Tuesday, 11 November 2014

Building homes where we need them

Finally had a chance to catch-up with Centre for Cities report on where to build homes for Britain's most successful cities.

In the ten least affordable (British) cities building out every brownfield site delivers a total of 425,000 extra houses. If you go outside of their existing built-up area and use land within 25 minute walk of an existing train station you could add up to 1.4 million new homes (at reasonable densities). If neighbouring authorities could be made to cooperate that total rises to 3.4 million homes within 2 km of existing train stations.

The trouble, of course, is that those 3.4 million homes (within walking distance of existing infrastructure) would need to be built on green-belt land. In total, around 12.5% of the green belt land around those cities would be needed for development.

Achieving agreement on this scale of development on green belt land will clearly be difficult. Although, as the report notes, developing brownfield land can be a complex process and may require cities to take additional actions (e.g. land assembly) and investment (e.g. new infrastructure). And that brownfield land is only capable of delivering a fraction of the homes that could be built around existing infrastructure in the greenbelt.

In short, as the report makes clear, both options have their challenges, but making housing more affordable in our most successful cities will require a more sensible debate to designate land on its merits rather than according to whether it is currently designated as brown or green field.

Monday, 10 November 2014

Who buys new homes in London?

There's some interesting figures in this British Property Federation report from earlier this year on purchases of new homes in London (which I somehow missed first time round).

Headline figure is that various forms of investor acquire around 60% of new units with owner occupiers taking 40%. Around half of those investor purchases are by overseas buyers (defined as buyers who are normally registered as overseas). There's little evidence that those overseas buyers are leaving properties empty.

There are interesting variations across price ranges and locations - with owner occupiers acquiring around 80% of sub £450 per square foot properties (mostly in outer London) but only around 30% of £1,000-£1,500 per square foot properties (mostly in inner and 'prime' central London).

Overseas buyer activity varies by location as well - accounting for 50% of prime, 20% of inner London and only 7% of outer London (I think this is totals of investors and owner occupiers).

As always, figures from the property industry come with a big fat health warning (there's lots of private data and expert adjustments in use here) but I still found the overall numbers interesting - and a useful counter point to some of the media reporting which suggests much more overseas buyer activity.

Monday, 27 October 2014

Can 'Tech North' take off?

Posted by Dr Max Nathan, SERC and NIESR

Rory Cellan-Jones has a nice article on the BBC website on the prospects for the Government’s ‘Tech North’ initiative, building extensively from my work with Emma Vandore on Tech City in London. Here’s some further thoughts.

Tech North was launched by Nick Clegg last week: it’s one of the products of the DPM’s recent Northern Futures initiative. The idea is to promote tech clusters in Liverpool, Manchester, Sheffield, Leeds and Newcastle: Clegg has put £2m/year on the table to support local firms, and to attract FDI to the area.

Politically this is a no brainer. It meshes with the government’s ‘rebalancing’ rhetoric. And it fits the new mission of TechCity UK, which has expanded its remit from just East London to cover the whole country. TCUK is publishing work next month looking at digital clusters, which will put some new numbers behind the policy.

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So will it work? Rory is fairly sceptical in his piece. I’m still unclear what the programme will actually do: so here are five issues policymakers should be thinking about.

1/ Real geographies – Tech North connects five big cities with over 150 miles between them. In the real world, urban tech is in very tight microclusters: neighbourhood scale scenes which allow for lots of face to face contact. In Liverpool, for example, a lot of the action is in Ropewalks or the Baltic Triangle.

In London, Ministers originally hoped to ‘connect’ the Shoreditch cluster to the Olympic Park a few miles away. That hasn’t proved possible, not least because Old Street firms didn’t want to move there and saw no connection between the two.

So the chances of creating a single super hub across the Pennines are slim at best. There are worrying echoes of the Thames Gateway here: a planning concept, not a real place. On the other hand, as we found in London, the area branding might prove a helpful way to raise the profile of these local scenes.

2/ Who’s in and who’s out? The DPM seems to have focused his attention on the five Northern core cities. Fair enough, in that these are the economic powerhouses of their wider regions. But the real geography of tech activity is a little different. But cities like York and Sunderland also have quite a lot of tech firms. So why aren’t they included?

3/ FDI versus growing our own – firms cluster because co-location makes sense: they can tap into new ideas and pools of skilled workers and can share useful inputs (like fast broadband or VC investors). On the other hand, as Henry Overman and I have argued, clusters have tensions built in. As more firms enter, pressures on space build up, so rents rise. And competition rises, for staff and for market share.

