How to fix London real estate problems

James Jirtle writes to me:

I am a long-time reader of your blog (and your books!) and hugely enjoyed your recent interview with Camille Paglia.

I was wondering whether you might consider writing a post about potential policy responses to the housing crises in many major cities, perhaps nowhere as acute as in London where I live.

London is a bit of a perfect storm: (i) restrictive planning regimes, preventing the building of new homes; (ii) a strictly-enforced “green belt”, limiting the physical expansion of the city; and (iii) huge inflows of both people and capital (both foreign and domestic, in the form of buy-to-let investors) driving up demand.

The average London house price passed £500,000 last November (http://www.telegraph.co.uk/finance/property/house-prices/11959731/Average-London-house-price-hits-500000-as-capitals-housing-market-shows-no-sign-of-losing-steam.html) and average rents for a 1-bedroom flat now exceed £700/month (http://www.workgateways.com/working-in-the-uk/cost-of-living).

Various policy responses have been proposed, including:

  1. raising stamp duty (tax on the purchase of a home – the UK government recently raised rates on homes worth more than £500,000, and introduced punitive rates on purchases of second homes);
  2. raising council tax (property tax – where a property is rented, this is paid by the tenants);
  3. “bedroom taxes” on unused bedrooms (currently in place for social housing);
  4. increasing taxes on private landlords (the UK government recently removed the ability of landlords to deduct mortgage interest, and capped deductions for repairs);
  5. loosening planning restrictions and taking other actions to combat NIMBYism;
  6. building on the green belt;
  7. deposit assistance for first-time buyers (the UK government currently underwrites mortgages of up to 95% LTV for first-time buyers for properties worth up to £600,000 and has introduced savings accounts where the government adds 25% to savings used to purchase a new home, contributing up to £3,000);
  8. punitive taxes on unused planning permission;
  9. direct price controls;
  10. restrictions on foreign ownership of property; and
  11. increasing interest rates.

Which of these (if any) do you think are likely to be effective?  Are there other policies which might be beneficial that I haven’t listed?  Politicians here have spent a lot of time bemoaning the crisis, but I don’t have much confidence that the solutions currently being proposed are likely to help.  Ideally, I think the goal should be to enable those who live and work in the city to live in reasonable, affordable comfort without causing those currently on the housing ladder to lose significant amounts of money.  But maybe we’re already beyond the point where that’s possible?

TC: I say we are probably beyond the point of fixing it, though marginal improvements surely are possible.  Here is a good feature story by The Economist on the problem.

Comments

Average rent for 1 bedroom apartment exceeds £700/month ($1016), that's not that bad.The city should be thrilled people want to move there; it's a measure of their success. Would they rather have Flint Michigan ?

Increase the housing supply ( #5 and #6) for Pete's sake. For #3 start with Buckingham Palace.

Funny. Fastest growing US cities are also some of the cheapest. Wonder why. Gee...I wonder.

In 1927, a National Weather forecaster said "Texas is a land of perennial drought, broken by the occasional devastating flood”.

But in Texas they have rejected that big government global warming alarmism, and let people build in flood plains, which are basically an area of Texas the size of Germany.

Housing needs to be cheap because it's here today and probably gone tomorrow, swept down stream. Either that, or the only water you get is delivered in barrels filled by water tankers trucking it in from a hundred miles away.

And the subsidized by Federal tax payers.

Thanks for insight mulp. I hope you stay safe in your mother's basement.

Market rent is around £1200 per month (http://www.londonpropertywatch.co.uk/average_rental_prices.html), not sure how that site came up with £700 per month

What Matt said. I was apartment hunting last month and it was damn near impossible to find even a tiny studio for less than £1000/month anywhere within Zones 1/2. You can get cheaper if you're okay with roommates, but anything I looked at under £900/month was borderline unlivable.

I pay £ 1100 a month for a medium sized modern 1 bedroom flat in zone 5, about 15 km north of central London. The same flat would set you back at least £ 1500 in central London.

Modern 1 bedroom flat means...a closet?

£1100 is still insane for a place like that.

It costs that much (USD 1600) to rent a 1-bedroom flat in a decent part of Chicago, which is known as a bargain among large cities. I suspect rents in desirable areas of London are *much* higher - I see them advertised in pounds per week!

For $1,600/month in Houston you can get a 2-bedroom...luxury...apartment right in the middle of downtown.

Or a 3-4 bedroom new-build house about 10-15 miles further out.

Enjoy living in Chicago.

Hmm. This is a tough one Londoners. Although, looking at the options given there, 99% of which are some form of "tax or price controls", this might be a little tougher for Londoners to get.

1) Stop putting up so many silly regulations.

2) There is this new invention called...a road. It's not a bike, it's not a train, it's not like a bus, although buses can travel on it. But it's like a river, but with concrete. And you can drive this new invention called the...automobile...on it. The automobile is like a bus, but only has 1 floor. And with the combination of roads and this new wonder of science, you can live anywhere you want up to 30 miles out from your work. This reduces the prices of real-estate because it increases the geographical area you can live on, thus more supply of available areas and housing.

Of course, this would only work if your silly country didn't charge 50% more for equivalent cars than the US or charge 100% more for insurance, and 200% more for gas. But I have some fixes for those problems too, if you care to hear.

3) Or, easier fix...move out of London and move out of UK.

At the density of London it simply doesn't work, and all it will do is get you from the outside to the edge, middle is already full and that's where the work is. you have the green belt as well so a new road has to go 10-20 miles to go to any towns.

Want to widen a road? Well let's say the average house is 20feet wide, and costs half a million... So £114m per mile to buy those. And if it's apartments forget it. Oh and listed buildings

Basically if you could build that amount of parking and space for roads you could fix the housing as easily...

