Thursday, 27 June 2013

On the road to recovery?

Posted by Dr Rosa Sanchis-Guarner, SERC

This morning the Government unveiled "the biggest road-building programme in 40 years", as part of a package of infrastructure schemes intended to drive the UK’s long-term economic development. Road-building is often opposed on environmental grounds, and those costs are clear. But does it produce any economic gains? Surprisingly, we have very little robust evidence - until now. 

SERC’s research suggests that roads can produce economic benefits – at least locally. In the first rigorous studies to look at the effects of UK road transport improvements on employment, output and wages, we find that road-related accessibility improvements  between 1998 and 2007 increased local employment and raised wages. Back-of-the-envelope calculations suggest that £1bn of road improvements could create around 2000 jobs in the affected areas.

Road networks dominate transport infrastructure in most countries, including the UK. According to official transport statistics, in 2010 91% of passenger transport and around 68% of freight transport was by road. Road traffic has increased steadily since the 50s, up to around 240 billion vehicle miles in 2011. And most of this traffic is concentrated in the major roads network. So it’s not surprising that a substantial amount of UK public spending is devoted to roads: around £1 billion, or 44% of total transport spending in 2010/11. An important slice of this expenditure is for new road links (since 2000, over 300 kilometres of new roads in England alone).

In theory, transport improvements decrease transportation costs, improve access to markets, foster economic integration, stimulate competition, generate agglomeration economies and a number of other ‘wider’ economic benefits. This is why transport improvements are frequently proposed as a strategy for economic growth, integration and local economic development. But for economies with well-developed transport networks like the UK, there is little good evidence on the extent of the gains that result from additions to the existing network. Although road improvements are routinely subject to appraisal - predicting the economic benefits before the roads are built - they have not historically been subject to any evaluation in order to work out whether these benefits actually materialised!

SERC’s research provides some of the first hard evidence. We link data on 31 major new road construction schemes between 1998 and 2007 to administrative data on businesses and workers. There are major challenges when evaluating the economic effects of road construction. 

The first one is how to capture the effect of new roads. We do this using an index of employment ‘accessibility’ that estimates the number of workers that can reach a location, per unit of travel time, using optimal routes along the major road network. When new links are added to the network, optimal travel times decrease and employment accessibility increases, but by different amounts according to where a place is in relation to the existing road network, the new road links and major centres of employment.

The second major challenge comes from the fact that new roads are not placed randomly, but are targeted specifically to improve traffic flows, decrease congestion or improve connectivity. For this reason, to measure the effects of increases in accessibility we cannot simply compare places that had new links to places that did not. Instead, we look only at places which that are close to a new road scheme, estimating the effects from the subtle local changes in accessibility that occur within a 20km radius. 


Linking these accessibility changes to firm level data on employment and output allows us to estimate how transport affected local production and employment. Firstly we find that places (electoral wards) that experienced accessibility improvements saw employment gains. A 10% increase in accessibility leads to a 3-4% increase in plants and employment. 

These gains come about through an increase in the number of businesses, particularly in the service sector, though surprisingly firms already operating in the area shed workers. An explanation for existing firms cutting employment is the observed wage increases in response to the accessibility changes (evident in other results based on worker data), coupled with improvements in productivity (output per worker). These wage and output effects are of a similar to the effects on employment: a 10% increase in accessibility results on an increase in labour productivity and average wages of around 2.5-3%.


So will road-building set the UK on the ‘road to recovery’? Overall, the economic benefits are relatively small. We also need to be careful in interpreting these changes as gains to the national economy. To some extent, jobs may be displaced from other areas, although our evidence indicates this is not the primary channel. Also, we are learning about the potential impacts of transport improvements from very localised changes, and abstracting from changes induced by local road schemes in more distant places. Given how much political attention infrastructure projects attract, though, our work opens the way for more research in an area where proper evaluation is badly needed.

Wednesday, 26 June 2013

Help to Buy

Posted by Dr Christian Hilber, SERC and LSE
I recently participated in a public debate organized by the Strategic Society Centre. The topic of the debate was the government’s Help to Buy scheme. The central question: Who will benefit from the scheme? My short answer: It is almost certainly not the young first-time buyers who are the supposed main beneficiaries of the scheme.