Given all this, it’s risky to base cluster development policies on foreign investment. If FDI simply brings in big multinationals, these might displace smaller, younger UK businesses. Even if this raises aggregate productivity, I doubt it's what Government or cities want in this case. Agencies like UKTI typically try and maximise the count and size of foreign investments. A different approach is needed here, which is to focus on the type of foreign inputs.

4/ Infrastructures – specifically FDI programmes should try and enrich the rest of the ecosystem, especially specialist services tech firms need: finance, lawyers, accountants and workspaces. This stuff is only just starting to appear in London at scale, and is likely to be a priority for other UK cities. Certainly, the UK’s VC scene has been pretty weak outside the capital.

Equally, fast internet (and fast connection to it) is a basic need. For me, this is now a public utility, so it’s disappointing that the Superconnected Cities scheme has retreated from rolling out faster systems to everyone, to simply providing vouchers to SMEs. The CORE programme in York, Peterborough and Derby is an interesting exception (thanks to Tom Forth for the link).

5/ Policy architecture (and whether it really matters) – cluster policy advocates like Michael Porter assume that cluster development has to be local, since clusters are local phenomena. But this doesn’t follow.

First, Tech North has little cash on the table: strikingly, its five-city budget is about the same as the original budget for East London.

Second, a lot of the relevant policy levers are held at national level: tax breaks for investors, crowdfunding regulation, immigration and skills. That still leaves some local levers: branding, networking, planning and any local investment pots. But it’s limited stuff.

Arguably some of these national levers should be devolved: that’s started to happen through City Deals and Local Growth Deals. But we’re at the very start of this process, and though the post-Scotland moment may yet shake things up further, what Ministers are handing over in powers they’re largely taking away in cuts.

But perhaps that’s too pessimistic. As Emma and I found in the East London research, the Old St scene grew quietly for years without policymakers really noticing. That could well be the likely trajectory for the many clusters under the Tech North umbrella.


Originally posted on the squareglasses blog.

Friday, 3 October 2014

Agglomeration Economies

[Posted by Prof Henry G. Overman]

I've been reading some of the recent material from the Foresight project on cities. In particular, I've been looking at the interesting piece by Ron Martin, Ben Gardiner and Peter Tyler on the long run economic growth performance of UK cities.

While there's much of interest in this paper, there are also a few things that puzzle me - and this blog is about one of them. Specifically, I'm puzzled by the suggestion that ("the New Neoclassical") Urban Economics predicts a positive link between size and economic growth. Or, as the paper puts it: "It is often argued that larger cities confer greater economies of agglomeration and increasing returns effects, and that, holding other things constant, these effects make for faster growth: in other words, that city size, agglomeration and growth form a process of circular and cumulative causation."

To my mind, this 'prediction' is muddling growth and levels. There is a large body of theoretical and empirical literature that suggests that, everything else equal, productivity will be higher in larger cities. It's also true that this literature supports the idea that initial shocks might be magnified by cumulative causation as the urban system adjusts to the shock. So, for example, a city experiencing a positive productivity shock might see a long run effect that is larger than the initial shock (as it attracts more workers and firms). This cumulative causation would, however, run its course once the city had adjusted. In the real world, this could show up as faster 'growth' over a number of years for a city experiencing a positive (productivity) shock.

However, when we switch to long run growth - i.e. to truly dynamic processes that may take place over decades - the link to size is much weaker both theoretically and empirically. Indeed, while some theoretical papers suggest a positive link, there's a growing empirical literature that suggests there may be no relationship. In particular, starting with a paper by Xavier Gabaix in the Quarterly Journal of Economics there's been considerable interest in whether Gibrat's law - which says that there is no link between city size and growth - explains the tendency of city systems to follow Zipf's law (a power law that links the relative size of cities). In an early empirical contribution to this literature, myself and Yannis Ioannides provided evidence to suggest that cities in the US system do indeed follow Gibrat's law. More recently, I've done work with Sabine D'Costa which suggests that for the UK there is very little evidence of any link from city size to wage growth (even thought there is a strong link for wage levels).

In short, the idea that there is no link between city growth and city size is a fairly mainstream 'neoclassical' position - and one that would reflect my own reading of the empirical literature (and indeed some of my own empirical work). So it's surprising to see the lack of a link between size and long run growth presented as somehow presenting a challenge to urban economists like myself.