You can't...fix...the housing problem. The housing problem is tied to the transportation problem.

Yes of course you can't do what I'm proposing in London. It's too far gone.

Expensive places are for ambitious people. I don't understand why people not motivated to work in lucrative careers wants to leave in expensive cities. A peaceful life in a town/small city or a stressful life in a big exciting city, choose one =)

Also, I remember an anecdote of an English engineer that worked with my mother. The guy stopped worrying about buying a home in England. He bought a home in a cheaper country and rented a house once a year for vacation and visiting his mother near Hereford. He said last time land changed hands in his hometown 100 or 200 years ago. Landlords are not interested in selling, rents are sweet. The once in a lifetime opportunity to buy is from a stupid and broke heir.

People live where the jobs are.

That being said, places like London, NYC, San Francisco etc are abnormally expensive.

Abnormally in the sense that their extreme costs don't come so much from demand, rather from reduced supply. These places aren't growing very much. A city like Houston is growing at 3-5 times that of London, and is almost the same size. It's almost the same GDP/capita as London. (~$80-85k/person)

Yet, there's no housing shortage in Houston, and the cost of living is much much cheaper (for much higher quality housing too).

And yet, commute times in Houston are on average 28 minutes. Commute times in London?...74 minutes! More than 3 million people in London spend 2 hours a day commuting. Hey! but they have public transport?!?

Ambitious, or stupid people? Choose one.

I'll go with stupid.

Could it have something to do with the fact that Houston has virgin land to develop as far as the eye can see. Whereas lots of these older cities started out crowded and with geographical features that make things difficult.

Here is density in these various cities:
Population/sq mile
Housing Units/sq mile

NYC: 8,158; 3,223
SF: 1,704; 701
Houston: 705; 266

Maybe Houston is cheaper and has an easier time developing because its less crowded to start with. That seems to be the pattern for the inland Sun Belt cities.

It's not the land. There is tons of agricultural land at £10k a hectare in the green belt. Oh, wait, what's that? You're not allowed to build on the green belt. You'll be wanting this bit of land right next to it which has planning permission. The price? Glad you asked; it's £2,000k per hectare.

When identical bits of land sat right next to each other have a price differential of x200, you can bet government is involved somewhere.

I'll admit that I don't know much about the green belt. From googling it appears to mostly be an outside the city proper phenomenon.

In spite of its existence, London does appear to be very dense. Certainly not an aberration compared to other world cities.

http://pdf.euro.savills.co.uk/global-research/the-world-and-london-2015.pdf

Right, London CAN develop like Houston. it has plenty of flat geography to expand, and plenty of space to build more highways. It's the regulations keeping it from being developed...plus the fact that cars and gas and insurance is prohibitively expensive in the UK compared to the US (artificially expensive, because there is no reason it is so expensive other than taxes and government regulations)

London isn't an island like Manhattan, or a piece of mountainous rock like Tokyo. It is flat land with no natural impediments.

I'm not necessarily against developing the green belt. My point is simply that even with the green belt, London is still way more dense then Houston. The green belt isn't causing it to be an outlier in density.

Saying, "make it more dense," could just as easily be asked of every major city like it with similar density. The answer seems to be that in all sorts of situations and cultures around the world you start running into hard limits past a certain level of density. You'd basically have to say that you think London could achieve something nobody else in the world has achieved.

"There is enough green-belt land in Greater London to build 1.6m houses at average densities, says Paul Cheshire of the London School of Economics (LSE)—about 30 times the number of new houses London needs a year."

"A plethora of other regulations also block development. By one count there are ten protected views of St Paul’s Cathedral, including one from a specific oak tree on Hampstead Heath. This imposes severe restrictions on building height across the city. Population density in central London is about half New York’s. According to Mr Cheshire and Christian Hilber, also of the LSE, restrictive planning policies inflate the price of office space in the West End by about 800%. A square foot there is twice as expensive as in midtown Manhattan."

http://www.economist.com/news/britain/21697575-faulty-land-use-regulation-throttling-capital-grip-tightens

You have one big development restriction with the Green Belt. But like NYC and SF, development is limited by a vast array of regulations. If London is like NYC and SF, there are many unnecessary building codes, too many historical landmarks and overrestrictive zoning, with a difficult process for zoning variances. That's in addition to the Green Belt and height restrictions, which NYC doesn't generally have.

So, while London is dense, so is Midtown Manhattan. As The Economist says, all comparable residential or office space costs about half in the densest parts of NYC. That's from both the lack the height restrictions and the allowed buildout of Long Island, Westchester and NJ.

https://citygeographics.files.wordpress.com/2012/12/residentialdensity3.png

It seems like London has less peak density (a small area with lots of high rises), but they have a lot of density diffused over the entire city. In total the density works out about the same as other world cities, but its not all centralized.

Again, I highly recommend this report that seems really thorough on this question:

http://pdf.euro.savills.co.uk/global-research/the-world-and-london-2015.pdf

That's...the point. Crowding comes about as a result of ridiculous public transport schemes, and under-development of roads and highways (and making cars as expensive as possible).

To reduce the home prices, you need to allow for development in other areas. To do that, you need highways being easily accessible form everywhere, and people actually being able to afford cars.

It's a chicken or the egg problem. I recognize that. Which is why places like London will never be fixed.

You need to start fresh on the drawing board.

There are advantages to living in the most expensive cities. If I want to be a $1 million a year chief investment officer of a fund, good luck doing that in Houston. (And paychecks for CIOs basically start there and go up....*way* up.) The cost of living doesn't eat up all the extra profit from selling your talent to the highest bidder and you can retire rich.

