AT FIRST glance London looks unstoppable. It is the
most important city in Europe, perhaps the world. In the past decade its
economy has grown twice as fast as Britain’s and its population 50% faster.
Scratch the surface, however, and its situation looks less good. The motor of
the British economy is becoming less productive and more unequal. The
fundamental problem is how land is used and regulated.
Over the last full
economic cycle, from 1993 to 2008, the cost of a hectare of residential land in
London increased by more than 300% in real terms, to more than £8m ($15m).
Commercial-property prices rocketed up as well. Now less-productive industries
are moving out. The supply of floor space put to industrial uses such as factories
and warehousing has fallen by half in the past five years, suggest data from
JLL, a property firm. At the same time London’s population is growing more
skilled. Over the past decade the proportion of people with university degrees
has increased much more quickly inside the capital than outside it.
Economists might welcome a shift from low- to
high-value industries, but high property prices threaten its continuance.
Academics complain that they have been forced to move out of town. The share of
employed people in inner London working in professional scientific, research,
engineering and technology jobs has fallen from 6.6% to 5.4% since 2011. Public
services are under stress. “It’s almost impossible to hire young teachers who
don’t live with their parents,” says one head teacher. And it is not just young
teachers who are throwing in the towel: in 2011-14 the number of
twenty-somethings fell by 3%, reversing long-term growth.
Those who cling on in the city do so at a cost.
Between 2008 and 2014, Londoners’ disposable income (ie, after housing costs)
fell by 4%, a steeper decline than in any other part of the country (see chart
1). According to a recent paper from the Centre for London (CFL), a think-tank,
the disposable income specifically of private renters in inner London dropped
by 28% between 2001 and 2011. And people are cramming in more tightly. The
average number of people per dwelling has risen from 2.3 to 2.5 in just ten
years.
But while most Londoners
struggle, some are thriving, in particular homeowners. Income inequality has
risen faster in London than in Britain as a whole over the past decade. In the
priciest boroughs, such as Kensington and Chelsea, income distribution now
resembles that in some developing countries.
Increasing inequality is
bad for the city economically. Costly rents and mortgages transfer wealth from
poorer people, who tend to spend whatever money they have, to richer folk, who
save it. As a result there is less overall demand to support the local economy.
Decreasing diversity is another loss: if different sorts of people do not
cluster together, they cannot exchange ideas and innovations so readily. In
2012 and 2013 productivity per worker fell in London, though it rose in the
rest of the country. The proportion of total employment that comes from
startups is falling, and small firms are currently closing at a faster rate
than more established outfits.
Going
to ground
Poor land-use regulation is the main reason for London’s crazy prices. Two
problems stand out.
First, not enough space
is given over to new development. About 20,000 homes were built last year, only
half of what was needed. Over one-fifth of London’s land is “green belt”, open
space encasing the city that is largely off-limits to development. In the
popular imagination, green belts are pleasant spaces for people to walk their
dogs. In reality, about 7% of London’s green belt consists of golf courses.
Over half is agricultural.
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 annually. But opposition from homeowners to
building on it is strong—especially those near the green belt, who do not much like
the thought of newcomers bringing down property prices. Today, despite popular
fears that the green belt is being concreted over, there is virtually as much
of it in London as there was in 2007. Many argue that developing brownfield
land (land previously used for some industrial purpose) would solve London’s
problems. Research by Nathaniel Lichfield and Partners, a consultancy, however,
concludes that brownfield sites could accommodate less than half of the homes
required up to 2030.
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 in this London neighbourhood
is twice as expensive as in midtown Manhattan (see chart 2).
Councils might get rid
of the barmiest rules were it not for the second problem: taxation. Council
tax, which is levied on housing, is collected by local governments. The
prospect of broadening their tax bases should logically spur councils to allow
more building.
Not a bit of it, argues
Mr Hilber. Residential-property taxes are low in Britain compared with other
countries, so housing developments create little additional revenue. Worse, the
so-called “equalisation system”, a way that the central government doles out
grants to councils, more or less eliminates any extra revenue in the medium
term for local authorities that permit more development. And the cost of the
additional infrastructure that development makes necessary—roads, schools and
the like—is rarely met by central government, he says.
Help is on the way, says
the government. Londoners may soon be allowed to add storeys to their home if
an adjoining building is taller. Few are likely to want the hassle, though. It
has also become easier to convert offices into dwellings (which creates a few
extra homes but reduces the supply of commercial property). In any case, other
new policies will discourage homebuilding. From 2020 councils will have full
control over business rates and receipts. This will give them an incentive to
allow commercial development at the expense of housing, points out Mr Hilber.
As Londoners prepare to
choose a new mayor on May 5th, London’s property woes have never loomed so
large. Unfortunately, neither of the leading mayoral hopefuls—Sadiq Khan, the
Labour candidate, and the Conservatives’ Zac Goldsmith—is brave enough to
propose a serious solution. Both have pledged to preserve the green belt, a
popular promise, and their other suggestions amount to little more than
tinkering.
So prices will probably
continue to rise—unless Britons vote on June 23rd to leave the European Union,
and demand for London property withers. The economy will slow as rent takes a
bigger chunk of pay and earnings. Skilled people will move to jobs in less
productive places, thus earning less. A recent paper by Chang-Tai Hsieh of
Chicago University and Enrico Moretti of the University of California, Berkeley
suggests that tight land regulation in America may have reduced GDP by more
than 10%. A similar, perhaps larger, effect is likely in Britain. Unless
London’s property market can be sorted out, people across the country will bear
the brunt.
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