There's a much simpler way to solve this housing shortage thing you know
I'm always amused to see our rulers tying themselves into ever greater knots to avoid having to admit that the problem they're trying to solve is in fact just terribly simple to deal with. The latest is this idea that those who cannot afford a house should have a free building plot given to them by the State:
Young people who cannot afford to buy a home should be given land by the state so they can construct their own houses, the planning minister has suggested. Nick Boles said it would be a way of reaching out to a generation of young Britons who want to be “given the opportunity to get on and help themselves”. Instead of renting or applying for council housing, young people should be able to “put themselves on the list for self-build,” he said.
What we really have here is an admission that it isn't the cost of building a house which is the problem. It's the scarcity value of the planning permission to be able to build on a certain plot that is. It's most certainly not the cost of land itself: even in SE England this is rarely above £10,000 an acre and you can get five or six houses on that. It's not the cost of the land nor is it the cost of building a house (£120k or so for a nice three bedder). It's that chitty from the State that allows you to marry the two together that makes housing unaffordable where people desire to live.
As, of course, is being admitted here by the suggestion that a solution is to give people one of those chitties for free.
Which is a very complicated and in some senses appallingly stupid way of trying to solve the problem. For I'm deeply unsure that the country actually needs more houses put up by self-building bodgers. Nor does it need the local commissars being able to gift a couple of hundred thousand pounds to favourites by controlling the allocation of those chitties.
Why not, instead, simple reduce the scarcity value of those chitties by issuing more of them? We get to the same end point, housing becomes the cost of building plus the cost of the underlying land. No artificial pumping up of the price at all through "planned" scarcity.
We've even a blueprint for you, Land Economy by Mischa Balen.
But there's a much more basic point here too. When the original problem is government screwing things up the solution is not yet more levels of complexity but rather vying to get the government to stop screwing things up. In this case housing is expensive because government doesn't let people build houses where people would like to live. Why not get government stop doing that and the rest of us can then get on with our lives?
The government's new doomsmonger case for HS2
John Burton shows how the government's new case for HS2 is even less convincing than the last.
The Government -- or rather the Department for Transport (DfT), and its offspring, HS2 Ltd -- have (once again) today published "new, updated" reworkings1 of their strategic, business and economic cases for the High Speed 2 (HS2) rail mega-project; which is forecast for full completion (if eventually approved by Parliament) in 2037.
These are largely reworkings of their earlier argumentation; but they do, now, accept (grudgingly) that the Benefit-Cost Ratio (BCR) of their (Giant!) "pet" project is lower than earlier claimed; and the daft assumption that businessfolk do no work on intercity trains (eg, via ICT) remains, discreetly, embedded in the "new" analysis
What I also think is new about this "new, updated" case for HS2 is that it involves a histrionic resort to (what can only be described as) blatant scare tactics to try to "sell" the HS2 case to an increasingly sceptical public audience. A day before the publication of these new reports, a "Government source said":2 'The alternative to HS2 is a patch and mend job that causes 14 years of gridlock, hellish journeys, and rail replacement buses. 'The main routes to the north would be crippled and the economy would be damaged'.
However, these reports do not demonstrate this "doom-without -HS2" scenario! There would be some disruption arising from the implementation of alternative, rail capacity-enhancing projects; but not the "14 years of chaos" claimed by the Government. Moreover, the HS2 project would also involve much disruption (eg, around Euston, and in Middle England in particular)... but this is ignored by the Government in this pre-publication marketing ploy.
What should be done is to compare the alternatives side-by-side, dispassionately...which the new bevy of HS2 reports fails signally to do. In a seperate media attempt to market HS2 by doomsmongering, on the day before publication, the (London) Evening Standard3 was told: 'Tens of thousands more rail passengers will have to stand during their journeys if the HS2 rail link is cancelled, a new study warns. 'It says that there would be 17 passengers for every 10 seats on trains into London by 2026 if the current growth in rail travel continues...'. Obviously, this specific "marketing" ploy for HS2 was aimed at the (long-suffering) London commuter hordes, trying to read their Standard, whilst packed like cattle on some commuter line!
