Friday, 9 October 2015

The mothballing of SSI: Is all lost for Teesside?

Posted by Maria Sanchez Vidal, SERC and University of Barcelona

Three weeks ago, SSI Redcar decided to mothball its Teesside steel plant citing a recent drop in world steel prices. The plant is one of the last large survivors of an industry that has been declining for years. There are, understandably, big concerns about the effect of eventual closure on local employment. Many commentators worry that the job losses will extend beyond those working in the plant itself. The end result, we are told, could be the loss of 2,000 direct jobs plus thousands more from contractors and other firms in the supply chain. And these concerns aren’t just limited to a fall in future orders: SSI Redcar currently owes suppliers more than £10m.

According to our recent research, however, the long run consequences of SSI Redcar’s plant may not be as drastic as they seem at first sight. We analyse the effects of 45 large manufacturing plant closures on local employment in Spain. To estimate the impact, we compare the areas that experienced a large closure to areas that are similar in terms of employment levels and trends prior to the closure. The results show that, for each job directly lost in the plant closure, only between 0.3 and 0.6 jobs are actually lost in the affected industry. That is, for every 10 people laid off, at least four workers return to similar jobs in other local firms. In addition, we find no employment effects of the large closure on firms in other manufacturing industries or in the services sectors within the local economy. In short, the medium to long-run effects on overall local employment are likely to be smaller than the original direct job loss.

Of course, it’s bad news that a plant as large as SSI Redcar is under threat. However, at least according to our results, there is still some scope for hope. The UK steel industry is clearly facing a huge challenge and the closure will negatively affect an already weak local economy. But, once the local economy adjusts, the employment effects are unlikely to be quite as devastating as the media suggests.

Wednesday, 30 September 2015

SERC Urban and Regional Economics seminar series, Winter 2015

Posted by Max Nathan (SERC)

Like true academics, SERC took the summer off and tried to do some writing. We are now back in action with our seminar series, which runs at LSE on Friday afternoons. Full details are here.

First up is LSE's new hire Felipe Carozzi, who'll be talking us through some new work on how anti-corruption programmes shape local (and national) election results. During the rest of this term we have papers from Frédéric Robert-Nicoud (University of Geneva), Sen Chai (Harvard and NBER), Siqi Zheng (Tsinghua), Olmo Silva (LSE), Michael Bikard (LBS), Steven Brakman (Groningen), Florian Mayneris (Louvain) and Maarten Bosker (Erasmus University, Rotterdam).

These seminars are aimed primarily at academics, and the discussion can get technical at points. But we regularly get government and think tank people in the audience too. 

Wednesday, 29 July 2015

Five Facts about Buy To Let

Posted by Philippe Bracke, SERC and Bank of England 

Buy-to-Let (BTL) investors are taking on an increasingly relevant role in the UK housing market. In this post, I present some initial findings from my ongoing research on BTL. I use data from the England and Wales Land Registry and the Zoopla web portal to find properties that are advertised for rent shortly after being bought. I show that: 1) BTL investors prefer (a) London and (b) flats; 2) BTL investors are more likely to pay cash; 3) BTL transactions are faster; 4) BTL investors buy at a discount; and 5) BTL discounts are larger for (a) Northern regions and (b) big properties.

Data from Department of Communities and Local Government (DCLG) show that the stock of housing held for private renting has more than doubled in the past 20 years, from 9% of the stock in 1993 to 19% in 2013. Despite this expansion, we don’t know much about BTL, which is defined here as the activity of purchasing properties to rent them out (independently of whether the investment is financed with a BTL mortgage). There are some papers on the role of housing investors in the recent US housing boom (for instance, Haughwout et al, 2011) but none of them specifically on BTL, except for Molloy and Zarutskie (2013), who analyse US large-scale investors’ activity after the housing bust.