Huh???

There are multiple Fortune 500 companies in Houston. There's the largest medical center in the world. There's plenty of people making insane amounts of money.

$1 million in NYC will not get you very far, given that the average home prices in Manhattan are WAY more than $1 million. For $1 million in Houston you can get a mansion in the best area of town. $1 million in NYC is only the equivalent of about $400k in Houston. There are a lot of people making that kind of money here. That's just a doctor's salary.

How exactly do you end up being "richer" with $1 million in NYC...when you have to pay nearly twice the tax of Houston, have top pay 3-5 times more for housing, have to pay 3-5 times more for schooling (you're not going to send your kids to NYC public schools, but a private school in Manhattan will cost you about $35k/year)

"A city like Houston is growing at 3-5 times that of London, and is almost the same size"

With false claims like this, it is hard to take the rest of your analysis seriously. The European statistical agency ranks the London metropolitan area as the most populous in the European Union by far, at just over 14 million people. Houston's seems to be about as large as the major metro areas in Spain, which don't have rental price problems, either. Houston was also built in the middle of an empty plain originally stolen from Indians, which is not an advantage enjoyed by European cities. London's other "problem", shared with NY/Chicago/SF, is that tourists want to go there because it is attractive, interesting and cultural.

Greater London is about 8 million. Houston is about 6 million. I said...almost the same size.

We stole the land from Mexico, thank you very much. You, stole the land from the Celts.

Don't be so stupid, Eurotrash.

This is a problem facing all global "alpha" cities, induced by a mixture of restrictive land use and poor tax policies. Looking around, among developed countries, Tokyo and Berlin have done the best to manage growth while still maintaining affordability. Berlin is a bit special as it hasn't had time to develop given recent reunification. Tokyo on the other hand manages through increased density and shrinking the size of each apartment, which has the effect of lowering overall purchase price even if the price per m2 remains high. They mitigate the unpleasant congestion that comes with density through efficient public transportation and a focus on minimalism. London, San Francisco, Vancouver, New York can all stand to learn a bit from their approach (especially London, which is less constrained by natural boundaries than the other three).

Another way to ease the competition for homes from foreign investors is to shift the burden of tax from consumption/income onto wealth a la property tax. This way, even if foreigners buy an investment property to sit empty, they contribute to local coffers and support local services. In comparison to e.g. the US, London's council tax is far below optimal levels.

Commute times in Tokyo are on average 66 minutes. And I don't think there's much to be learned from turning housing into closets and cabinet drawers. Gee, I wonder why they're not having any kids over there. What a puzzle.

No, there's nothing to be learned from these places. These are all insane asylums.

There are literally a dozen+ US cities which are large, growing fast, lots of jobs, high GDP/capita...and yet have extremely affordable housing, extremely efficient transportation (precisely because they DON'T rely on public transportation), and are extremely stress free.

Apparently, there's nothing to be learned from them :) But plenty to be learned from Tokyo about living in the equivalent space of my underwear drawer.

I got to say, you Euros are a funny bunch.

While I agree with all of your comments here, Seoul had wonderful, reliable, cheap, ubiquitous public transport, high population density, and cheap housing. The problem was that people didn't think their housing was as cheap and kept pushing form more regulations like price controls and tax shenanigans to limit how many houses you can have.... things are probably a lot worse now.

my point is however, there are market conditions where "public" transport is ideal, such as very high population density cities.

Seoul is better than the rest, yes. But even in Seoul average commute times are about 40 minutes. Way more than US cities.

Yes, but it's a chicken or the egg problem. High density comes about from the inability to disperse, and the inability to disperse comes about due to reliance on public transport. It's not the other way around.

The problem is that all these cities were developed and build at a time when there weren't a lot of cars available for people to use. So they had to rely on public transport. Cities build during the time when cars were plenty and cheap, developed highway systems which allowed for people...and businesses...to disperse and not be centralized.

The US was unique in that it had very large automobile penetration even as early as the 1930s. Other countries didn't reach that until the 1980s, if ever.

So I get it that the US solution cannot apply to other places. Simply pointing out that...the solution...is already available.

>There are literally a dozen+ US cities which are large, growing fast, lots of jobs, high GDP/capita…and yet have extremely affordable housing..

As I said in an earlier post, they may have lots of middle-class, $100,000 jobs but not lots of jobs that will make you rich. Young ambitious people don't want to settle for average.

The best balance of amenities and opportunity in the US are in Seattle, Boston, and (perhaps) Chicago. None of them is particularly affordable, but they are much cheaper than NY and SF and there are very high-paying jobs in each of them.

Yeah NYC is filled with "young ambitious people"...serving tables and fixing bikes :)

Look, young ambitious people aren't making $100k jobs. Not even in NYC. A small minority are, yes.

Also keep in mind that BUSINESSES are relocating plenty of their activities to these "sun belt" cities. Bank of America is building lots of offices and centers in Tampa Florida, for this reason. Much cheaper to operate there, and to attract talent. Lots and lots of high tech industries in places like NC, Austin, Denver, Kansas City etc. Lots and lots of bio-medical and medical jobs in Houston and Dallas. Not to mention engineering jobs etc.

As I said, GDP/capita in Houston is about the same as London. This isn't some under-developed backwater. Except cost of living is 3-5 times cheaper.

Young ambitious people aren't only Goldman Sachs employees.

Ok, you are not talking about Texas....

Where are fast growing cities with no traffic congestion?