However, there are some very basic problems with this scare-tactic argument. First, Phase I of the HS2 project is not planned to open until 2027...one year after the 2026 "crisis scenario" fed to the Standard! So, HS2 could not head off this proclaimed capacity crisis! Second, HS2 is not aimed at all at relieving London (or other-city) commuting congestion at all...it is, by very design, a high-speed inter-city proposition (with a £50bn.+ price tag).
There are genuine capacity problems looming in the British Rail system; but these mainly relate to the very crowded commuter services in/around Britain's large cities -- notably London, Birmingham, Manchester and Leeds -- plus the Paddington-West Country/S.Wales lines . There are, moreover, plenty of potential ways of incrementally improving North-South rail capacity in the UK, without recourse to HS2 (should that demand arise).
I have elsewhere4 compared the doomsmongering that now accompanies proclamations of the case for HS2 to the Great Horse Manure Crisis of 1894; in which a (London) Times analyst forecast that London was doomed to be (literally) overwhelmed by horse manure -- to a depth of 9' -- by 1944 at the very latest... This Doom Scenario did not come about because alternatives to/substitutes for horse-drawn conveyance -- eg, cars, buses, rail, tubes, phones -- were developed. Likewise, if sensible alternative investments are made in infrastructure, we need not fear the "Doom-without-HS2" prospect that HS2's proponents now espouse to bolster their teetering case.
Sources referred to:
1:DfT, The Strategic Case for HS2, (29/10/13); HS2 Ltd, Economic Case and Other Supporting Documents, (29/10/13).
2: J.Groves, 'Passengers face "14 years of chaos" if HS2 is Derailed', Daily Mail, 28/10/13, p20.
3:Joe Murphy, 'Standing Room Only "Could Become Norm Without HS2"', Evening Standard, 28/10/13, p.8
4: John Burton, 'Conometricks and the new NAFF 'case' for HS2', Institute of Economic Affairs Blog, 24 October, 2013.
We need competition in transport, not grand projects
I've just done a Spectator podcast - online end of the week - on airport competition with Gatwick CEO Stewart Wingate and Margot James, member of the No 10 Parliamentary Advisory board. Let's face it, we need more airport capacity much more than we need a high-speed train that gets you to Manchester half an hour earlier. The Transport Department forecasts that demand will double, from 219m passengers per year, to 480m in 2015. We don't need one new runway, we need a whole slew of them, with extra capacity to encourage real competition.
Boris Island? I love it—big, shiny, high speed connections an all that—but at £96bn-odd and a 30-year planning and construction period, it seems a bit of a non-starter. The Houses of Parliament were built 150 years ago, and came in three times over budget and 27 years late, and that is about the norm for state-run infrastructure projects. So think more £300bn and 90 years. After all, it took nine years just to build a new terminal at Heathrow, not even a new runway.
How I wish that the Thatcher government had listened to us in our paper Airports For Sale back int the early 80s. Then, the state quango, British Airports Authority, ran all six major UK airports, three round London and three in Scotland. But no, they privatized BAA as a unit because it was easier. Since then, all the talk, and action, has been about building up Heathrow as a 'hub'. Typical monopolist talk – we need the biggest, the flagship facility. Nothing about customers being best served by competition. But now, in the last few years, with the (inevitable) forced break-up of BAA plc, we do have competition, and it is wonderful, if you are an air passenger, to see the individual airports vying for your business. Like trying to speed up queues in customs and immigration, and getting rail links to their airports that actually take account of the fact that you might have some luggage. And indeed, competing for the next runway.
Sir Howard Davies, who is reviewing all the options, has so far identified fifty different choices. Let's hope he realises that the most cost-effective solutions are the ones that focus on what customers, not politicians and airport planners, want. Use the market. Only about 7% or UK airline passengers are interlining, so let the airlines with that sort of traffic pay to go to the biggest hub, heathrow. Otherwise, develop capacity with new runways at Gatwick, City, Luton and you name it. As I say if only we'd had competition when ASI suggested it, passengers would have a much better experience than they get today.