The data
I assume that flats or houses advertised for rent within 6 month of their purchase are BTL properties. To find them, I use rental adverts from Zoopla, the second UK property portal in terms of traffic, as provided by Whenfresh, a data company. A Bank colleague, Perttu Korhonen, has matched these data at property and transaction level with the corresponding sales in the England and Wales Land Registry. This work was described in a previous  Bank Underground post.

Using this definition over the 2009Q1-2014Q1 period, I detect more than 100,000 BTL transactions. These closely match the aggregate trend in BTL mortgages for house purchases computed by the Council of Mortgage Lenders (CML), so we have confidence in this constructed measure. The solid line in Figure 1 shows quarterly CML data over the sample period, whereas the red dashed line represents our subsample (restricted to BTL transactions funded by mortgages, to be consistent with the CML data).

Fact 1: BTL investors prefer (a) London and (b) flats
BTL investors target areas and type of properties with a large private rented market. Figure 2 plots the percentage of Land Registry transactions classified as BTL against the percentage of the housing stock privately rented (as reported by DCLG). The left-hand side chart shows that BTL activity is much more common in London than elsewhere. The right-hand side chart shows that flats are more likely to be sold to BTL investors than other types of dwellings (terraced, semi-detached, and detached houses).

Fact 2: BTL investors are more likely to pay cash
Land Registry data suggest that around 70% of property transactions are financed with a mortgage.  Among BTL sales, only 50% are so: a half of BTL transactions are paid through some other method, mostly cash (although a few large BTL companies may use standard corporate credit). This result is robust across property characteristics, sale year, and location. So, for example, it does not depend on BTL investors purchasing cheaper properties which are incidentally more likely to be bought with cash.

Fact 3: BTL transactions are faster
The time needed to sell a property can be measured by matching sale adverts in the Whenfresh/Zoopla data with Land Registry transactions. On average, going from online advert to completion takes 5 and half months. For all BTL properties (cash- or mortgage-funded) this interval is reduced by 2%, i.e. approximately 3 days. On top of that, all cash transactions (BTL and others) entail an additional 6% reduction in time-on-market, corresponding to a 10-day decrease.

Fact 4: BTL investors buy at a discount
The media often contain stories of BTL investors pricing other buyers out of the market. It is expected that additional demand from a group of buyers such as BTL investors will raise price on aggregate, although this general effect is difficult to isolate in practice. It is less clear whether a direct effect is also at work: are BTL investors willing to pay more for the same properties?
To investigate this question, I compare properties bought by BTL investors with properties bought by other purchasers, keeping all the observed features (such as number of bedrooms or postcode) constant. Crucially, I can further restrict my analysis to properties that had the same advertised price, but are sold to different types of buyers, one of whom is a BTL investor.
It turns out that BTL investors spend on average less than other buyers for equivalent properties: the baseline estimate shows a statistically significant 1% discount. Or, put differently, other buyers spend 1% more than BTL investors for the same properties.

Fact 5: BTL discounts are larger for (a) Northern regions and (b) big properties
The 1% aggregate figure may hide a wide range of different discounts. Some regions may be less attractive to BTL investors because they have smaller rental markets. Figure 3 shows that BTL investors invest in those markets only in exchange for larger discounts: in the North East of England, the average BTL discount is 2.2%, whereas in the South of England and in London discounts are below 1%. A similar analysis shows that flats are associated with a discount smaller than 1%, whereas semi-detached and detached properties – which more rarely host private renting households – sell to BTL investors at a 1.5% average discount. In general, big properties take longer to sell, which leads to larger discounts. But these BTL discounts are computed relative to other buyers, implying that BTL investors are better at translating a longer time-on-market into a price reduction.

Ongoing research
The evidence gathered so far suggests that the impact of BTL investors on the housing market depends on the cycle. In a market where properties take a long time to sell, BTL investors can play a helpful role as buyers of last resort and contribute to market clearing by accelerating transactions. In a market where prices are already going up, BTL investors obtain lower discounts and could put additional pressure on property valuations. We are still far from the last word on the effects of BTL, but the available micro data are greatly improving our understanding of this part of the housing market.