How can this be? Aren’t the equity loan scheme and the mortgage guarantee scheme directly targeted towards first-time buyers? Yes, true. And does the equity loan scheme not only apply to new build homes? Again, yes, true. It is true that Help to Buy will likely increase mortgage availability, especially for those attempting to buy with small deposits.

However, the effect of this is an increase in demand for housing – in economics language: it shifts the individual and aggregate demand curves outwards to the right. It does not shift the supply curve. But as long as supply is ‘responsive’ (i.e., the supply curve is not very steep), this should still have the desired effect of more new housing and perhaps only slightly higher prices.

So what can we say about the supply side? In the very short-run, housing supply does of course not respond at all to demand shocks because of planning and construction lags, so prices can be expected to rise in the short-run. The trouble is that in the UK, even in the very long-run, supply is incredibly unresponsive to demand shocks (i.e., the long-run supply curve is very steep). Why? The main culprit is the UK planning system, which is, in an international context, extraordinarily inflexible. Since 1947 there are virtually no fiscal incentives at the local level to permit development. Local planning authorities face most of the costs of development but have very few benefits from it. Moreover, local homeowners – in the UK perhaps best described as BANANAs (Build Absolutely Nothing Anywhere Near Anything) – oppose (virtually) any development in their backyards.

As a consequence of all this, Help to Buy will likely have the effect of pushing up house prices (and rents) further with very little positive effect on new construction. Housing will likely become less – not more – affordable for young would-be-owners! The beneficiaries of the scheme are the existing (typically wealthier) homeowners who benefit from the capital gain. However, not all homeowners benefit equally. Young expanding families may not benefit at all since their new larger house will also become more expensive. The true beneficiaries are those elderly homeowners who are thinking about downsizing (not many) and those wealthier retired homeowners who decide to pocket the capital gains from Help to Buy and move to Spain or Southern France, where housing is much more affordable and spacious. First-time buyers will arguably be no better off because the easier access to credit is offset by higher prices. And mobile young households who do not want to or still cannot own will be worse off. They will face higher rents and, as tax payers, bear the burden of the schemes.

The empirical evidence strongly supports these arguments. In recent work (here and here) Wouter Vermeulen and I provide strong evidence that local planning constraints – in conjunction with strong local demand – are indeed the main culprit of the extraordinarily high house prices and the cramped spaces in the Greater London Area and the South East of England. (The UK has the second highest house prices per square metre in the world – only topped by tiny Monaco – and new build houses in the UK are 38% smaller than in densely populated Germany and 40% smaller than in the even more densely populated Netherlands.)

In another paper, forthcoming at the Review of Economics and Statistics, Tracy Turner and I find for the US, that in tightly regulated cities mortgage rate subsidies have the effect of substantially raising house prices and reducing homeownership attainment – the opposite of policy makers’ intentions. The aggregate effect on homeownership attainment for the US as a whole is ‘zero’. Notably, this is achieved at an annual cost exceeding $100 billion.

Proponents of Help to Buy have argued that the equity loan scheme only applies to new build homes, so this should only increase the demand for new build homes and thus lead to more construction. But this is a bogus argument: existing homes and new build homes (and in fact rental homes) are reasonably close substitutes, so Help to Buy will affect aggregate demand for housing and not just new build. There have been, at long last, clear signs of a recovery in the construction sector – in fact, for a while now; talk to architects! But this has nothing to do with Help to Buy. It is merely a (welcome) coincidence (for proponents of the scheme).

I argued above that the main beneficiaries are mainly wealthy and older homeowners. But especially the wealthy arguably also pay much of the taxes. So one might think that Help to Buy does ‘no good’ but it also does ‘no harm’ – it is a ‘zero sum game’. Unfortunately, this couldn’t be further from the truth for at least two important reasons. Firstly, the taxes needed to finance the schemes have a ‘dead weight loss’ – they are a pure welfare loss to the society. Secondly, there are ‘systemic risks’. In contrast to, for example, the American and Canadian systems, there is no cushion in the form of private mortgage insurance companies that bear the risks associated with a house price bust.