Medieval peasants really did not work only 150 days a year
One of the things that irks my choler, yanks my goat if you like, is this idea that the medieval peasant led a life of incredible leisure, had to work vastly less than we poor saps ground down under capitalism have to. It's entirely nonsense of course:
Plowing and harvesting were backbreaking toil, but the peasant enjoyed anywhere from eight weeks to half the year off. The Church, mindful of how to keep a population from rebelling, enforced frequent mandatory holidays. Weddings, wakes and births might mean a week off quaffing ale to celebrate, and when wandering jugglers or sporting events came to town, the peasant expected time off for entertainment. There were labor-free Sundays, and when the plowing and harvesting seasons were over, the peasant got time to rest, too. In fact, economist Juliet Shor found that during periods of particularly high wages, such as 14th-century England, peasants might put in no more than 150 days a year.
What Shor (and others, for there are others who make the same claim) has done is looked at the labour service expected of the villein and then claimed that this was the amount of work they had to do. Nonsense: this work on the lord's demesne was the rent payable for the peasant's own land to farm. Something which rather added to his workload of course, that farming his own land.
We might also point to the amount of household labour that had to be performed. Yarn had to be spun, cloth to be weaved. Cooking was over open fires: and that firewood had to be collected. Bread baked and so on and on. There was a recent report (rather exagerrated but still) which claimed that in the 1930s it took 65 hours of human labour a week to run a household. Today it takes 3. Things were worse back in medieval days.
And finally there's the obvious point that these villeins and churls were animal owning peasant farmers. And people who own animals just don't get 70 days off a year, you don't manage to go off and get pissed for a week and then expect to have live animals when you come back.
What has been done here is to mistake work in the market economy for all the work being done. As a vast amount of a peasant's work is not in that market economy (that's why they're peasants and why they're poor) then they've decided not to include that back breaking labour done inside the household as labour.
As to why this is all being trotted out:
As for the modern American worker? After a year on the job, she gets an average of eight vacation days annually.
The US is the only leading nation that does not have legislation as to how much paid vacation time an employee must get. There is thus a move to make such a law. Thus these rather tired misunderstandings of medieval lafe being trotted out, to aid in making that case.
But there's one more surprise here. If you look again at their argument it is that everyone does indeed get paid vacation in the US even though there isn't a law insisting that they must. Therefore, because everyone gets it already we must have a law. Why not, you know, just leave everyone to get on with it themselves?
Help to Buy scheme will worsen Britain's housing crisis, says new Adam Smith Institute paper
Today we've launched a new briefing paper on Help to Buy, the government's scheme to increase home ownership. Unfortunately it seems more likely to inflate the housing bubble even more and risk taxpayer money in the process. Here's our press release:
Help to Buy scheme will worsen Britain's housing crisis, says new Adam Smith Institute paper
- The government’s Help to Buy scheme will drive up house prices by increasing demand for but not supply of housing – it will not improve overall access
- Help to Buy risks taxpayers’ money with no guarantee of a return
- By subsidising homebuyers and introducing the possibility of socialising lender losses, Help to Buy risks recreating the perverse incentives that led to the 2000s-era US housing bubble
The government’s Help to Buy scheme, which offers government-backed equity loans to house buyers and mortgage guarantees to banks, will distort the housing market, risk taxpayers’ money with no promise of a return, and introduce into the UK housing market the same perverse incentives that led to the US subprime mortgage crisis, argues a new paper by the Adam Smith Institute, released today (Monday, September 2nd).
The report, Burning Down the House (available to download here), argues that without measures to increase supply by liberalising planning laws, the Help to Buy scheme will simply drive up house prices, making housing no more accessible overall. Indeed, users of Help to Buy benefit at the expense of those who fail to use the subsidy scheme; the policy is like putting a platform under the buyer while also raising the bottom rung on the housing ladder.