Part of the muddle here, I suspect, comes in the translation to policy discussions where there has been a tendency to conflate growth and levels effects. I've personally tried to avoid doing this in my policy orientated writings. For example, our work for the Manchester Independent Economic Review was concerned with the productivity advantage that Manchester had relative to the wider region - but this was a statement about levels not growth rates. But it's an easy slip to make when discussing complex issues but trying to use non-technical language.

All of this also raises the much more important question of the implications for urban policy. At any point in time, the urban system is likely to have some large cities that are doing well and some that are doing badly (both in terms of growth and levels). The same is true for small and medium size cities. This reminds us that basing policy on size, per-se, isn't very sensible unless size correlates with some other important considerations - e.g. governance. This is why, for example, some of us pushed very hard to have the second round of English city deals focus on some of the smaller cities that were fast growing rather than just focusing on the (next ten) biggest cities.

But neither does the lack of a link suggest that we should completely ignore the issue of size. If, for example, the government wants to have a northern city to act as a counterbalance to London then it may make sense to focus investment in a place (e.g. Manchester) that is relatively large and has relatively high productivity. The hope would then be that agglomeration economies might generate a cumulative causation process that helped further the positive impact of that investment. Whether this would happen in practice depends on the extent to which policy can generate productivity increases, whether congestion costs increase quickly or slowly, etc. If it was successful, the effects would show up as faster growth for Manchester in the short to medium run, but (as the data make clear) not necessarily in the long run.

So the link between size, productivity and growth does matter for policy, even if - as seems likely - there is not a strong link between city size and long run growth.

Tuesday, 9 September 2014

Why are the poorest regions in the UK the poorest regions in Northern Europe?

[Posted by Prof Henry G. Overman]

A few weeks ago the map below showed up in my twitter stream. It had been retweeted hundreds of times. At the time, I meant to write a post on the numbers behind the map. In particular, I wanted to take issue with what it tells us. According to the side bar: "The poorest UK regions are by far the poorest in Northern Europe. This is because the UK is much more unequal than all other countries, where there is nowhere as rich as London, but nowhere as poor as our poorest neighbours"

You can read this statement in two ways. One is simply providing the description of the map - we have very rich and poor regions so we are unequal. The other is to view it causally - the fact that we have high inequality explains why we have the poorest regions in Northern Europe. Unfortunately, the underlying numbers raise questions about both these interpretations (although the second one is particularly problematic).

Let's start with the claim that 'there is nowhere in Northern Europe that is as rich as London'. Unfortunately, this is not what the map shows. The map shows that INNER London has the highest GDP per capita calculated (on a PPS basis). This is three times the UK average. I find it worrying that people think this figure could possibly be correct. Of course, it's not for reasons that are a little, but not very, technical.

To see why this is a problem you need to know a little about how these statistics are calculated and something about the slightly weird geography of EU NUTS2 regions (on which the map is based). The GDP per capita figures allocate output on a workplace basis but population on a residence basis
The crucial issue is that Inner London is an administrative construct, not an economic one. That means that there is lots of commuting across the border of Inner London and, as the original data source makes very clear, "in some regions the GDP per capita figures can be significantly influenced by commuter flows. Net commuter inflows in these regions push up production to a level that could not be achieved by the resident active population on its own". That explains why the London figure looks so crazily high - because it ignores all the commuters who help produce inner London's output.

This is a bigger issue for Inner London than for some other rich EU areas. For example, according to the EU data that are used for this map, London has a population of 3m. In contrast, the Ile de France region has a population of 11m. All of this means that sensible comparisons need to correct for commuting - which I'll do the easy way by simply averaging Inner and outer London. This puts it on a par with Paris (at around 180% of the EU average) but below Luxembourg, Brussels and Hamburg. Of course, some of those regions probably need correcting to - but my point is that the data vastly overestimates London's income - and that you'd want to take account of that before reaching conclusions that 'nowhere is as rich as London'.

Next, is it the case that the UK is much more unequal than all other countries on this map? Here, the answer from the academic literature is that we are certainly more unequal. Whether we are much more unequal is open to debate. Regardless, does this level of inequality explain why the UK has the poorest 10 regions in this selection of Northern countries? It plays a part, but so too does the fact that we also have the lowest average GDP per capita (on a PPS basis). Indeed, the UK average level of income would rank it lower than the poorest Swedish region, poorer than all but a handful of Austrian, Finnish, Danish and Dutch regions (I count 6 in total) without any need to take in to account the level of inequality. In short we have lots of regions in the bottom 10 because we have both lower average income and higher inequality. There's no clean answer as to how much of this map is explained by low average income versus higher inequality. You could think of ways to try to get at it - taking, say, the level of inequality in other countries and applying it to the UK - but you certainly can't identify the separate role of average income and inequality on the basis of the map alone.