It's two factors:

- The fast growth of money supply
- The absence (or very slow growth) of new housing stock

http://www.devilsdictionaries.com/blog/inflation-and-english-house-prices

The same effect may be observed in Norway:
http://www.devilsdictionaries.com/blog/what-inflation-really-means-a-norwegian-example

"potential policy responses to the housing crises in many major cities, perhaps nowhere as acute as in London where I live."

1) Houston
2) Dallas
3) Phoenix
4) Denver
5) Orlando
6) Tampa
7) Charlotte
8) Kansas City
9) San Antonio
10) Austin
11) Nashville
12) Indianapolis
13) Salt Lake City
14) Minneapolis
15) Atlanta
16) Las Vegas

Hell, even Chicago deserves to be on the list. (and Detroit, if one ignores the city proper and looks only at the surrounding area)

For some policy prescriptions, see above. What do these cities have in common? They are all large (~2 million plus), they are all growing (some extremely fast), they are all at least 3x cheaper in housing, they are all highly decentralized, they all have extremely efficient transport systems (2-3-4x lower commute times), they all have much higher quality housing, they are all economically highly developed (some as much as London), and they are all very stress free.

Hell, pretty much every city in the US outside of the core of SF and Manhattan/Brooklyn, looks pretty damn attractive in price and ease of living.

How do they do that? It's really not so much of a mystery, guys. The car and the highway is the key.

You are comparing entire metropolitan areas to "SF and Manhattan/Brooklyn." The Bay Area and greater NYC area, of course, have lots of cars and lots of multilane expressways and thoroughfares. But what they also have are higher average levels of human capital which contributes to higher wages and higher housing costs, a greater number of prestige or bulge-bracket employers, and geographic barriers to expansion that, say, Las Vegas doesn't face.

But the SF, NYC, and DC metro areas suffer from the same kinds of ills as their central cities -- development restrictions, high housing costs, high taxes, congestion, long commute times. The higher wages that are more than eaten by the higher housing and other costs. Here, the NYC, SF, and LA metro areas come in far below not just the Denver, Phoenix, Salt Lake, and Houston metro areas, but also Detroit once cost-of-living adjustments are applied:

http://www.governing.com/gov-data/metro-area-wages-cost-of-living-adjusted-2014-data.html

Damn! That's a good map.

That shows that adjusted for cost of living, Houston has about 50% higher average wages than NYC. That's pretty much the whole story right there.

No. Houston GDP per capita is greater or equal to any of these places.

Yes, I'm talking metro areas. Metro area NYC is still absurdly expensive compared to any of these other places, with 3-5 times the cost of living, with much higher commute times. Yes Metro NYC has more reliance on cars than Manhattan or Brooklyn. But it's still very under-developed in terms of highway.

When was the last time they build any new highway, bridge, or expanded the road system in NYC? In Houston they are building 180 miles of new highway.

But NYC suffers precisely from the problem of too much centralization. Which comes about due to the heavy (heavier) reliance on public transport. And the corresponding higher commute times.

Figure out how long does it take one to travel only...5 miles...from Midtown Manhattan to NJ, using public transport? If you can do it in under 1 hour, I'd be amazed.

I used to ride the F train plus the NJ Path to my (one year older than me) gf's in Jersey City in about 1/2 hour.

Funny. It used to take me 1 hour to go to NJ, where there wasn't a Path train.

Of wait, you see the problem now? of course you don't.

It helps to have land to build on. Lyman Stone's piece on greenspace that was posted here a few weeks back covers this admirably, and see also http://isteve.com/2005_dirt_gap.htm

London has plenty of land to build on.

But that's also kind of my point. The "efficient" city of the future isn't going to be one build on an island or on a rock. It's going to be one build where there is space.

"they all have extremely efficient transport systems"

You must like spending more than an hour sitting in your car every day.

Houston average commute times are 26 minutes. Considerably lower than NYC (and way lower than London or these other places).

Try to get a clue, for once, mulp.

It is sort of odd that so few of the suggested policies focus on increasing supply, when any intelligent person can see that increased supply is the only possible solution. I guess Londoners (at least the chattering classes) are really stupid. A lot of the suggested policies focus on increasing sellers' costs, which may punish them by cutting their profit, but obviously will not reduce prices. I hypothesize that Londoners (again, at least the chattering classes) have that particular brand of stupidity called envy, envy so strong it leads to cutting off your nose to spite your face.

"It is sort of odd that so few of the suggested policies focus on increasing supply, when any intelligent person can see that increased supply is the only possible solution. I guess Londoners (at least the chattering classes) are really stupid"

That is, unfortunately, the pattern in almost all cities. The increasingly ignorant and dumb "millennial" class, combined with the increasingly Leftist politicians, want more "public transport", which inevitably leads to dwindling supply of housing and higher housing prices. All in the quest to fix a problem which was caused by public transit in the first place.

Or, as for US cities, to fix a problem that doesn't even exist. I've met people in Houston who tell me things like "oh I wish we had a better public transit system. When I used to live in London I could take the tube and go anywhere!!!". As if, Houston doesn't already have 1/3 the commute time of London, but apparently taking the "tube" in their mind is a solution to the already low commute times they have in Houston...because they are somehow convinced that "cars" are a problem.

It's all value signaling and conformism. It's not a serious policy debate. It's pre-determined that "cars" and "highways" are bad, and "light rail" and "public transit" is good. Even though all the evidence in the world shows the opposite. Costs be damned.

