Tired of London?

Samuel Johnson famously pronounced: “when a man is tired of London, he is tired of life”. This isn’t the end of his statement though, he added: “for there is in London all that life can afford.” But what if you can’t afford life in London? Surely then it is time to up sticks and move to a cheaper city.

According to a poll from the Supper Club, the network for entrepreneurs turning over £1m or more, 40pc of London-based business owners have considered moving their operations.

More than a third claimed that the cost and inefficiency of London’s public transport system is holding back businesses, while 40pc said that the cost of housing is driving away the best talent. With house prices in London reaching an all-time peak, business owners have warned of a “brain drain”.

The Supper Club, which represents 330 entrepreneurs from a range of sectors, found that 79pc of respondents fear a skills crisis within five years.

Of course, for as long as London remains a leading world city – at the cutting edge of finance, business and culture – it will remain a pricey place to live. After all, there is a flipside of the economies of amalgamation – some stuff, like housing becomes more expensive. And yet, there can be no doubting that house prices are hitting crisis point. For Generation Y, many can’t foresee how they will ever be able to own property in the capital. London’s big divide is between the owners and the renters and successive governments’ failure in allowing more houses to be built is squarely to blame.

To give you a sense of the crisis, Shelter’s model predicts that fewer than 1 in 5 of London families will be able to become owners by the age of 65 if prices inflate as they have done in the past.

As the LSE’s Paul Cheshire points out, politicians haven’t stepped up to the plate. The coalitions’ Help to Buy policies are doing little (except pushing up prices), while Labour’s suggestion for partial controls on rents, increased security of tenure, and elimination of agent’s fees for finding housing for renters, will probably just decrease rental supply as fewer people want to become landlords.

Cheshire believes “nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening.” Affordable, more stable house prices should be the policy goals of all political parties. This requires a more liberalised system, whereby the demand for housing would impact its supply.

This generation of successful entrepreneurs may be able to live in London but their employees increasingly can’t. And crucially, for the wealth of this nation, the next generation of entrepreneurs may have already moved to a city where the cost of living isn’t prohibitively expensive – and my first pick wouldn’t be the UK.

It really is the planning system that’s harming us

It really is the 1947 Town and Country Planning Act that is causing our housing problems:

Britons live in the smallest homes in Western Europe because of draconian planning laws restricting house building, a report found yesterday.

Residential floor space in Britain is on average just 66 square metres (710 square feet) per household, compared to a spacious 118 square metres (1,270 sq ft) in Ireland, 115 square metres (1,238 sq ft) in Denmark or 110 square metres (1,184 sq ft) in Italy, according to data compiled by the Institute of Economic Affairs.

‘All the evidence suggests that years of tight planning controls restricting house building has led to us having the smallest space per household in Western Europe.’ The figures were compiled as part of a report which confronted some of the most widely-held views about the cost of living crisis.

We have some of the most expensive housing in Europe and some of the smallest. Those two logically go together of course: people tend to consume less of something the more expensive it becomes. But is it actually desirable?

If we were facing a shortage of land upon which to build then perhaps so. If something does have to be rationed then rationing by price is the way to do it. But there isn’t any shortage of land. Housing takes up some 3% of England all urban areas no more than 10%. Famously, more of Surrey has golf courses than housing on it. What we do have though is a shortage of the pieces of paper that allow building a house on a piece of land.

Many say that this is a problem that government should solve. Build more council houses for example, force the private sector to do so. And the aim is correct, the government should solve this problem. But not by actually doing anything of course. That shortage of planning permissions is an active action by government: and the solution is therefore for them not to try to do something but to stop doing something.

Simply liberalise that planning system. After all, the last time the private sector built houses in the sort of volumes we need today was the 1930s. And it built all those houses where people wanted to live, in sizes they desired: those semi-urban semis are exactly what people find desirable today as well, judging by their prices. And all of this was done without much restriction on what could be built where.

We know this solution works because the last time we had a reasonably functional housing market was when we had an absence of that planning.

Why does everyone want to subsidise the stuff that no one wants any more?

Here’s another one of those terribly silly ideas that people keep having. People aren’t using the High Street as much as they used to. Therefore everyone must be taxed more in order to subsidise that High Street that no fewer people want to use any more:

The Labour Party is considering a new secret tax on the high street to try to boost ailing town centres across the UK if it wins next year’s General Election.

An advisory group created by Labour to consider the future of the high street has recommended that it looks at introducing a new levy on residents to fund a major expansion of Business Improvement Districts, which manage local areas.

In its report, which has been seen by The Telegraph, the High Street Advisory Group recommends “diversifying the application of BIDs, including the ability to assess property owners and residents” and says that “new tools will need to be explored which diversify income streams”.

Sigh.

OK, so hands up everyone, why are people using the High Street less?

Yes, correct, because some 11 to 12% of retail sales now take place on the internet. We thus require some 11 to 12% less retail space on a High Street. Or, if you wish to be picky, we require 11 to 12% fewer High Streets. So the idea of taxing the people who don’t want to use High Streets as much as they used to in order to preserve those High Streets they no longer want to use is, well, it’s ridiculous, isn’t it? Akin to taxing Ford and GM to keep buggy whip makers in business.

