Affordability or amenity?

Rowan Moore reads the new enormobook 'Living in the Endless City' and fishes out a good quote:

Suketu Mehta, on Mumbai, articulates the fundamental dilemma of urban improvement. No matter how appalling the overcrowding and squalor might seem, the city will continue to attract yet more people because it still offers things, such as freedoms and opportunities, that the countryside cannot. And, therefore, according to a planner quoted by Mehta, "the nicer you make the city, the larger the number of people that will come to live there".

Now, on the one hand, that's extremely obvious. But on the other hand I'm not sure we always think through the implications.

Over the past few decades city centres in richer countries have generally become better places to live, as crime has fallen and dirty industries are either priced or regulated out [1]. So demand to live in city centres has also gone up. Faced with higher demand, cities can choose to increase supply (by building more housing and offices) or to keep things as they are.

If you increase supply you are changing the environment that people have come to value. People being risk-averse, it's not surprising that they tend to resist. But not increasing supply (or, more commonly, not increasing it enough to match rising demand) means that over time, improved quality of life feeds into higher prices for housing and commercial space. Which is exactly what we have seen happen in Manhattan, and what I think is happening in London.

So cities with improving environments have a decision to make: if they try to keep their city affordable, they need to make some big changes to its built environment just as people start attaching a greater value to the status quo. Economists sometimes act like this is a no-brainer, but it really isn't. I think that people become more resistant to change in the built environment (i.e. to new housing or office supply) as its amenity value increases, and you can see why. But the implications for the long-term affordability of city centres are very serious.

[1] These two trends are two sides of the same coin, if you buy the argument that falling lead pollution caused falling crime rates - and I think I do.

UK house price to rent ratios aren't all that reliable

The Economist has a nifty interactive resource showing trends in house prices and associated indicators for a bunch of countries. It includes trends in the ratio of house prices to rents, which in theory should be useful as an indicator of over- or under-valuation in house prices - if prices are very high in relation to rents then that's a sign that they are over-valued as an asset in comparison to the income stream they can be expected to earn. According to the Economist's data, the price to rent ratio in Britain is still way above its historical average, and this is evidence that housing is over-valued as an asset.

That could well be true, but I think we should be cautious in how we interpret these figures, because constructing them is not at all straightforward, perhaps particularly in Britain. That's because while we have a bunch of house price indices we have no equivalent for market rents: that is, no reliable and comprehensive data on trends in average market rents, from either official or private sector sources. So what is the Economist using? They say the data is from Office for National Statistics but are no more specific, but since ONS to my knowledge don't have any dedicated market rent data my guess is that they are relying on the 'Rent' component of the official CPI/RPI indices.

The problem with that source is that it includes not just private sector but also social rented housing, i.e. council and housing association stock (see here for the 'basket' of goods and services included in CPI/RPI). But social housing rents are strictly controlled by government regulation, so the trend in social rents is typically quite different from the trend in market rents, making the CPI/RPI rental index a poor proxy for either.

So I would be much more cautious than the Economist, who confidently assert here that British house prices are 30% over-valued and do the same calculation for a bunch of other countries, the data for which may or may not be any better than for Britain. The benchmark used to identify over- or under-valuation is a long-run average, but even leaving aside the very large problem of data quality it is not clear to me that the level of the price/rents ratio in, say, the late 1970s is a good guide to what it should be in the 2010s.

Anyway, there you have it. Note that I'm not saying British houses aren't over-valued, just that you can't really tell from the market rents data we have at the moment. I have heard that the Valuation Office Agency will start publishing statistics based on their very extensive market rents database soon, which would be great, but that still won't provide the kind of historic trend the Economist's table requires.

Up with escalators

Dave Hill has an interesting post about the potential impact of the Olympics on the prospects for regeneration in Newham. Here he quotes Sir Robin Wales, mayor of Newham:

But the problem was not only about getting local people into new local jobs. It was also about getting them to remain local people afterwards. Sir Robin spoke of population churn, which his borough has a lot of: "The people moving into Newham are poorer than the people moving out. They come into Newham, they get work, they get jobs and then they move out of the area, and another group of people come in, who are poorer."