>That is, unfortunately, the pattern in almost all cities. The increasingly ignorant and dumb “millennial” class, combined with the increasingly Leftist politicians, want more “public transport”, which inevitably leads to dwindling supply of housing and higher housing prices. All in the quest to fix a problem which was caused by public transit in the first place.

as a millennial who lives in a high-cost city that supports development and increasing housing supply and expansion of public transit capital spending, I'm not really sure what you're talking about. Real estate development and transportation infrastructure has always moved together hand-in-glove. Witness the construction of hotels and gas stations as soon as a new interstate highway exit is created to the development of amusement parks near the end of streetcar lines 100+ years ago (for example, Coney Island) to the premium paid by developers on land near subway stations in New York City and elsewhere. What large cities should really do (and some are) is upzone land near existing transit stations and commuter rail to allow for larger and denser building (and expansion of housing supply).

"as a millennial who lives in a high-cost city...I’m not really sure what you’re talking about"

I know. You're dumb.

Funny though, we've been adding to the supply of buildings for centuries and the price of land only ever gets higher. Repeated everywhere we look around the World.

The 2011 UK Census showed we have more dwellings per capita, in every region (London included) than ever.

The UK may have a few rough sleepers (a tiny fraction of that in the US), but by and large everyone has a roof over their heads. We do have over one million empty homes and 25 million empty bedrooms. So, I don't think anyone can really say we have a housing shortage.

If your problem is selling prices, then a 100% Land Value Tax would drop the selling price of land to zero, knocking off, on average, 66% of the selling price of houses.

Furthermore, if everyone paid LVT (just as renters do to their landlords) then the market could then allocate land and immovable property at optimal efficiency, thereby reducing vacancy, under occupation, land banking and regional inequality. Hey as it would reduce the tendency for urban sprawl we could scrap the Greenbelt too.

So, there we are, a massive reduction in house prices and a massive increase in efficiency. Job done and all without the need to wastefully build a single extra new home where it isn't needed.

What intelligent person could argue against that? Of course there are those people who will lower themselves to using Poor Widows in Mansions as their human shield, but I'm sure that's not relevant here.

Lets assume house prices are, like most prices, set by the intersection of supply and demand. So if you have a desire for lower house prices you must affect either one of these variables or both. There are may potential strategies to do this including the ones mentioned. I think though that in the short to medium terms both supply and demand are pretty inelastic. People have to live in London for career reasons (not necessarily the money, more the prestige) so demand will remain strong whatever you do to increase prices. And supply is also fairly fixed - even if the green belt was got rid of, there are still local planning laws to deal with, plus expanding the supply of builders won't be easy, plus of course the green belt land is probably pretty valuable even empty. A Houston style cheap housing land bank just does not exist in the South East of London. And new houses and flats that are being built won't significantly affect prices much, because they only way that they can be built is through high prices, because they cost so much to build (or to put it another way, if prices started to fall there would be a very quick fall off in new houses which would restore prices).This is all ceteris paribus though with respect to the economy. The conservative government in the early nineties managed to significantly reduce London house prices by hiking interest rates and creating a recession thanks to the ERM fiasco (which allowed me to buy my house in Notting Hill - thanks). But probably that is one of those cures are worse than the disease.

My question though is, why do you want to lower prices in London. That's a bit like arguing gold prices should be lower. I can see why that is good for a buyer of gold, but for the seller not so. And for the economy it is not a clear win.

Unlike gold, people need housing and employment (hence the need for housing in cities). I think the artificial planning restrictions are doing a lot to restrict supply. Decades ago, people built high rises even though they could only charge lower real rents. What changed?

Yeah, because obviously we would all be better off if houses cost ten times what they do now....

Houses are NOT stores of value. Or shouldn't be, if successive stupid government policy hadn't destroyed every other saving vehicle.

So let's talk the supply side of the equation.

One very simple fix: Don't restrict building types/sizes in any location in and around the city(green belt included) and don't restrict rental agreements.

There, all done, no more higher-than-market housing prices, plus plenty of inexpensive housing available in short order.

Don't like that solution? Then they're not really wanting more affordable housing, they're actually hoping for something else (like a magic policy with no trade-offs) which likely doesn't exist.

You have valid points, of course. A Houston style solution, even though I'm proposing it...will never be applied to a place like London. A city build over hundreds of years is not going to miraculously be transformed into a car-centric city like Houston.

But some lessons should be learned. The way to get cheaper housing and more abundant location choices...is to allow for decentralization.

You're also forgetting that it's not simply housing. It's BUSINESSES. Businesses have to pick locations according to where they can draw people. Thus in a place like London, businesses are limited to where they can expand. That amplifies the problem of housing costs since people will want to live in places where they can access businesses.

Compare to Houston, or Minneapolis, or Dallas. Businesses are present throughout the area of the city, not just Downtown (downtowns are actually becoming increasingly insignificant in terms of jobs). You've got all the oil companies in Houston expanding a full...20 miles...outside of downtown Houston in the Energy Corridor, where land to build large office buildings, and to build large housing communities for people to live in, is plenty available.

Thus business costs are much lower too.

Which is they in the US businesses are growing their presence in these cities, or moving to these cities. Both business costs are lower, compensations for employees can be lower since costs of living are much lower, and employees will be much happier than having to spend 50-60% of their income just on rent.

AIG - London is pretty decentralised, like Houston. I am very familiar with both cities having worked in both and have houses in both. There are businesses and offices all over the greater London area. There is no real zoning like in some American cities. Remember London is a collection of villages, each village has its own commercial centre.

They're nowhere near the same level of decentralization. Every village has its own commercial center, but that doesn't tell us where people work and live.

Now yes, it's bad for sellers. That's an economic calculation of the social benefits or costs. I don't think it will be in favor of the sellers, or keeping prices artificially high for everyone.

I don't know of how any economic theory would say that increasing costs for everyone artificially is better for the economy, because some sellers (who are always in the very tiny minority compared to everyone else), benefit from high prices.

