The future of freeports

In 1983, 36 years ago, Dr Eamonn Butler and Dr Madsen Pirie, founders of the Adam Smith Institute, wrote Free Ports. 3 years later, Dr Butler co-authored Free Ports Experiment. In 1981, the ASI had proposed freeports for the UK – and six were established – but their chances of great success were scuppered from both sides by the EU and HM Treasury. The European Union steadfastly refused to ease any of their choking regulations – and the UK Treasury, similarly, refused to ease VAT or tariffs. According to Dr Madsen Pirie in the Spectator today, ‘the freeports were effectively just reduced to being bonded warehouses, where goods could be stored, and only be taxed when they left.’

The Adam Smith Institute has long been clear that this isn’t what freeports should be about. Freeports could, and should, be hi-tech, high enterprise hubs for the British economy, springboards for regional and global competition through free trade, and gateways to local employment and prosperity.

Freeports aren’t a new concept – they rose to prominence in post-Renaissance Italy – and they aren’t a complex idea. As Dr Butler explains in his piece for the Telegraph today: ‘take a bit of land near a port or airport and treat it as if it were a foreign country as far as import/export trade is concerned. So, people can fly or ship in goods from abroad, store, consolidate, process, assemble, package or label them in the freeport, and fly or ship them out again. All this with no import tariffs, no VAT or any other taxes, and no paperwork when the goods leave. All plain and simple for the importers and exporters, and a nice generator of jobs, enterprise and investment for the local community.’

Despite the simple nature of freeports policy – and the limited cost to the public purse – government has insisted on getting them wrong in the past. The sites rolled out when the Adam Smith Institute first championed the idea were chosen by the government for political reasons, not for sound business ones. Freeports should have regulations which are as simple as possible – and tax codes to match. Freeports should be treated as foreign territory in many ways – and managed through an independent port operator – not a meddling government.

If done right, freeports can be a huge win for post-Brexit Britain. We can increase the capacity of our ports, develop strategic assets needed to be a serious global player on trade, and boost jobs and British products at the same time. As Dr Pirie said today: ‘Liz Truss, as the new International Trade Secretary should be bold. We should support her fight for real freeports, ones that can draw business, wealth and jobs to some of the UK’s ports, located in areas that have not kept pace with its economic expansion, and which could be regenerated with a such a boost. Low taxes and low regulation mixed with high-tech and tall global ambition — a recipe for success.’

Freeports are one of those policies which can make one really excited for the future – if they’re rolled out in the right way. Since 1981, the Adam Smith Institute has led the calls for freeports policy – and there’s now a wealth of evidence from around the world that shows we’re right. If done properly, freeports can be serious assets to an economy – we look forward to continuing to make the case for them. 

An interesting little example of political rhetoric

Apparently it is some terrible scandal that local authorities do not build anew those houses that are sold under the right to buy legislation. The answer given to this accusation being that they do, but slowly. What neither side actually says being the important part: local authority housebuilding is simply not a relevant measure of anything interesting at all:

Local authorities in England have replaced one in 10 of the homes sold through right to buy since discounts were increased in 2012.

Government figures show there have been 49,573 sales since the scheme was relaunched, while 4,594 have been started on site or acquired by councils.

About this we are told:

John Healey, shadow secretary of state for housing and planning, said government decisions were “leading to a huge loss of genuinely affordable homes to rent and buy at a time when they’ve never been needed more”.

He said: “Tory ministers have repeatedly promised that every home sold under right to buy will be replaced one for one, but these figures show that they are failing by a huge margin. Only one home is being built for every eight sold.”

That would seem to be a slam dunk, wouldn't it? And yet:

The DCLG said: “Under the right to buy one-for-one additions policy, local authorities have three years from the date of the sale of each additional home to provide an additional affordable property. There were 1,326 additional sales between Q1 of 2012-13 and Q3 of 2012-13. There have been 4,594 starts and acquisitions since Q1 of 2012-13, exceeding the target for one-for-one additions.”