Originally posted on the Bank Underground blog. The views expressed here are those of the authors, and are not necessarily those of the Bank of England or its policy committees.

Tuesday, 2 June 2015

Deep-rooted vested interests are to blame for our housing crisis

Posted by Christian Hilber, LSE and SERC 

The UK housing affordability crisis is a serious concern. A recent poll by Ipsos Mori found that 15% now mention housing as among the most important issues facing Britain, up from 5% in 2010.

The crisis is particularly acute in London and the South East, where housing is most unaffordable. In 2014, a year after the introduction of the governments Help-to-Buy in scheme, the price of the average dwelling in London increased by almost 26% to £400,404. Thats £82,190 or to really get a sense of what this means £9.38 every hour of the day and the night.

While many London homeowners and private landlords may be delighted to make more money from their houses than they do from their jobs, housing has become ever more unaffordable for young would-be-buyers, which is probably why, according to the same survey, 26% of Londoners think housing is an important issue, much higher than the national average.

Still, government figures show that the rate of home ownership peaked at above 69% nationally in 2002 but has fallen steadily to almost 63% in 2013, largely because fewer young people are buying homes. Other statistics show that in 1991, 67% of 25-34 year olds were homeowners but, by 2011, this had declined to 43%.

In a recent report, I showed that there is strong evidence that the planning system, as well as strong demand in some areas, is the main cause of this affordability crisis. Our planning system restricts urban areas with the use of green belts, with development control by local authorities and strict controls on height. There is also a lack of tax incentives at local level and a preponderance of not in my backyard behaviour, facilitated by the planning regime. This is largely why house building has been in decline or, some might say, in free fall since the late 1960s. We build about a third  of the homes each year today than we did in the late 1960s.


In short, the planning system does not allow the supply of homes to rise no matter how high prices rise, which essentially suggests that demand-focused policies proposed by the various parties are attacking symptoms but not causes of the problem.

For instance, the Help-to-Buy scheme already mentioned effectively stimulates demand and, since supply is so severely constrained, simply pushes up prices without stimulating construction, exactly as predicted when the policy was first announced. So rather than help, it has effectively priced out young would-be-buyers from the market so that Hinder-to-Buy would have been a more appropriate name for the policy. And its not alone in doing more harm than good.

There is today pretty much universal agreement among politicians that we have a serious housing crisis where the main losers are the young generation and there is also some consensus that the problem is one of supply. Regrettably, recognition isn't leading to action.

Fixing the planning system does not mean not having one. We absolutely need a system of land use planning to correct market failures. The planning system has an important role to play for example to ensure land-based public goods such as urban public parks or areas of outstanding natural beauty are adequately maintained or landmark buildings are protected.

In the absence of serious planning reform, political parties have resorted to announcing house building targets, as they seek to show voters that they will do something about the problem. But, again, these are of little use as prices already give developers, architects and builders the right signals of where and how much to build. Its the planning system that ignores price signals and tries to prevent residential development nearly anywhere. Were these price signals not ignored, we would build many more homes in more attractive areas. Wed have more high-rise buildings in town centres and more single-family homes further out.

More homes make housing more affordable. Thats a much better way to solve the crisis than with any government-set target.


So if the solution is so simple and obvious, why arent things changing? The reason is a powerful array of deeply embedded vested interests that make meaningful change difficult.

Homeowner-NIMBYs can protect the value of their homes by opposing almost any project that spoils their view or generates noise. Homeowners near green belts are even worse and best described as BANANAs: Build-Absolutely-Nothing-Anywhere-Near-Anything. They have particularly nice views to protect and particularly expensive houses that rely, to a certain extent, on keeping the green belt land off-limits from development.

What is more, a majority of voters still own their own homes, making the impetus for change even more sluggish.

So, is the only solution to wait for a socially explosive and economically traumatic situation that eventually triggers reform or even revolution? Possibly not, because there is an ever-growing group of young and not so young would-be buyers who have a strong interest in genuine reform and who may become more politically powerful over time.