You can understand why some people, especially local politicans, look at this and see a problem. Any static snapshot of Newham will reveal a lot of poverty and a lot people struggling to get on. But by Sir Robin's own account, over time a good deal of them do get on, and many eventually move out. They are replaced by more poor people, and the process repeats. The snapshot may not change, but what it doesn't show is that living in Newham seems to give many people on very low incomes a place from which to improve their lives, in a way that ostensibly more 'successful' London boroughs like, say, Richmond or Kingston don't.

So maybe somewhere like Newham actually performs a very valuable function in terms of poverty reduction, acting as what's called an 'escalator' area enabling people to get up and perhaps get out (see here for some research on escalator areas as compared to other types). But people who get 'up and out' by definition won't be around to express their gratitude. Local politicians know that if they can improve the local economy and local amenities to the extent that more current residents are happy to stay, there will probably be a positive political payoff, as well as an area that looks and feels better. It's difficult to disagree with that vision, but I worry that if everyone pursues it there may eventually be no escalator areas left in London.

In summary, I think there are two problems here. One is a simple problem of statics versus dynamics: a place that looks poor may really be doing a very good job of helping people improve their lot, while a place that looks nice and successful might only be good for those who are already wealthy. The second problem is that our institutions seem to provide more incentives to pursue success in relatively static terms, putting the interests of current residents above potential future residents. There's a lot to be said for the interests of current residents, obviously, but they're not the whole show.

Snobbery and endogenous amenity

Richard Florida observes the extraordinary price premium attached to apartments in central Manhattan, and argues that such a location is

a commodity that reflects two underlying price premiums. The first is an amenity premium – the price people pay to be around great restaurants, museums, theatre and culture as Harvard’s Ed Glaeser and others have shown. The second is a productivity premium, for the economic leverage that comes with such central locations. As the University of Chicago economist Robert Lucas famously put it: “What can people be paying Manhattan or downtown Chicago rents for, if not for being near other people?” It’s this underlying productivity effect that generates higher incomes, which in turn lead to higher prices.

I think this is right, but I would just add that while economists tend to treat amenity values as largely exogenous, i.e. inherent to a location, they are in fact partly endogenous to the market. When prices are Manhattan-high, would-be buyers or renters know that their neighbours will be rich people. And some rich people are willing to pay a lot to be surrounded by other rich people. It's partly status and partly sociocultural affinity - snobbery, you might say.

So there is a social component to amenity as well as an environmental one, and the social component is partly endogenous. I think this is one reason why you get runaway price differentials between areas of the Manhattan variety.

Property-owning democracy or home-having democracy?

I'm fully on board with Andrew Rawnsley's call for more housing supply, but I question some of the assumptions he's making.

First, he argues that Harold Macmillan's success in getting new homes built in the 1950s was motivated by the conservative dream of a 'property-owning democracy', which implied that "the working classes would turn away from socialism as property ownership infused them with conservative values".

Well, maybe, but if Supermac really expected his housebuilding program to result in a property-owning democracy he was playing a very long game, because three quarters of the 1.1m homes built in his tenure as Housing Minister (1951-54) were council homes (see table 241 here). I don't know much about Macmillan's stated beliefs on this subject, but based on his actual record he looks more like a pragmatist who believed in a 'home-having democracy', where people who badly needed decent, affordable homes got them, and getting them built was much more important than who owned them.

In fact, it's tempting to conclude from the historical record as shown in the chart above that if the government really wants to get some homes built the most effective way is to do it itself through a large programme of council house building. The catch is that the conditions that facilitated that policy in the past, such as relatively cheap land and labour and a very high proportion of people living in crowded or otherwise inadequate housing [1], may no longer apply.

Rawnsley argues that truly widespread home ownership should still be the goal of any sensible political party in Britain. It's not just that nearly everyone wants to own their own home, but that in doing so they are effectively forced to save and build up assets, which they can draw on later in life if they need to or pass on to their children if they wish. So property ownership spreads the wealth, promotes financial prudence, and most important of all it just makes people happy.