While I usually tend to favour deregulations, I do have some sympathy for the idea that green space, low rise and low density buildings are somehow a public good. To take an extreme example I would be sad and would support London being bulldozed to make a North Korean style housing complex, even if it were more "efficient". So if everyone agrees to preserve a place somewhat, it should be more expensive to build property in London than in other places that don't have that heritage. So in that sense the high prices are not artificial, they are the result of restricted supply due to heritage issue. Probably there are some marginal improvements that can be made in this area, but I doubt it will change the picture much.

And on the sellers being less than the buyers, sure, but I don't think the ratio is as skewed as you suggest. And people can and do leave their houses to their children, and it is not clear to me why one young person is more deserving than another young person of low housing costs. So I don't know if the situation of high house prices is prima facia unfair.

One final point, London is now bigger and richer than ever before. Revealed preference suggests that whatever the mix that London has, it is working. I would suggest that people be very careful about assuming that they can mess with this system and make it better - seems like the socialist planning fallacy to me.

Duhh - that's "would not support"!

There's probably far more "green spaces" in a place like Houston than in London. Some of that has to do with our climate, of course, but there are a lot of parks in Houston.

Same for low-rise and low-density buildings. A lot more of that in Houston than in London.

I'm not making the claim that one should be preferred over the other. Rather, there is a clear policy being undertaken to artificially keep costs high, not just in housing, but in transport too.

Cars don't cost 50% more in the UK, or gas costing 100% more, because the UK is somehow harder to supply with cars or gas. They are kept higher artificially due to an explicit government program to limit their use.

"I would suggest that people be very careful about assuming that they can mess with this system and make it better – seems like the socialist planning fallacy to me."

It doesn't get more of "socialist planning" than London, or the UK in general.

It's not stupidity. Follow the money. The landlords of London are, as a result of artificial scarcity, the rich and, if not themselves powerful, able to buy off those who are. They have a direct interest in maintaining the staus quo which will see them becoming ever richer and more powerful. Don't expect London's housing costs to decrease any time soon.

We all know that restrictive zoning plays a key role in suppressing the supply of housing stock. I wonder if the costs were more transparent people would demand they be reduced. For example, if you bought a new condo in Manhattan, if the sales price were to be broken down into categories such a as, land value, labor, materials, marketing, planning and approval costs. I bet a lot of people would be surprised how much of the cost is soaked up in that last category.

Maybe nothing would change, but I have to hope that if we better understood and messages the costs of restrictive zoning policies they may be changed.

>JMCSF I wonder if the costs were more transparent people would demand they be reduced. For example, if you bought a new condo in Manhattan, if the sales price were to be broken down into categories such a as, land value, labor, materials, marketing, planning and approval costs.

well, developer's margins would still be on that breakdown and people would sooner demand concessions from that than a reduction in construction costs or material costs. Regardless, here's a good breakdown of NYC new development costs http://therealdeal.com/wp-content/uploads/all/images/37700/What_a_building_costs.pdf and another http://therealdeal.com/issues_articles/486631/ ...land costs are some of the largest increases, in part because of pent-up demand and zoning restrictions. More reading: http://chpcny.org/2015/06/inside-the-rent-methodology-and-assumptions/

Devolution. So long as England is constituted as London and the rest, the demand to be in London will overwhelm attempts to keep up.

1) Upgrade the London rail link to Stansted airport, expand that and demolish Heathrow airport. Build real estate on the freed up land.

2) Both the government and the opposition are firmly focused on expanding home ownership when what is required for London is an increase in accommodation supply. This should be incentivised by tax relief for converting unused commercial space, warehouses, government buildings etc. into rental accommodation and for putting vacant flats, houses, basements and rooms on the rental market. The UK seems unique in Europe for having a pronounced house buying fetish.

3) London is probably the least dense major city on the globe. Replace two story apartment buildings (mansion blocks) in inner London with eight to twelve story buildings.

1. Standsted has less than 50% of Heathrows capacity. You need another airport somewhere if doing this.
2. Renting or buying doesn't matter too much. Just increase the supply.
3. +1. Now take a look at what planing regulations say about this idea...

Greatly expand Luton and build a high speed link into St. Pancras.

Buy to let investing and foreign investors also create a significant distortion on the types of new-build housing created.

Overseas investors are often from countries where the apartment block is the high-staus form of housing. Buy-to-Let investors love two bedroom apartments, since you can rent them to two people in a flat-share. Yet for permanent occupation people really want/need a 3+ bedroom house, which is more or less essential if you have a son and a daughter or more than two children.

But I think a lot of this is best explained not by supply and demand but by George Akerlof's/Rachel Kranton's idea of Identity Economics. Most people start their working lives in London, and rapidly acquire or adopt an identity as urbanites. I would argue that a great deal of this is self-delusion to a degree: out of ego-preservation, they take the annoying aspects of a city - noise, crowds, congestion, crime - and reframe it as vibrancy or edginess. A move to suburbia hence becomes disconsonant with their idea of who they are, even though in objective terms it would probably be sensible.

But there is an interesting solution which does not involve tax, or supply or demand. If you simply redesigned the tube map so that it included suburban railway lines, and ran suburban trains until 3am, especially on Fridays/Saturdays, what would happen? Most people form their conception of London not from proper maps, but from the tube map - which is actually a schematic diagram. If you redesign this map, you could change people's conception of what is and isn't London. At present, anywhere not on the tube map is basically thought of as Not London. Only Brighton (and Oxford/Cambridge) are cool enough towns to commute from - Tunbridge Wells is actually rather nice, but has an image problem all Brits will understand.