Among the other groups that may begin to push for change are the aspiring and expanding families that have just about managed to get on the housing ladder. This group is crucial because young home-owning families are clear losers of the broken planning system, even though they often dont realise it.

They should be in favour of genuine reform for two reasons: because they live in artificially cramped housing and because they are increasingly priced out from moving to a larger home that would be more adequate for the growing family. Trading up becomes expensive and the problem is only made worse by the stamp duty.

Elderly homeowners should also have an interest in change. Many may well be sitting on large capital gains accumulated since the 1960s and 1970s when homes were still affordable. But realising those gains will be difficult if they want to remain in the same communities where they may have built strong ties over the years.

The only real winners of the broken system are elderly homeowners who are prepared to sell their houses, pocket the proceeds and move to a country with cheaper housing. For those who stay put, its mostly the children that inherit property who will eventually benefit, leaving children of people who rent at a relative disadvantage. The broken planning system cements wealth inequality and the proposed inheritance tax reform makes things even worse.

Why does no party not one propose genuine reform? Politicians of all stripes back away from meaningful change out of fear of being demonised by the vested interests.

Still there is hope. Many commentators and secretly many politicians now understand the real cause of the crisis, which suggests public opinion may soon turn away from the vested interests. The polls certainly suggest a softening and even this Financial Times poll shows that almost 72% of its readers would back building on the green belt. Once public opinion warms up to the idea, a well-thought through reform could even become a vote-winner. Now theres an idea for the next election.

This article was originally written for Disclaimer Magazine. View it here

Thursday, 28 May 2015

City Devolution

[Posted by Prof Henry G. Overman]

Following the Queen's speech my twitter feed is full of people expressing views for or against devolution to cities. Supporters push for maximum devolution to boost growth and productivity, improve efficiency in local government and build the northern powerhouse. Critics suggest the main attractions lie elsewhere - for example as a means of cutting government expenditure, a crude power grab by local politicians and a way for Londoner's to reduce taxes.

While there may be some truth in both these arguments, they won't do much to progress debate on what might constitute the right balance of powers between central and local governments. Indeed, what's a little depressing, but not very surprising, is the extent to which the vociferous public debate appears to pay almost no regard to the large academic literature that considers this issue.

Here, for example, is Wallace E. Oates one of the leading experts on fiscal federalism writing in a 1999 Journal of Economic Literature essay:

"But the proper goal of restructuring the public sector cannot simply be decentralisation. The public sector [...] consists of several different levels. The basic issue is one of aligning responsibilities and fiscal instruments with the proper level of government. [...] To realize [the advantages of federalism] we need to understand which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government"

I've reflected on some of these issues before on this blog. For example, I'm pretty convinced that many decisions on transport and housing would better sit below national but above local authority level. After all, the evidence suggests that this is the spatial scale at which labour and housing markets operate. The governments proposals on metro mayors would help achieve this improved alignment.

In contrast, I'm still to be convinced on skills policy. Local authorities are certainly clamouring for powers in this area. But I worry that there is too much focus on higher level skills and not enough on the basics. I personally think the evidence is clear that early years and schooling should be central to any LED policy. Not only do these policies directly target one of the central problems faced by poorer families, but good local schools also help attract and retain already educated workers. But, I have no idea whether skills policy needs to be individualised, localised or centralised. I have similar reservations when it comes to active labour market policy.

I'm pretty sceptical on local industrial policy (e.g. cluster policy, complex attempts to create innovation systems, targeting particular sectors etc) because I don't think the evidence on its effectiveness is compelling and I worry that competition amongst local areas will lead to wasteful - and ultimately fruitless - expenditure.

Finally - I don't have a strong view on health or policing - because these are areas in which I have no particular expertise.

This isn't supposed to be comprehensive list - and my position on some of these areas isn't settled. Convincing evidence could shift my opinion either way. But we need the debate to shift from arguments over 'whether' to arguments over 'what' and 'why'. To my mind, we need answers to these latter two questions, before we can figure out how to proceed.


