. Of course, none of this matters much although it does raise concerns about, for example, local authorities spending money on their local club in the hope of some future economic bonus.

Thursday 12 May 2011

Culture and regeneration

GLA economics has published a new working paper that looks at the link between culture and regeneration. The report concludes that "Despite much research, there have been few comprehensive evaluations of culture-led regeneration schemes and so a good evidence base does not exist. A review of the limited evidence shows mixed results and much uncertainty of the impact of culture-led regeneration."

This is certainly consistent with my own take on the evidence. I think it is also relevant for the widere debate about the regeneration potential of city centre living. As I argued in a recent SERC policy paper: "There has been an increase in the number of highly skilled people living in previously run down city centres. This likely reflects improvements in levels of crime, the built environment and other amenities as well as three demand-side factors: emptynesters choosing city centres for consumption reasons; people delaying family formation; increased participation in higher education. For some cities (e.g. Manchester, Leeds and Newcastle) improving central locations has attracted more skilled people. For the majority of places, however, central locations remain highly unattractive because the amenities they offer in terms of accessibility to employment and consumption are not sufficient to offset other negative factors. This is particularly true for families as single family homes remain much more popular than any of the multi-family urban housing options. These preferences mean that while city-centre improvements may bring benefits to existing residents (including the poor) the usefulness of this policy as a means of attracting highly skilled workers to declining places is certainly overstated."

Wednesday 11 May 2011

Abandoned Streets

Housing Minister Grant Shapps has announced a £30 million "lifeline to families trapped in abandoned streets due to stalled large scale housing demolition schemes."

In his recent book Ed Glaeser argues: "Investing in buildings instead of people in places where prices were already low may have been the biggest mistake in urban policy over the last 60 years".

If large scale demolitions have such high social costs and dubious economic rationale, it's important to ask whether they make for good policy? The answer will surely depend on context but I think that the way in which the question is framed is crucial for making better decisions. Too often, policy makers ask "what can we do to improve the housing stock in this area?" when what they care about is "how can we improve the housing conditions of people who currently live in this area?" The answer to the two questions will not always be the same which is why economists emphasise the importance of focusing on people not place when thinking about the objectives of policy.

Tuesday 10 May 2011

Made in Britain

Talking about his programme "Made in Britain", Evan Davis suggests that "the service sector raises a number of problems. Here's the nub of it: old industries – manufacturing industries – had lots of good reasons to disperse geographically. You had shipbuilding in Sunderland, steel in South Wales and coal scattered around the country. The new industries are brainy industries and so-called knowledge workers tend to like to be near other people who are the same. Think of the City or Hollywood. People cluster. This means you have winning regions, such as London and Cambridge, and losing regions. The people who want to be top lawyers in Sunderland are hoovered up by London."

I think this is correct. Face-to-face contact is more important for services and this raises the importance of geographical proximity for both production and innovation. Paradoxically, globalisation and ICT, by raising the rewards to innovation have reinforced the benefits of clustering to drive innovation. As Evan Davis points out, these changes have benefited some places more than others. But in terms of understanding the impact on poorer individuals I think that the increasing returns to human capital, as a result of technological change and globalisation, are a much more important part of the story than the within country shift of activity from north to south.

Monday 9 May 2011

Science Parks

SERC affiliate Christian Helmers has been doing some interesting research on science parks. His findings suggest that the composition of parks can matter a lot and that, from the evidence available, specialisation of science parks might be important for success.

This contrasts with the innovation process in cities, where the evidence suggests that diversity is good for ideas generation. Some time ago, urban economists Gilles Duranton and Diego Puga developed this insight in their American Economic Review Paper on Nursery Cities. They argued that it was good to be in cities to help develop initial ideas but that production then took place outside cities where land was cheap. Data from France seemed to support this theory.

But Christian's research highlights a continued gap in our knowledge. If specialisation is important in science parks, why is diversity more important in cities? When we still face uncertainties about such crucial aspects of the innovation process it is not surprising that some of us argue that policy makers lack the capacity to develop complex local innovation policies that could somehow 'fix' the externalities present in the ideas generation process.