What is not being said is that all of this is entirely irrelevant, The housebuilding statistics are here. Local authorities started perhaps 1.700 houses last year, out of some 150,000 for the country. They're 1% of the market, no more. No, this does not mean that "affordable housing" is not being built (quite apart from the fact that a house people can afford is affordable). Because we simply do not use local authorities to build such housing these days. That is now done by housing associations. They have taken over that 15% of the market that used to be councils.

Local authorities and their activities in the housing market are simply an irrelevance. We don't use then as we used to, we've changed the structure of the system. Bleating about irrelevances is, well, it's irrelevant.

No to council housing, yes to housing benefit

That we have something of a housing problem in the UK is obvious. That we should be doing something about it equally so. However, those who tell us that we should be building more council houses are wrong. Yes, obviously, build more housing to bring the price down (by releasing more land to build upon) but housing on council tenancies is just the wrong way to go:

This paper provides new evidence on the effects of moving out of disadvantaged neighborhoods on the long-run economic outcomes of children. My empirical strategy is based on public housing demolitions in Chicago which forced households to relocate to private market housing using vouchers. Specifically, I compare adult outcomes of children displaced by demolition to their peers who lived in nearby public housing that was not demolished. Displaced children are 9 percent more likely to be employed and earn 16 percent more as adults. These results contrast with the Moving-to-Opportunity (MTO) relocation study, which detected effects only for children who were young when their families moved. To explore this discrepancy, this paper also examines a housing voucher lottery program (similar to MTO) conducted in Chicago. I find no measurable impact on labor market outcomes for children in households that won vouchers. The contrast between the lottery and demolition estimates remains even after re-weighting the demolition sample to adjust for differences in observed characteristics. Overall, this evidence suggests lottery volunteers are negatively selected on the magnitude of their children’s gains from relocation. This implies that moving from disadvantaged neighborhoods may have substantially larger impact on children than what is suggested by results from voucher experiments where parents elect to participate.

This is over and above the well known finding that labour immobility reduces employment levels. And in the British housing market there's nothing so immobile as a council tenancy.

We're always going to have some form of housing subsidy for those who simply cannot manage themselves. But it should be a subsidy simply paid out, not the creation of estates of immobile people.

As we've been telling you about house prices

As we've been telling you for some time now a goodly portion of the house price problem in Britain is because of the insanities of our housing planning system. As the Royal Economic Society is now pointing out:

House prices in the South East of England would have been roughly 25% lower in 2008 and perhaps 30% lower in 2015 if the region had planning regulations of similar restrictiveness as the North East of England.

This really is what we have been telling you:

Today housing space in England – particularly in London and the South East but also in other urban centres and large pockets of rural England – is among the most expensive and unaffordable in the world. Hilber and Vermeulen’s study shows that this is in large part due to supply constraints imposed by the planning system.

According to the research, the problem is clearly that there is too little supply given the strong demand for housing in parts of the country. But why? The study explores three possible types of supply constraints:

• The first type is regulatory and dates back to the Town and Country Planning Act of 1947. The UK planning system since 1947 is extraordinarily rigid by world standards. Urban containment through ‘green belts’, strict controls on height, lack of fiscal incentives at the local level to develop and ‘not in my backyard’ (NIMBY) behaviour facilitated by the planning regime all make it very difficult to build new homes.

• The second type is physical. Local scarcity of brownfield or greenfield land makes residential development in desirable locations very costly.

• The third type is uneven topography. It is very difficult to build new homes in places with steep slopes.

So which of the three types is most important in the case of England? The researchers use data from over 350 local authorities from 1974 to 2008 to explore this question. Their findings strongly suggest that regulatory constraints are the main culprit.

As we have indeed been saying.

So, abolish the Town and Country Planning acts and return us to the 1930s, the last time the private sector kept up with housing demand. The point being that markets really do work and regulation of them often does not.

As we've been saying, it's all about land prices

Or as we've been saying in rather more detail: the price of housing in Britain is really about the price of the chitty that allows you to build a house on a certain piece of land. For there's no real other reason that housing should not be at about the cost of building a house. As this builder is showing:

The company uses figures from the annual survey of hours and income to work out where it can build, and has identified other parts of the UK where it could construct affordable two-bedroom semis for couples. Across the north of England it thinks it can build homes affordable to those on a household income of just £23,000, and going further south, including Kent, believes it can sell to those earning £27,000. Harrison says this would require a different approach, possibly involving local authorities selling the land at a lower price but keeping some equity in the houses.