This is an attractive vision, and one pursued (with some success, as measured by home ownership rates) by governments since Thatcher. But as Rawnsley goes on to note, there was a problem, as a "steep rise in values made British homes very pricey relative to income".

This run-up in prices is presented as just one of those things that happens, but what if it was no accident but an unintended consequence of the promotion of home ownership? Simply put, a large number of home owners in an area means a large number of people whose major asset may decline in value if there is too much new housing supply in the area. Contrast that with the situation of renters, who should (all else being equal, which of course it often isn't) welcome new housing supply insofar as it tends to lower equilibrium rents. So if government policy is to turn renters into owners, then maybe it shouldn't be surprised if people start being more hostile to new supply.

As Rawnsley says, people do indeed aspire to home ownership. But who doesn't want to own a valuable asset? The problem is that one person's valuable asset is another person's sky-high housing costs.

[1] I'm well aware that there are a substantial number of people living in overcrowded households. But it's nowhere near the levels of overcrowding seen in the 1950s.

Non-newsworthy people also affected by high housing costs

Just to add to my last post, I find it frustrating that the expense and insecurity experienced by tenants in the private rented sector is only considered really newsworthy when those tenants are frustrated would-be homeowners. There are lots of people renting privately who for all sorts of reasons are not looking to buy. Perhaps they are students, or migrant workers, or just at stage in life where they don't want or need to 'settle down'. Perhaps they like living in city-centre locations, where the flatted accommodation makes ownership less attractive. Or perhaps they are part of the large group of people who are just not very well-off and even in 'normal' times would have little or no prospect of saving up for a deposit and making the monthly payments on a mortgage.

It's not so easy to fit these groups into nice media narratives, and many of them are politically or culturally marginalised anyway. But their concerns are just as valid, and if the private rented sector is not meeting their needs then that should be just as much of a public policy priority as the frustrations of aspirant first-time buyers.

Anyway, as Tony Clements points out, any significant 'help for first-time buyers' in the form of subsidies or cheaper credit is just going to push prices up again. But tight restrictions on mortgage lending in the last two years has just displaced demand into the rental sector, pushing up rents.  As I said before, the real solution has to be increasing new supply by enough to bring down overall housing costs. The extra supply required to bend the curve of long-term housing cost growth downwards is very large, so the question of how to achieve it is a difficult one to answer. But it's one we have to face up to.

Not enough housing supply means rising housing costs

The IPPR have published a report on housing bubbles and how to stop them, which along with a Halifax report on 'Generation Rent' has been getting a good deal of attention. I agree with most of the IPPR's analysis and recommendations (which are mostly to do with reducing price volatility), but just wanted to focus on one thing, namely their graph of the long-term trend in real (inflation-adjusted) house prices:

It's notable that after a long and deep recession and a sharp fall in house prices, and at a time of high unemployment and very restricted mortgage lending, we are still only back to the long-term trend in house price growth. The short term picture is very uncertain, but when we eventually return to falling unemployment and/or somewhat looser mortgage lending criteria, don't be surprised to see above 'trend' growth in house prices come back.

But it's also a mistake to look only at prices. As the Halifax pointed out, more and more of us are renting for longer periods, partly (but not entirely) because many who want to buy can't. And while house prices were falling, average rents have been rising in recent years (see here and DCLG's table FT3232 here). Depending on what happens to mortgage lending conditions, we might see the balance between house price rises and rent increases change, but as long as demand (see latest household growth projections here, for example) continues to outstrip supply, the long-term story will be one of rising overall housing costs.

Cheap fuel is costly

The BBC wants to know why Americans are so angry about petrol prices. Here's 'crossrider' of the Cycalogical blog:

The USA has the lowest petrol taxes of just about any developed country. So you would think that because they spend about half of what we do on a litre of motor fuel, petrol prices wouldn't be much of an issue. In fact, the opposite is the case. They have seen a much higher percentage increase in the forecourt price as the underlying oil price has risen, and because super-cheap fuel has enabled them to become highly dependent on big, thirsty vehicles for everything from shopping to commuting, and because they typically live further from their workplace than the average European, the sudden increase in the oil price has really squeezed ordinary Americans.