Friday 6 May 2011

Innovation in cities

An interesting piece from Centre for Cities suggests that by far the biggest economic impact that a university has on its city economy is through its local employment and the spending of its students rather than the interaction that it has with the local business base.

I thought this was interesting because it urges caution about the role universities might play in the development of complex local innovation policies (as is often advocated by academics studying "regional innovation systems"). Those of us sceptical about the capacity to develop such policies tend to advocate spatially neutral innovation policy that focuses on rewarding success as the best means of encouraging innovation in cities.

This doesn't mean that there are no questions to address when it comes to innovation policy and cities. For example, to the extent that innovation policy focuses on formal R&D it may not apply to much of the innovation in cities that occurs in service industries through investment in intangible assets such as design. In addition, many other policies may be more important in negatively affecting innovation in cities. High rents limit physical proximity (which benefits innovation) and constrains entrepreneurs from starting new businesses. Failing urban schools reduce the supply of highly educated workers, as does restrictive immigration policy. Tackling these problems is likely to prove far more important than any local variation in innovation policy.

Thursday 5 May 2011

London (still) getting away with it

In my January lecture "How did London get away with it?" I used house prices as one of the economic indicators to support the idea that London was doing well (both relative to expectations and to other regions in the UK). Latest figures from the Land Registry suggest that this continues to be the case. In the year to March 2011 London saw prices increase by 0.8%, while the North East saw falls of 9.3%. The average change for England and Wales was a 2.3% decrease.

Wednesday 4 May 2011

Supermarkets and planning: Be careful what you wish for.

The "Tesco riots" in Bristol have led to yet another round of supermarket bashing.

Writing in the Guardian, Peter Wilby argues that small shops generate positive externalities on their community and that because of this politicians should adopt policies to "partially re-create, and preserve what is left of, the independent retail sector through, for example, [through] tax concessions; a community right to take over or find buyers for threatened businesses; and enhanced powers for local councils to protect retail competitiveness."

Would enhanced powers for local councils help? Research by CEP affiliate Raeffaela Sadun suggests Mr Wilby might want to be careful what he wishes for. She writes: "In 1996, new regulations made it much harder for UK supermarkets and other retailers to develop new out-of-town outlets – so-called ‘big boxes’. In part, these regulations were supposed to ‘save the traditional British High Street’ by protecting small retailers. [My research] shows that they might have actually accelerated the decline of independent stores." The problem, in short, was that restricting out of town development led to the growth of smaller store concepts ('metros', 'locals' etc) which more directly competed with independent retailers. Expect all kinds of other unintended consequences if we decided to come up with a new way of allowing local councils to 'protect' independent retailers.

Tuesday 3 May 2011

Football Stadiums

SERC affiliate Gabriel Ahlfeldt has been doing some interesting work on the impact of football stadiums on local house prices.

Looking at developments at Wembley and at Arsenal, they find that new stadiums have a significant positive effect on house prices. Does this mean that the NIMBYs are wrong when they oppose this kind of development? Not necessarily, because the evidence tells us only that they receive a financial gain in terms of house prices (and that this exceeds construction costs). It is possible that this financial gain doesn't sufficiently compensate home owners for the added inconvenience of larger crowds (assuming the redesign increases capacity). Of course, although home owners are usually more vocal, larger crowds and increased house prices will certainly make renters worse off. The other caveat is that this research predominantly provides evidence relating to redevelopment of an existing stadium.

Completely new developments generate additional issues that are much harder to assess. The authors try to tackle this issue, by considering the impact on housing near to Arsenal's old ground (house prices fall) but I find this a little harder to interpret. I can see that a view of an attractive stadium might partially offset the inconvenience of matchday crowds but I find it hard to see why the removal of crowds from areas around the old ground shouldn't be positively capitalised in to house prices.

For those of you who want to read further, the underlying research paper will shortly be available as a SERC discussion paper.