But sadly it’s not just ridiculous. For what do we also have a shortage of? Yes, you’re right again, batting 1.0 so far. We have a shortage of housing in the centre of towns, where people like to live (OK, some people like to live, but enough people do that the point still stands). And what else have we got? That 11 to 12% of former retail space that has gone bust and is standing empty. Walls, roof, utility connections: bish bosh with a bit of plasterboard and some Dulux and we can convert one to the other. You know, this structural change stuff, where we move an extant asset from a lower valued use to a higher and thereby make the nation and society richer as a result?

And what is the response to this? Quite seriously there are people campaigning to deny change of planning use from retail (most especially the pubs that no one is allowed to smoke in any more, and are thus going bust) to homes and houses. That’s not ridiculous that’s just crazed lunacy.

Sigh.

Tempus mutandis and the extant infrastructure of the nation occasionally needs to be repurposed. The idea that we should tax everyone to set it in aspic is so, so, well, it could really only have come from politicians, couldn’t it?

Why Uber might be making a mistake in paying by the hour

There’s a little technical detail about incentives that suggests that Uber might be making a mistake in their policy of paying minicab drivers by the hour. That mistake being not quite getting the difference between the income effect and the substitution effect as it affects pieceworkers (those two effects together being what gives us the Laffer Curve of course).

The point is mentioned here:

I’ve been chatting to local minicab drivers about Uber’s operation in Manchester. They don’t feel threatened, or tempted. Prices here start at £1.50, and wages are hard for even those VC types to undercut. Uber have allegedly been trying to do this with the bogus guarantee technique: drivers around here are apparently on £10.00 an hour, anything above that gets kicked back to Big Minicab. They don’t fancy the deal. Even in slack times, when they’re not being robbed of their reward moments, there’s always the hope that a fare to the airport will show up, and that’s part of what keeps you ferrying people around all day. It means you can (XXXX) toddle off home a bit early, which you can’t do if you’re on Uber’s clock.

Uber, Lyft, Hurnya and whatever don’t seem to realise that there’s such a thing as a minicab work culture, intensely local and adapted both to the people who work in it and their customers.

Re those incentives: the income effect is the idea that we have a mental model of how much we want to earn in a day (or week, whatever). If we achieve that then we’ll go home: or if taxes rise then we’ll work more hours to make that target, if taxes on incomes fall then we’ll work fewer hours. The other is the substitution effect where if taxes fall we’ll work more hours as work now becomes more valuable to us than leisure and vice versa when taxes rise.

In general, across the economy, neither applies to us all all the time and both apply to some of us at least some of the time. It’s the mixture of both, according to personal preference, that gives us that Laffer Curve.

However, detailed empirical studies have shown that pieceworkers (and taxi and minicab drivers are one of the groups that have been studied) tend to be more subject to that income effect. There’s a definite mental model of how much they want to earn in a day and they’ll keep going until it is earned then toddle off to do something more interesting. This is why you can never get a cab when it’s raining of course: higher demand for cab rides means they earn their target earlier in hte day and thus, amazingly, an increase in demand leads to a reduction in supply.

Uber has thought this through with their surge pricing: in bad weather they increase prices and thus earnings to overcome this effect. But offering drivers a flat rate per hour is precisely and exactly the opposite and almost certainly isn’t the correct response to that known propensity to the income effect.

This isn’t the most amazing observation about the world, obviously, but it’s an interesting little application of the microeconomics we know to be correct. Piece workers are more subject to the income effect than the substitution: thus hourly pay for them might not be quite as effective in attracting them as one might originally think.

As Herb Stein said, if something cannot go on forever then it won’t

It’s the Daily Mail that brings us the news that property prices have been rising by 8.6% a year for many decades now. This is of course a nominal number, not a post-inflation one, but projecting it outwards we see that there’s going to be something of a problem in the future:

Children born today looking to buy their first home in 2048 will be required to pay a staggering £3.4million, according to new research.

The remarkable figure was revealed in a study showing how decades of property value rises will affect a baby born today should the price increases continue on their currently trajectory.

The study was based on average annual increases of 8.6 per cent a year since 1954 and then uses this to pinpoint a cost for those buying their first home at the average age of 35.

Obviously, unless there’s rather more inflation than we currently think is going to happen, that’s not going to happen. Herb Stein will be right, something will happen to make this not happen.

But what will happen is the interesting bit. We hope that the solution will be a change in the way we plan housing in this country. For it’s worth noting that this house price inflation really only started as the effects of the 1947 Town and Country Planning Act started to bite. In effect the government said that no one should build houses where people would like to go and live.

No, really, the 1930s were a time of an almost laissez faire attitude to who could build what where. And where people wanted to be able to buy should not be a surprise, they wanted to live in the countryside surrounding the towns and cities. That’s how towns and cities had grown in England for centuries. We ended up with those ribbon developments across the South East, suburban semis along the major roads, little estates added to villages and towns within reasonable distance of London.

That’s what people actually wanted, something we can see from the way people flocked to purchase these speculatively built homes. So what did the government do? Banned building what people actually wanted to live in. For of course we can’t let the ghastly proles actually enjoy their lives, can we?

The solution to housing becoming too expensive is of course to reverse course on what it is that makes housing so expensive. Allow people to build houses where people actually want to live: in short abolish the Town and Country Planning Acts.

We’ll get there, of course we will, for Stein was and is right. The only question is how long will the Nimby’s be able to frustrate the desires of their fellow citizens?