Friday, 22 May 2015

Are they Green *Belts* by Accident?

Posted by Paul Cheshire, LSE and SERC 

We Brits are a self-satisfied lot, and seem to assume that Green Belts are a splendid British invention and a wonderful boon to the world. A signal of our praiseworthy efforts to protect the green: whether the village green or the environment: never a signal of our nostalgic hankerings for a rural England which never existed.

In fact, the truth seems remote from this English foundational myth. The way in which Green Belts developed suggests they are only belts by accident and are certainly an imported idea. As part of the work for a London First report, I have recently been looking at how our Green Belts came into existence and how their purposes have been transformed in the process. It is an extraordinary story, and I have learnt substantially from Jonathan Manns' work.

In the 19th Century, many continental European cities were getting rid of their city walls: the development of the nation-state and mechanised warfare had rendered them functionally irrelevant. This was happening in Vienna in the late 1850s and the idea of a Ringstrasse park was proposed. Although Napoleon had twice shown that Vienna’s fortifications could not withstand a modern (early 19th Century) army, the conservative Austrian military withstood their demolition until 1857. The city walls had had an area around them kept clear for military purposes, so their demolition released a substantial circular ring of space around the city. Bourgeoisie civic-mindedness was just developing. The map shows what was proposed: a Green Belt if ever there was one! But only a belt by accident. It was on the space released by the city walls and not surprisingly city walls had a roughly circular shape.

In the UK we also tend to link the idea of green belts to Ebenezer Howard’s proposals for Garden Cities.  Not so. The first British person to propose a Green Belt seems to have been Lord Meath – an Anglo-Irish public figure and philanthropist. He is an interesting character and, to put it mildly, very alien to modern sensibilities. Despite being an Alderman on the original LCC he believed in the fundamentally corrupting nature of cities – so far as possible, their size should be limited and rural-urban migration halted. He also believed cities ‘corrupted’ the gene pool of the British. He realised, however, that London was going to continue to grow: so his answer was to increase the supply of green spaces and recreation grounds in London and construct a ‘Green belt or girdle’. His other solution to the burgeoning urban population was state-sponsored emigration to the British Colonies: he was a strong Imperialist - indeed the founder of Empire Day, a public holiday to celebrate the British Empire wherever the sun never set.

Meath explicitly imported the idea from the Viennese proposal but his version of a green belt or girdle had much more in common with Howard’s later ideas for green belts around his Garden Cities of Tomorrow than it did with the modern Green Belt. Apart from the Viennese Ringstrasse park, Meath was influenced by his visits to the US and seeing early ‘beltways’ – wide avenues around major cities.  He envisaged such a broad avenue connecting public open spaces, some existing and some to be bought and dedicated to public use, encircling London. 

An updating of his proposal as published in 1901 is illustrated below (and is taken from here). Much of the Meathian green belt was close to central London and all would have been within the GLA boundaries – mostly inside the inner boundaries of the modern Green Belt. 

Source: Aalen, F. Planning Perspectives, 1989

The idea was taken up by the London Society in1919 in its proposed Development Plan for Greater London. This was still a proposal for ‘green lungs’ for a smoky, dirty and highly congested London. Official adaptation came in 1935 when the old London County Council endorsed the idea. It was implemented in 1938 with the Green Belt (London and Home Counties) Act. This empowered local authorities to buy land for public use.  By the late 1940s 20,000 hectares of land had been bought around London dedicated as public open space.

In the immediate post-WWII period of reconstruction under the Atlee government, Green Belts were provided for all major cities that wanted them under the Town and Country Planning Act of 1947. But this did not propose buying land. The Act – still the basis for our planning system - expropriated ‘development rights’ from freehold land ownership. So in effect it gave power to local governments to prevent urban development on as yet undeveloped land. It did not give rights of public access or generate any change in ownership. Privately-owned land, if designated as Green Belt, would remain private. So, while still promoted in the name of green space, in practice the Green Belt provisions in the 1947 Act just stopped anything happening – rather than creating valued recreational or open spaces.