In the US for example, even before the crisis, Fannie Mae and Freddie Mac only guaranteed and securitised mortgages up to a 80% loan-to-value (LTV) ratio; the portion of the loan that exceeded 80% of the house value had to be ‘enhanced’ by private mortgage insurance companies. These insurance companies either assumed those risks or – more likely – reinsured them, the reason why AIG got into such trouble. Should the British housing market(s) take a significant hit (perhaps not very likely, but who would have predicted the ‘Great Recession’?), then the situation for UK taxpayers would be much worse than that of US taxpayers.

This is because the government doesn't just provide an implicit warranty as a last resort (as was the case in the US) but directly takes the first hit. Private mortgage insurance companies won't provide any cushion, unlike with Fannie and Freddie (who only got into trouble because house prices in many metro areas decreased by more than 20%). The UK government – or rather, the British tax payer – will face huge costs, even if loans go only slightly ‘under water’. The fact that mortgages in the UK are ‘recourse’ helps in the sense that there would be fewer defaults (compared to the US mess) but would also arguably mean prolonging the crisis.

A last point: what is the exit strategy? If the scheme was indeed withdrawn abruptly after three years, then might this not cause a house price bust and yet quite possibly another recession. If this is ‘too big a political risk’, is it really plausible to think that the scheme will end in three years? My concern really is that we end up in a vicious circle with a policy that arguably does not only do more harm than good and is very costly but is also very hard to get rid of. If we are lucky, the two schemes will, for whatever reason, never really take off and the schemes will be silently discarded after a few years. My sincere hope is that the government does more to tackle the real problem on the supply side: the fact that there are too few incentives at the local level to permit residential (or commercial) development. I floated the idea of a genuine local property tax that would replace the current council tax and stamp duty (another harmful tax – see here and here) …it would be a (good) start…

A version of this post first appeared on the LSE Politics and Policy blog.

Tuesday, 25 June 2013

Time to Build

I'm still grappling with figures around land hoarding and completion times. Prompted by a colleague (who tells me that yesterday's numbers were 'hard to follow') I took a look at the US figures on completion times to provide a comparison to figures for England and Wales.

For England and Wales, average completion time is 25 months which breaks down as:
  • 10 months from obtaining permission to starting on the site
  • 15 months from starting to completion
For the US as a whole, average completion time is about 9.5 months which breaks down as:
  • 1 months to start
  • 8.5 months start to completion
So, we look quite slow. But we know that the US market as whole is very lightly regulated compared to the UK. What happens if, instead, we compare with the figures for the North East (which is the more heavily regulated market in the US - and also more metropolitan). For the North East,  average completion time is about 12 months which breaks down as:
  • 1 month to start
  • 11 months start to completion
12 months is a lot lower than 25 months so does this suggest developers here are slow? The problem is that the US numbers are presented by housing unit broken down by the size of the unit whereas the England and Wales numbers are broken down by scheme and size of scheme. Our average time to completion would look considerably lower if we looked at the completion rate for individual houses within schemes (rather than dating completion when the last unit in the scheme is built). It's also important to note that the time to completion various a lot depending on whether you are building single unit or multi-unit buildings (with the latter taking much longer in the US). If most England and Wales permitting is for flats, our completion rates would compare reasonably favourably with the North East.

In short, the international comparison doesn't seem to get us much further other than to show that i) we are slow to start and that ii) in the US at least, as regulations increase, it takes developers longer to complete. 

Either way, simply pointing to the headline figures for England and Wales of 400,000 permissions 'unimplemented' and average completion times of 25 months doesn't tell us much about the source of any problem and what we might do about it.

[NB: If anyone knows of something more systematic on this, I'd be happy for pointers.]

Monday, 24 June 2013

How big a problem is land 'hoarding'?

A follow up from my post on Friday about whether ending land hoarding will help solve the housing crisis.

I've finally had a chance to take a look at the report underlying the headline figure - that councils have provided planning permission for 400,000 homes that have yet to be built. Some thoughts:

There were 399,816 unimplemented units as of December 2011 (down, from 499,873 in March 2008)

Unimplemented units are either unstarted or under construction. Of the 399,816 headline figure 37% are unstarted (down from 47% in 2008). Units under construction make up the other 63%. In terms of numbers of units that equates to around 150k units unstarted, around 250k under construction.