If already badly-off people are less likely to access the scheme, it could have a particularly hard effect on the poor, the report says, a group who already lose out badly—the UK's extreme restrictions on housing supply have been calculated to add 3.5 percentage points to the GINI coefficient measure of inequality.
According to the report, a preferred alternative would be liberalising a hostile regulatory environment which inhibits the construction of additional housing supply—allowing houses to be built in more places, and slashing regulation on doing so. According to official statistics, only about 10% of the UK is built on, and of that the biggest fraction is gardens. If we want to control runaway house prices and give first-timers a chance to get on the ladder, we need to allow more houses to be built.
"It is crazy for the government to stoke demand even more without addressing supply and claim that this will help the housing market," said the Institute's Research Director Sam Bowman. "Making taxpayer-subsidised handouts to homebuyers will only drive further house prices up, risking a bubble, improving access for a select few but making housing even more unaffordable for most people."
"On the other hand, radical liberalisation of the planning system has the potential to drive massive economic growth, drastically reduce housing costs for the badly-off, and give millions more a chance to own property of their own. "
"Deregulation is a way of addressing the housing supply shortage while avoiding recourse to public fiscal intervention,” commented Preston Byrne, the Institute’s Legal Fellow. "If the Government is serious about finding a long-term solution to the housing crisis, it's time to take a hard look in the mirror and examine the role existing planning regimes – both local and national – play in regulating and inhibiting new housing construction.”
The HS2 argument is getting very confused
Various people seem to have various ideas about the merits or not of the high speed railway line to the North, HS2. Three little comments that stand out from the crowd for me:
Britain's construction and engineering industries need a more stable pipeline of work if they are to stay "right at the top of their game" following major works such as the Olympics, the boss of Crossrail has warned. Andrew Wolstenholme, who is overseeing the £14.8bn rail project across London, has laid down the gauntlet to ministers, claiming a "lack of continuity" is endangering the country’s competitiveness and threatening to push up prices. "If you see where UK infrastructure is right now…the reputation we are gaining to deliver on time, on cost and of high quality is building,” said Mr Wolstenholme. “UK plc is right at the top of its game in delivering these major works." But he added: "What we need to do is find ways to bring the pipeline forward… so that the industry is presented with a continuous pipeline of these major projects."
Nothing surprising about that. Man who makes his living doing infrastructure projects thinks that lots of infrastructure projects is a very good thing. I could be convinced that lots of opportunities to scribble on the internet would be a very good thing I'm sure.
The Institute of Directors (IoD) has urged ministers to abandon the "grand folly" of the £50bn HS2 high-speed rail project, saying little more than a quarter of its members believe it will prove value for money. The IoD's head, Simon Walker, said the business case for the line linking London with Birmingham, Manchester and Leeds over the next 20 years "simply is not there".
Also not a surprise there. That business case for the project has been looking pretty ropey for some years now. And then there's this:
I want the schoolchildren of the North-west to be captivated and inspired to take up careers in construction and engineering, and for the students at universities in Liverpool, Manchester, Leeds, Sheffield and Birmingham, to have the opportunity to choose where they work once they graduate. HS2 is a 20-year programme that could transform the skills base of the country. We lament how few young people go into engineering and science. Today more than a quarter of our science, technology, engineering and maths graduates go on to take non-engineering jobs. The project will be beacon for any young person looking to the future and deciding what to study. Through building HS2 we have a golden opportunity to expand greatly an engineering skills base that for years we thought could ebb away entirely.
Building lots of railways will encourage lots of people into studying how to build railways. And I can see that as a valid and unsurprising argument as well.
But when we put all three of the points together we get something rather different. We should build lots of these infrastructure projects because we're getting better at doing so, even though hte projects themselves are of no value, in order that we will encourage the next generation to train as people who can build infrastructure projects.
At which point presumably we'd have to continue subsidising infrastructure problems that aren't worth building in order to keep these newly minted engineers employed. Becasue, you know, we're really rather good at building things that don't make sense to build.