Although the 1947 Act provided for Green Belts, however, it did not implement them. That the 1947 Act was a creation of the Atlee government gives the Labour Party a sense of ownership of the idea but the implementation was under a Conservative Housing Minister, Duncan Sandys, in 1955. And the purposes by now had totally changed – both in aspiration and in reality. No more were Green Belts to be green lungs or recreational space; they were just to stop development.

As the Minister wrote: even if…neither green nor particularly attractive scenically, the major function of the Greenbelt was…to stop further urban development.  That remains their function as confirmed in the National Planning Policy Framework of 2012. Their purpose was to be empty spaces between cities, to protect the Home Counties from the encroachment of London and force urban expansion to jump over Surrey or Hertfordshire to Northants, Cambridgeshire or Hampshire.

In the early 20th Century the Californians tried to apply zoning to confine Chinese minorities to particular neighbourhoods and later, in Louisville, Kentucky, zoning ordinances were brought in to stop Blacks from buying houses in certain areas. This was deliberate discriminatory zoning designed to protect privileges and create new ghettoes. Such discriminatory zoning was struck down by the Supreme Court in 1917, but the right to zone in a non-discriminatory way was permitted in a judgement of 1926. Local communities in the US soon found a way of keeping ‘undesirables’ out: they zoned for single family homes only and on large plots. Over time plots became ever larger and what is now euphemistically known as ‘minimum lot size’ requirements became pervasive. 

It is claimed, for example, that ‘the Bay Area is built-out’. And so it is in the sense that more or less all available zoned lots are developed. But look across the Golden Gate Bridge and you see Marin County just a mile or so from downtown San Francisco. Minimum lot sizes in many of the communities in Marin County are 60 acres! There are many prosperous communities in the mid-West and West of the US which have 10, 20 and even 50 acre minimum lot size requirements. This is very effective at keeping poor people out. It is exclusionary but is does not discriminate and so is legal. It also contributes significantly to the sprawl of US urban development.

Greenbelts, as implemented, have become a very British form of exclusionary zoning. They have the effect of confining the urban poor to live at high densities in the cities and preserving the Home Counties (and other similar green places near to all our other cities with Green Belts of their own) for the aspirant gentry who had got there earlier on the tracks of the suburban railway network; or as bohemian urban refugees establishing artistic colonies such as Eric Gill’s Piggotts or the Sussex retreats of the Bloomsbury Group. It seems to be a long-standing tradition of the privileged British to want to deny for others what they enjoy themselves. Particularly if they can do so while maintaining a stance of moral superiority, presenting themselves as protectors of the real interests of those whose desires they frustrate. Prominent members of the Bloomsbury Group, happily housed in England’s pleasant fields, were solid supporters of the early Council for the Preservation of the Rural England and J. M. Keynes contributed to Clough Williams-Ellis’s seminal 1928 anti-urban tract, Englandand the Octopus. Williams-Ellis himself, of course, built a tasteful Italianate Disneyland precursor on a beautiful estuary in North Wales. But he had taste so that, of course, was alright.

Thus the idea of Green Belts, the accidental innovation – aimed at adding green space to high-density ancient Vienna in place of the city walls, then adopted in unaltered form in England as an idea to improve urban life for all – has been transmuted into a protective device for the wealthy. If you really want to plan to protect and provide better access to green space and open countryside without artificially constraining land supply and forcing up house prices, then Green Fingers (or Green Wedges) would seem to be the best solution. That is what more egalitarian Scandinavians have. Copenhagen has its Green Fingers – really brown urbanisation along the radial routes out of the city with protected countryside each side. Denmark has not just got cheaper housing: according to the Dallas Fed’s data, the real house price has increased by a factor of 1.6 in Denmark compared to 3.4 in the UK since 1975 but new houses in Denmark are a lot bigger: 80% bigger in fact.

Now green wedges seem like a quite sensible idea.