I think that's exactly right.  To go back to the BBC story:

At Tyson's Corner Center, a huge shopping mall in northern Virginia, motorist after motorist said it was hurting them in everything they did - the commute, the weekly shop or the school run.

Yes, if everything you do involves buying fuel, then increases in the price of fuel are going to hit you really hard. And it's not like Americans spend less on car transport than us Europeans. The price of fuel is low, but as crossrider says it has just encouraged the average American to consume more fuel, and to buy and maintain more cars than the average European. All that adds up. 

For some numbers, see this fascinating paper on household transport spending in OECD countries by Jari Kauppila. His main chart is below (you might need to click for a larger version).

Looks like transport takes up about 18% of total spending for the average US household, compared to about 14% for the UK. Here's a breakdown of total US household transport expenditure:

Only 6% of average US household transport expenditure goes on 'transport services', i.e. public transport (compared to about 26% in the UK. The rest goes on cars, whether it's buying them, maintaining them or fueling them.

By my sums that means the average US household spends about 17% of its total expenditure on cars, compared to about 10% for UK households. So the fuel may be cheap, but the whole package certainly isn't. And that's not including the wider costs of a car-dependent society, of course.

Map of cars per household in London

Somewhat related to yesterday's post, here is a map showing the average rate of cars per household across London. It's my first time using Fusion Tables to produce a map so I'm not even sure if it's going to work okay. And I can't seem to attach a legend anywhere, which is a bit of an issue ...



If it does work, what it should show is that, unsurprisingly, there are fewer car-dependent households in inner London than in outer. This is based on 2001 Census data, so it will be interesting to see if there are any significant changes when the 2011 data is eventually released.

Link to the Fusion Table.

Census data is Crown Copyright 2010 from CasWeb, boundaries are Crown Copyright 2010 from UKBorders, an Edina/JISC supplied service.

Spaces for cars, spaces for people

At some point early in the previous decade, Britain reached what I think should be considered a significant landmark. The number of licensed private cars in the country surpassed the number of dwellings for the first time: in 1961 there were three dwellings per car, in 1981 1.8, and by 2008 it was 0.98 (though showing signs of stabilising).

Obviously a car is a great thing to have for many people, if they can afford it, and as incomes have grown more people have found it a worthwhile investment. But a decent, affordable home is a good thing to have too, and I think it's interesting to contrast our enthusiasm as a society for allocating more and more space for cars with our hostility towards allocating more space for people to live in, as well as the very different government policies applied to each case.

Considering how expensive and cramped the housing in much of the country is, you might expect society in general and the various levels of government to be constantly striving to increase the housing stock. But what you actually see is amazingly energetic and committed grass-roots efforts to constrain the growth of the housing stock, which are then reflected in a very restrictive set of government policies. By contrast, people and government in most parts of the country seem united in their determination to increase the amount of car parking available. It's rational for every individual to want cheap parking for themselves, but the aggregate consequences are fairly perverse: you end up creating places like Hungerford and many similar towns around the country, where there are strict controls on using land for anything except car parking, so that car parking is made cheaper and everything else more expensive.

The growing number of cars is using up more of our time as well as more of our space. The more cars there are on the road, the more congestion there is and the more time each car spends sitting in traffic. And because both space and time are strictly finite resources, the opportunity cost of space and time given up to cars is only going to grow if incomes continue rising over time. We seem to be acting with a collective assumption that allocating more and more space to cars is a costless decision, but it really isn't. Over time we have turned many of our streets from places of movement into places for storing large metal boxes - just because the change has happened gradually doesn't mean it doesn't have very important consequences, many of them negative.

In short, I think the growth in the number of cars represents a significant resource problem for our society, one that seems to be receiving roughly zero strategic attention at the moment. What to do about it is an argument for another day: in general I think a combination of supply caps and market pricing would help a lot, but as we haven't even started having a debate about the issue yet any reasonable policies seem a long way off.

Sources for the graph: Private cars licensed from Department for Transport table VEH0103 here, number of dwellings from DCLG table 102 here.