It's really not the most convincing of arguments when taken in the round, in the whole, is it? Indeed, I rather get the feeling that we'd all be made richer by people training to make and build the goods and services that are worth more than their production cost rather than those that are worth less.
Could people please stop trying to plan losers for us all?
An oft expressed contention is that if only we allowed those wise people in Whitehall to plan more of our lives then the future would be made so very much better that we won't mind paying the costs of having those wise people in Whitehall. One problem, among many, with this idea is that it does require the people we're paying for to be wise. Not something that I'm really willing to bet on, that. The Very British Dude makes an excellent point here:
.....the biggest change to transport technology on the horizon, the driverless car. Instead, the Lib-Dems are wibbling about High-Speed Rail which will be almost completely obsolete by 2050 as everyone will be snoozing in their own autonomous vehicles. Such vehicles will run door-to-door on a vastly greater network of tracks (let's call them "roads" shall we?) than any train network will ever be able to compete with.
This is exactly right I think. The planning that we're being offered is that we should have more of a 19th century technology in the 21 st century. And it's entirely ignoring the coming impact of a 21 st century technology.
The arguments in favour of HST and other fast trains etc are capacity and speed. We want or desire a rise in the capacity of people to move around the country simultaneously. And we also want to increase the speed at which they do so because time spent travelling is "dead time". That latter isn't really true what with mobiles and notebooks: and it most certainly won't be true when we're all sitting in the back seats of our Wi Fi enabled cars. Such cars will also solve some to all of the capacity problems: the current road networks can carry a great deal more traffic if it isn't all being directed by that all too fallible few pounds of meat called the human brain.
I will admit to being a little unsure about how quickly computer controlled cars are going to be rolled out. But it wouldn't surprise me at all if they were actually commonplace before anyone even starts breaking ground on HST. Which would be an interesting example of spending £40 billion on a project that was outdated before it was even begun, wouldn't it?
Letter losses + parcel profits = Royal Mail privatisation
This week Royal Mail, the UK's state-owned letters and parcels delivery business, is expected to announce profits of £300m-£400m. A few years back, the Royal Mail looked like a loss-making sunset business. Emails were replacing letters, and delivering bits of paper to 28m homes in every corner of the UK seemed like a good way to go broke.
Now we are sending even more emails – the Royal Mail's staples of greetings cards are being replaced by e-cards too. Bills and statements are going increasingly online, and more of us pay them online rather than putting a cheque in the mail.
But what is saving the Royal Mail is its parcels business. With email we are sending fewer letters, but with the web we are shopping more online. Losses in the letters business are being overtaken by profits in parcels. The UK online retail market was £78bn, up 12.8% on the year before. Department stores' online sales grew by an astonishing 37%. Around one-fifth of our retail purchases are now made online. A business that can deliver to 28m homes now suddenly has a value again.
What Royal Mail needs, though, is new capital to invest in this parcel delivery business. They know they won't get it from the government, which is deep in debt. They need new capital from the market and new strategic partners from business to help them invest it wisely and develop the parcels business. That means privatisation. On this weeks figure, it could be a £3bn business, which means a share offering to the public. On past form, the government will sell 51% and pocket a useful sum. But once the new capital is invested and is making the parcels business even more profitable, it could pick up even more when it sells the other 49%.
An end to zombie politics 4: Land use
Zombie policies on land use are no Aunt Sally: credit conditions come and go, but planning delay (or unavailability) is a project-killer from cycle to cycle. In October 1998, the McInsey report, Driving productivity, identified UK land-use restrictions as one of the critical impediments to productivity growth. This was never contested but neither was it acted upon. In October 2012 Lord Heseltine’s report, No stone unturned, pressed for “…inject[ing] urgency and purpose into the planning system”. On 17 March 2013, the Treasury responded that HMG is committed to “reforming the planning system to reduce costs and bring speed and certainty to business; and to addressing under-investment in the UK’s infrastructure while providing investment opportunities to the private sector.“
All well and good, but this won’t happen unless HMG deals with the underlying reasons for delays choking off the supply of land for growth. The central problem is that the benefits of change in land-use are valued less highly by locals (including local government) than loss in amenity. Another way of looking at this is that benefits are appropriated by developers, users and central government.