When the Silverlink Metro rail line was rebranded as the Overground, and added to the London tube map, usage went up by 400% in just one month. Similarly it has transformed young people's idea of where they want to live by making places people once ignored seem central and connected. The daughter of a friend declared to her parents that she wanted to live in Peckham since it was handy for Shoreditch. Before the Overground was added to the map, no-one would have said this.

I'm not suggesting for a second this is the only answer. But, because you economists assume perfect information, you tend to overlook informational solutions. London south of the river has a huge overground rail network of which most North Londoners are in complete ignorance.

1.Foreign buyers are a tiny proportion of London's market. They are high profile, dead centre, and a disproportionate number of the very, very, high end properties, but their £ effect on the overall market is zilch.

2. Buy to let is a fairly modest part of the market, but so what? The return on buy to let is only about 5%. If follows you could move the lot into private single ownership and not drop house prices that much.

Do nothing. The problem will solve itself. If something can't go on forever, it will stop. Prices will rise to a point where the bang-for-the-pound in London isn't there. Businesses will realize they can hire more readily at lower cost elsewhere. More and more people will realize they can enjoy a better quality of life outside of Oz. There's no hard limit on the number of desirable places -- new ones will emerge over time.

I think all of those suggestions will work perfectly, if your goal is to create a huge welfare slum.

It is interesting to look at the distributional effects of the existing programs and their effect on supply/demand. It tells you who has power and who does not.

Taking each of the items listed in the post:

1. Raising tax duty on the purchase of a home. This is a tax on new entrants and is not a tax on existing home owners who, of course, do not pay it and also are not incented to move to a lower tax district if it were a general property tax increase. Probably favors the elderly, as does rent control. Screw the kids.

2. Raising property tax. Old folks move out of their 3 bedroom apartment, or they earn a living on airbnb. Housing prices drop, supply drops.

3. Bedroom tax. Call it a granny tax. Old folks move out of larger place and move to smaller space, or kids move in to live with granny.

4. Increasing taxes on private landlords. How does that help. Maybe captures land rent increases due to scarcity, but would make more sense to use property taxes.

5. Loosening planning restrictions. Depends on the restriction, but OK, so long as it is not in my backyard.

6. Building on the green belt. Medieval walls didn't last forever. You could look at usage and determine what could be built on.

7. Deposit assistance for first time buyers. This is sort of like an isometric exercise in that item 1 raised prices to first time buyers, and this item reduces it. WTF. Why not cancel both 1 and 7.

8. Punitive taxes on unused planning permissions. Maybe justified in planning agency is not granting new permissions based on the fact that it has unused ones that have not been exercised. Better would be to make permissions time limited. Use it or loose it, or pay for the cost you impose on others for them not getting permissions because you haven't used yours. Just make sure you have good property valuations and capture it with property taxes as well...tax the property AS IF it was built on, and not at a rate like a farm land tax rate so the person with permission can sell property with permits at the peak of the market.

9. Direct price controls. Yeah, that always works.

10. Restrictions on foreign ownership of property. London version of let's build a wall and make the Russians pay for it.

11, Increasing interest rates. How about singing Hail Brittania instead. Just as effective. But not as counterproductive.

+ 1 for an actual economists post.

I'm just a humble antitrust lawyer who has hired economists to help obfuscate or clarify, depending on the clients interest.

A shift from taxing wealth creation to using land rents as public revenue leaves a typical UK household around £11K better in their pockets every year. Furthermore such a shift, as long as the rental value was always taxed at 100%, would result in the selling price of land drop to zero. So, assuming that typical household at some point has a mortgage, then the resultant increase in discretionary income improves housing affordability four fold for that household.

We don't have a "housing crisis". Problems with affordability for some parts of our society are merely another symptom of an unjust economic system. So what we actually have is a "transfer of wealth crisis", from those who pay proportionately more taxes compared to the value of land they own, to those where that is the opposite ie the top 1%

Those who blame planning are failing to see the bigger picture, and are inadvertently (or perhaps not) diverting attention away from the root cause of these problems.

http://www.zoopla.co.uk/heatmaps/

Even accounting for distance from city center, its clear that certain areas are way more expensive then others, usually by multiples of price.

https://en.wikipedia.org/wiki/Ethnic_groups_in_London#/media/File:White_Greater_London_2011_census.png

So you've got a pocket by the river to the east with the lowest prices in the city by far...and no white people (hint: its black africans over there).

And you've got this little pocket in the south center with cheap flats...and no white people.

And you've got another pocket of cheap real estate out by Heathrow airport...and no white people.

Well, you can read the map, continue through the patches of cheap real estate and match it up with demographic profile.

Seems to me that London has plenty of land and plenty of real estate, but that large swaths of the city appear to be completely off limits for some reason. It's almost like if you could free it up somehow you're housing crises would be solved.

First of all:
"The average London house price passed £500,000 last November and average rents for a 1-bedroom flat now exceed £700/month."

At current exchange rates that's $725k to buy a house in London? And an average one-bedroom rent of $1k/month? How are rents one-third those of New York City a crisis? What am I missing?

OK, now some suggestions for lowering prices. "deposit assistance for first-time buyers (the UK government currently underwrites mortgages of up to 95% LTV for first-time buyers for properties worth up to £600,000" There. That right there. Stop doing that. Is there straight property tax in London rather than all these fiddly "bedrooms" "purchases" ? Make it more expensive to own property in the city and prices will go down. Push out any poor people currently occupying potentially valuable real estate and build it up to increase supply.

I see that some other figures place average London rent at ~60% of New York City's, which is more understandable but still leaves a gap.