On average, it takes 10 months from getting permission for development to start and then another 15 months for completion. In 2011/12 planning permission was given for 135,179 units (down from 187,605 in 2007/08). Let's say 130k a year for the last two years which equates to 10.8k per month. So at any point in time we might expect around 110k units to have permission, but not be under construction. I'm not sure how to square that with the 150k figure quoted above - perhaps the point in time sampling as of 31 December 2011 tends to overestimate the average. Let's imagine we could reduce the average delay to start from 10 months down to it's 2007 figure of 7 months. That gives around 30k additional units (or 45k units if we use the higher 150k figure from the report)

If it takes 15 months from start to completion, then at any point in time we should expect around 162k units to be under construction. Again, I struggle to square this with the 250k figure reported above. Again, let's ignore that and imagine reducing the average length of time to completion back to it's 2007 figure. The total time to completion back then was 20 months as compared to 25 months now. 3 months of that is accounted for by additional time to start, so that means we would need to take 2 months of current time to completion, reducing it from 15 months to 13 months to get back to figures comparable to 2007. Using my 162k figure (based on 10.8k permissions per month) this gives around 21k additional units (or 33k if we use the higher 250k figure).

So if we had time to completion from permission running at levels seen at the height of the boom we would have somewhere between 51k and 78k additional units. That doesn't sound that significant in the grand scheme of things (especially when you consider that the drop in total permissions from 50k per year will undo all of this 'gain' within the next 12-18 months).

I should also note that I've ignored the impact of stalled sites (which I assume are driving up the average time to completion - and which government is already trying to do something about). I also have no idea if 7 or 10 months stock of permissions is more suitable for developers. Finally, I have no idea whether we should be focusing on bringing down the average time to completion by focusing on developer productivity or by trimming the right tail of sights that are being hoarded by developers. What I do know is that 400,000 is certainly not a good estimate of the amount of 'hoarding' that may be going on.

Friday, 21 June 2013

Ending Land 'Hoarding' won't solve the Housing Crisis

It's reported that Ed Milliband is to call for penalties for developers that 'hoard land'. I do hope not, for reasons discussed in a post from last September:

"I find myself increasingly irritated by people pointing to the number of sites with permissions (enough for 400,000 homes we are told) as if this somehow proves that the planning system is not part of the longer term problem. First, many of these sites will be in areas that always had low demand. Remember, the UK planning system is incredibly unresponsive to price signals. So no surprise that these sites aren't being developed now demand has tanked. Second, when those sites are in relatively high demand areas, developers still have strong incentives to hold on to sites, because they know that the long term trajectory of house (and hence land) prices in those areas is upwards. In other words, holding sites becomes more sensible as the gap between current price and future expected price increases. And why do developers expect prices to increase more in the long run? Partly because demand will recover, but partly because the planning system continues to restrict the supply of land in places where demand is highest."

Sure, developers share some of the 'blame' for problems in the housing market. Some of the problem is down to bad practises, bad management etc; some of it down to the planning system itself. But genuine land 'hoarding' (getting planning permission for sites you have no intention of developing in the short to medium run) is only a small part of the problem. Ed Milliband will get headlines for attacking it, but that doesn't bring us any closer to understanding how Labour would try to fix the much bigger problems of housing supply and hence help solve the housing crisis.

Friday, 7 June 2013

Housing Policy Curse Strikes Again

I see that Hilary Benn has been struck by the housing market policy curse (that makes politicians say silly things when talking about housing policy). This follows on from recent incidents including the budget, and announcements by Nick Clegg and Ed Balls

Here's Hilary Benn talking about planning in the Telegraph: "I believe communities can make these [planning] decisions for themselves. I don’t think that if given that power, communities will ignore the needs of young people and the nation as a whole. In fact, if they can shape what happens – deciding where the homes will go, being certain that the extra infrastructure (schools, shops, and GPs surgeries) will be there, feeling comfortable with the design and knowing that their children and people on the local waiting list will be at the head of the queue - then I am confident that communities will take the right decisions about what is best for their needs."