It’s beginning to sink in that the goodies need to be spread around if they are to be earned in the first place. In the case of fracking this is straightforward: a fraction of the incremental revenues from drilling or distribution are put the local’s way. HMG is proposing reduced energy costs; other hydrocarbon regimes appropriate revenues for public infrastructure. It’s a matter of mechanics and political judgment and HMG is already going the right way. But more should be done.
Policy for immediate relief
1. On balance I get that the local authorities need to be incentivised to go along with a more liberal planning regime, so as a matter of practical politics I’d go for pushing a bit of the gravy their way.
2. In return, let them accept more permissive guidance to planning authorities; or suspension of the objectionable clauses of the Town and Country Planning Acts.
3. This would be with a view to a holiday on restrictions in the construction of qualifying infrastructure, the definition which to be announced from time to time by the Secretary of State.
4. All this needs to be exempted from judicial review.
Policy for eventual resolution
Sharing out the spoils is more problematic where changes in land-use add value only over time or indirectly. Here let HMG add securitisation to “value capture”, that is sovereign appropriation of increased land-values when road or rail links are built.
5. Let HMG compensate owners of lands blighted by infrastructure at market rates on “most-favoured vendor” terms, with securities representing the value of the overall parcel of land, traded in the secondary market and enjoying time-limited underwriting (eg, negotiability for taxes at par).
6. Let HMG establish Enterprise Zone (EZ) reliefs for the lands concerned, attracting new development and adding to the land value and upside for the bonds.
Please see here for a worked example of such a scheme and here for a draft term-sheet for a land bond.
Unfinished business at the airports
Our 1984 paper Airports for Sale, by the noted transport economist (and now Irish Senator) Sean Barrett, put airport privatisation on the agenda in the UK. Dr Barrett showed why the six airports of the then British Aviation Authority (Heathrow, Gatwick and Stansted around London, and Glasgow, Edinburgh and Aberdeen in Scotland) should be sold separately rather than as a unit, so that competition and fresh thinking could come in to the UK's state-run airport sector.
Sadly, the Thatcher government – rarely as radical as people on either side suggest it was – thought it much easier to privatise BAA as a unit. A company of that size could be sold easily to the public through the stock market, a monopoly provider would bring in a higher price, there would be none of the legal or accounting problems that might be caused by a break-up, and the sale could go through much faster. Competition, they told us, could come later.
So the state airports monopoly (or near-monopoly: there were other notable local-government owned airports such as Manchester, East Midlands, Bournemouth and Luton) was turned into BAA plc and sold as a block. It has taken nearly thirty years, though, for the first prospect of competition cracking that block, and the cracks aren't all that deep.
Spanish-owned company Ferrovia took over BAA a few years back, but the Competition Commission later ruled that it should sell three of its airports – Gatwick and Stansted and one of either Glasgow or Edinburgh - to help create competition.
Gatwick was at least sold to a private consortium, the US-based investment fund Global Infrastructure Partners. Though GIP also owns London City Airport, so you could argue that there is still a monopoly element in that. And as I explained in January, Stansted has been sold too - but to Manchester Airports Group, which is entirely owned by local authorities. So that is hardly an injection of dynamic private-sector thinking. And what are local authorities doing running airports anyway?
The most promising sign is that Gatwick is now pushing the regulatory, the Civil Aviation Authority, for more operating freedom. It is demanding freedom to expand, and wants to be allowed to offer discounts to Far Eastern airlines. It sees a niche in attracting more flights from China, Indonesia, Korea and Vietnam. Current CAA regulation insists that all airlines should be charged the same, around £8.80 per passenger. Why? Steven Wingate, chief executive of Gatwick, says his plan would be a victory for competition over regulation. He's right.