If you want an analogy, this is little like taking a primary school, finding that the ten smallest kids are in year one and attributing this to inequality amongst five year olds. [I'd be surprised to see hundreds of people retweeting that study].

One final issue is the use of GDP per capita in PPS. As the statistical note states: "GDP does not measure the income ultimately available to private households in a region" so I am not quite sure in what sense the map even shows 'poorest' and 'richest' regions. Worse, the PPS calculation is done at national, not local level. So this comparison is on nominal not real standards of living - so completely ignores the fact that London is a very expensive city relative to most other EU regions (including those in the UK).

In short, the map is a pretty misleading visual aid. Of course, we all use these kind of tricks to get people talking about important issues (like spatial disparities in the UK). The danger here, however, is that an awful lot of people (some of whom should know better) seem to take this map as showing that 1) London is the richest region in the EU; 2) High inequality explains why we have the poorest regions in Northern Europe. Unfortunately it does nothing of the kind.
 

Friday, 5 September 2014

Garden Cities

[Posted by Prof Henry G. Overman]

I'm fairly ambivelant about Garden Cities. We clearly need additional housing. The idea of finding some fast growing urban area, taking a bit of greenbelt land and building decent housing on it with good transport links and open spaces would probably help (such a suggestion won the Wolfson Prize). Whether it's the solution to our housing supply problems is another matter. I'd certainly want to see whether such a development proved attractive to people in general (rather than to the people who designed it) before rolling it out across the country. I'm also a believer in properly incentivising local people to agree to development - so I don't like the idea of a blue print that we'd impose on lots of places.

However, while I may be ambivelant about Garden Cities, I find our housing minister's response to the Wolfson Prize deeply depressing. According to the Independent: "the Housing minister, Brandon Lewis, has now condemned the scheme as “urban sprawl” that would build nothing other than “resentment” among local people and has said the Government would have nothing to do with it."

We have to stop this knee jerk reaction - that anything built on the green-belt is urban sprawl - if we are going to have a proper debate about increasing housing supply. Historically, towns and cities have had to accomodate some of their growth by expanding outwards. A sensible housing policy would allow for this, while also ensuring that huge amounts of countryside are not swallowed up by very low density housing (the real urban sprawl that we see in so many US cities)*. You would hope that a sensible housing minister would recognise this and try to do more to encourage considered debate about how to meet our housing needs. On the basis of his reported comments (assuming accurate) our current housing minister fails that test.

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* Interestingly, even in the US, some of the claims about urban sprawl may be overstated. For example, in a 2005 paper in the Quarterly Journal of Economics we found little evidence that urban sprawl was increasing at the metro level. Using remote-sensing data to track the evolution of land use on a grid of 8.7 billion 30 × 30 meter cells, we measured sprawl as the amount of undeveloped land surrounding an average urban dwelling. Our findings suggested that the extent of sprawl remained roughly unchanged between 1976 and 1992 (although it varied dramatically across metropolitan areas). Of course, new development does tend to be less dense. But when you zoom out to the metro level you find that infilling of what used to be the urban fringe tended to leave a very similar pattern of development - just one that occured on a larger scale to house new population.

Thursday, 21 August 2014

Foreign buyers and property markets

[Posted by Prof Henry G. Overman]

In May last year, I did some back of the envelope numbers on the role of foreign buyers in driving the London property market. On the basis of a very quick calculation I concluded that "domestic sources of demand (including from first time buyers) are much more important in understanding the overall London property market than a small number of rich foreigners."

I haven't revisted these numbers, but was interested to read the following in Thomas Piketty's Capital (p463-4):

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The rich countries are not about to be taken over by the poor countries, which would have to get much richer to do anything of the kind, and that will take many more decades.

What then, is the source of this fear, this feeling of dispossession, which is partly irrational? Part of the reason is no doubt the universal tendency to look elsewhere for the source of domestic difficulties. For example, many people in France believe that rich foriegn buyers are responsible for the skyrocketing price of Paris real state. When one looks closely at who is buying what type of apartment , however, one finds that the increase in teh number of foreign (or foreign-resident) buyers can explain barely 3 percent of the price increase. In other words, 97 percent of today's very high real estate prices are duce to the fact that there are enough French buyers residing in France who are prosperous enough to pay such large amounts for property.
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This is certainly in line with my priors but I'd love to see similar calculations for London.

[The source for the precise 3% figure is a PhD thesis that proved to be beyond my (miserable) French - I'm not aware of anything similar for London].