In short, Hilary Benn thinks that local homes for local people will produce local plans that allow much more housing. Will this work? Well, the coalition is already promoting local plans which give people say over what happens where in their communities, but there's precious little evidence that this will deliver more housing. Hilary Benn thinks that this would change if we introduced a "local homes for local people policy". That is, he is proposing to moving housing allocation to a system that recognises the right to live where you are born (residency criteria) or where you work (employment criteria). As I have written before I don't like the politics of this: Putting aside issues of how it would be implemented, do the Labour party feel that these are sufficiently strong rights to weaken those around housing need (the current criteria)? If they do, then that is an important policy shift which will have big (negative) implications for many of our poorest families (as well as for the functioning of the economy). Of course, I don't believe that the Labour party intend to abandon the principle of needs based housing allocation and move to a local homes for local people policy, in which case Hilary Benn is essentially calling for the implementation of a (local plan) policy that already exists. The curse strikes again ...

Thursday, 6 June 2013

Windfarms and House Prices

[by Dr Steve Gibbons]

News this morning suggests that communities near new wind-farm developments could be in for some form of compensation, through lower electricity prices or other payment schemes. The BBC reports that the compensation could be worth as much as £100,000 per community This is probably welcome news for residents potentially affected by wind-farm developments, although provisional findings from on-going research suggests that this level of compensation may not cover the costs involved, in terms of environmental, health and other impacts. I find that an operational wind farm reduces housing prices by around 7% up to 5km from the wind farm site. Some rough calculations based on these estimates suggest that the implied social costs on the local community (within 5km) amounts to about £80 million per operational wind farm, or about £500 per household per year.

Extended (user friendly) abstract follows below

Renewable energy technology has potential global environmental benefits in terms of reduced CO2 emissions and slower depletion of natural energy resources. However, like most power generation and transmission infrastructure, the plant, access services and transmission equipment associated with renewable electricity generation may involve environmental costs. This is particularly so in the case of wind turbine developments, where the sites that are optimal in terms of energy efficiency are typically in rural, coastal and wilderness locations that offer many natural environmental amenities. These natural amenities include the aesthetic appeal of landscape, outdoor recreational opportunities and the existence values of wilderness habitats. In addition, for residents local to operational wind turbines have reported health effects related to noise and visual disturbances.

The UK, like other areas in Europe and parts of the US has seen a rapid expansion in the number of these wind turbine developments since the mid 1990s. Although these ‘wind farms’ can offer various local community benefits, including shared ownership schemes and the rents to land owners, in the UK, and elsewhere in Europe, wind farm developments have faced significant opposition from local residents and other stakeholders with interests in environmental preservation. This opposition suggests that the environmental costs may be important. This is a controversial issue, given that opinion polls and other surveys generally indicate majority support of around 70% for green energy, including wind farms, (e.g. Eurobarometer 2007). This contradiction has led to accusations of ‘nimbyism’ (not in my backyard-ism), on the assumption that it is the same people opposing wind farm developments in practice as supporting them in principle. There is a perhaps less of a contradiction when it is considered that the development of wind farms in rural locations potentially represents a transfer from residents in these communities and users of natural amenities (in the form of loss of amenities) to the majority of the population who are urban residents (in the form of energy).

This research provides quantitative evidence on the local benefits and costs of wind farm developments. In the tradition of studies in environmental, public and urban economics, housing costs are used to reveal local preferences for wind farm development in England and Wales. This is feasible in England and Wales because wind farms are increasingly encroaching on rural, semi-rural and even urban residential areas in terms of their proximity and visibility, so the context provides a large sample of housing sales that potentially affected (around 15% of residential postcodes are within 5 km of operational or proposed wind farm developments). Estimation is based on quasi experimental research designs that compare price changes in places close to wind farms when wind farms become operational with various comparator groups. These comparator groups include: places close to wind farms that became operational in the past, or where they will become operational in the future; places close to wind farms sites that were refused planning permission; places close to wind farms that are planned or proposed but are not yet operational; and places close to where wind farms became operational but where the turbines are hidden by the terrain.

All these comparisons suggest that wind farm developments reduce local house prices. This price reduction is around 7% for housing within 5km of a wind farm. The impact increases to 9% within 1km and falls to 3% at 10-15km which is at the limit of likely visibility. At 5km, half of this impact can be attributed to visibility and the other half to the general proximity to the site. If we take these figures seriously as estimates of the mean willingness to pay to avoid wind farms in communities exposed to their development, the implied costs are very large. Aggregating over households within 5km of current and proposed wind farm sites alone leads to an implied social cost of around £34 billion.