Also factor in that incomes in London (and the UK) are much lower than in NY/SF (and the US). It's easy to assume based on the telly that people in European capitals earn money similar to Americans, but they don't, not even in London. Also, average house size in the UK is 76 m2, less than even Japan at 95 m2, let alone the US at 201 m2.

I'm aware of the income difference between Europe and the US, and I guess if the real price gap is only 40% then income is going to explain some more of that.

I also wonder if London suffers from having really no intranational competition. If an American prefers a lower cost of living to NYC amenities, it's very possible to find an elite finance/law/high-tech/media job in Chicago or LA or DC or Boston. Are there hedge funds and tech headquarters and biglaw firms in (Googles "second largest city in UK") Birmingham?

They are a crises when you consider what $725k will buy you in other places.

I'd rather not pay $725k for a closet.

How is £700/month a "crisis"? I find it incredible that OP suggests increasing restrictions (more tax, more regulations). Here's one: adopt a "wage tax" assessed on each business proportional to their labor costs in the City. Here's another: random public strip searches. But seriously...

I'm not an expert in real estate economics, but Kate Barker is. Her book "Where's the Plan" describes in depth the malaise of the British real estate "market". The main issue is that planning restrictions are extremely tight, and that the "Green Belt", most of it agro-industrial wasteland, is a British obsession. The long term economic and social consequences of this policies are disastrous. London is f****d.

From the Economist article:

"Economists might welcome a shift from low- to high-value industries [in London], but property prices threaten its continuance."

And a little later in the article there's a reference to people who "cling" to the city as doing so at very high cost. The magazine seems concerned that property values will get so high that no one will live there any more.

That rumble you're feeling is Ricardo rolling over in his grave.

What on earth gives anyone the impression that there is any desire to "fix" it? If they fix it, house prices might fall. So they never will.

What is preventing them from building high-rise apartment complexes?

#5 seems like the only thing likely to work.
#6 will certainly reduce housing prices, but at the cost of losing a major amenity, which would make London a less desirable place to live.
When cities run out of room to expand outwards, they should build upwards. The typical reason they can't is because some regulation or other is stopping them.

Planning regulations make building high rise apartments almost impossible and very expensive.

The main problems I have heard are:
- Brown field land too regulated to invest in
- labour supply inadequate due to the service and education bubbles
- governments housing budget is used to pay private renters, so little free capital interested in homes to let rather than investment (foreign investors being disinterested in homes).

Barriers to demand would help. Making it more challenging to migrate for example. That would hurt property owners. But c'est la vie.

I agree supply restrictions are the problem, but there are some crazy theories here that NYC and London should become like Houston.

For one thing, Houston is a bit of a special case among Sun Belt cities, with its oil wealth. I live in Atlanta and though housing is relatively cheap, I've seen many people earn less because the low density means a lower concentration of jobs and thus less specialization.

The specialization is very apparent in places such as NYC and SF. NYC original advantage as a port hardly matters anymore, but the specialization in finance, media, advertising, etc. mean the production is much higher in NYC than elsewhere. Even though supply is the issue, the high prices wouldn't exist if people didn't pay to live in these places.

Houston is not a special case of anything. Most of these "sun belt" cities are similar. Look at this map: http://www.governing.com/gov-data/metro-area-wages-cost-of-living-adjusted-2014-data.html

Average cost-of-living adjusted wages in Atlanta are about 37% higher than in NYC.

The reason you have more low-income people is precisely because they are much cheaper places to live. Not because somehow there are fewer "specialized" people. So of course there are a lot more "poor" living in the South and Midwest, precisely because these places are cheaper.

The only "attractive" old-world cities are Boston and Seattle (but still lagging behind the "sun-belt cities") And DC for obvious reason of agglomeration of human waste (i.e politicians and gov. bureaucrats). Boston is also very car-centric and dispersed. Seattle even more car-centric (and of course high concentration of high-tech industry)

There's 3 cities in Texas alone which indicate that this is no special case. Houston, DFD and Austin. There's little oil industry in DFW or Austin. There's little oil or single-industry in Denver, Phoenix, Minneapolis, or even Chicago (which is mostly low-density suburbs too). Or Tampa or Charlotte or Durham-Raleigh.

And of course it's not just "sun-belt" cities. It's Midwest cities too. Kansas-City, Oklahoma City, Chicago, St.Louis, Colombus, Indianapolis, even Detroit (outside of the horrors of the city proper), are all evolving in the same direction.

Of course, that's where businesses are moving to, and that's why those cities are growing. In 10 years time, the picture will look even more stark between the sun-belt cities and the old-world cities. That's where the future is.

Follow the hispster migration :) Brooklyn was sooo 10 years ago, bro.

Some may argue that London, for its good points, is good only based on that (false) scarcity.
The small percentage of individuals who can afford to live/work/play there provide those qualities likely through their unique, heightened, and abundant skills/interests/passions that would otherwise be diluted or counteracted by having a free-for-all or a randomized/arbitrary insertion of 'affordable' access.
What evidence is there that space/time/resources are wasted or under-utilized? Access just for the point of access or diversity just for the point of diversity is not a worthy reasoning set. Does London somehow hold a vital and essential service not otherwise available elsewhere? Of course - slightly increased opportunity - but that's a perk, not a requirement.
Ask not why you can't live somewhere great, but why you are not already creating somewhere great.

Average London home at ~$520k: http://www.newstatesman.com/sites/default/files/images/house3.png

Average Houston home at ~$520k, about 10 minutes from downtown: http://www.zillow.com/homedetails/1415-A-West-21st-St-Houston-TX-77008/2098494068_zpid/

Or about 30 minutes from downtown: http://www.zillow.com/community/hidden-lakes/2098666716_zpid/

Thanks. You can keep your "creating" to yourself.

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