The actual build cost of a two bed semi is in the £80k range, that for a larger 3 bedder perhaps £100k. So, why isn't it possible for people to build to that price in the South? And ifthey were, why aren't we inundated with firms looking to make the 75% margins that would come from doing so?

The answer being that we've an idiot planning system which determinedly, purposefully, with malice aforethought, refuses to licence land for building houses upon anywhere near people would like to have a house to live in.

We're not going to solve the housing problem until we solve this problem. The correct answer being to tear up the Town and Country Planning Acts and go back to what prevailed the last time the private sector managed to house Britain, a free for all. The thing being that we really did learn this lesson last century: markets work and planning doesn't. The Soviet Union's economy collapsed into rubble because they tried to plan the whole economy. The parts of our economy which don't work are those subject to that very same mistake of planning.

People prefer neo-traditional buildings

It seems obvious to me—and I think to most people—that housing built since the 1930s is by and large much less attractive than housing built before. But if this is true, and if we are much richer now than we were in the 1930s and before, then why would we build, buy and live in housing we don't like? We have some sort of market in housing; surely if we really all preferred traditional housing styles we'd just buy it.

A new paper (slides) provides the answer—at least if we can assume the UK and the Netherlands are similar in this respect. The authors look at a large database of new-builds and sales and compare similar neo-traditional houses to houses with some traditional features and those with none. They find that, even controlling for a wide range of features, fully neo-traditional houses sell for 15% more than fully non-traditional houses. Houses with references to tradition sell for 5% more. We might reasonably speculate that truly traditional houses sell for yet more.

In their words:

Popular reports on the housing market often refer to attractive style characteristics of houses. In the case of the Netherlands specifically housing from the 1930s is very popular. It is, however, difficult to disentangle the attractive vintage effects of the dwelling from (often inner city) locational amenities.

This paper studies exactly these attractive physical features without the confounding influence of age and location effects by studying newly built houses in newly developed neighborhoods only. A rich data set of housing transactions in the Netherlands is enriched with style characteristics of houses on 86 (Vinex) housing estates across the Netherlands. This resulted in over 60,000 transactions between 1995, the starting point of the development of these sites, and 2014.

The hedonic price model that has been estimated shows a significant price premium of 15% for pure neo-traditional styles and 5% for referring to traditional styles. Various robustness checks confirm that these results are partly, but not entirely, driven by, e.g., unobserved differences in quality between houses with different building styles.

The riddle is why—if this premium exists—do developers not build mainly or purely in the neo-traditional style, to reap profits from satisfying market demand. Why do developers only build neo-traditionally—why don't they really try and ape the creations of the past? The authors blame tight regulation of both the volume of production and the inputs; local authorities effectively prescribe modern styles and proscribe prerequisites for traditional design. They find that construction cost has only a marginal or negligible impact, by contrast.

This research is especially plausible, as it turns out London and the Netherlands probably are similar in the relevant respect: some of our housing problems are caused by similar factors. Everyone wants to live in beautiful terraces, right? But new housing usually looks nothing like the most popular existing stock.

Nicholas Boys Smith and Create Streets provide an elegant explanation (pdf): building codes in London make popular traditional housing—which is very dense and could be sold very profitably—near-impossible. They blame six key barriers including: bans on recycling dead space between buildings into gardens; universal lift requirements; illogical value calculations; staircase width rules; and excessive wheelchair requirements; as well as many others with smaller individual impacts.

Top-down planning ruins cities, wherever it is tried. If we loosened regulations on the volume of building, and the type of buildings that could be built, then we could massively increase London's density while simultaneously providing the sorts of dwellings people actually want to live in.

In praise of gentrification

In a column for Inside Housing I've looked at some of the data around how gentrification affects existing residents to see if there's any reason to worry about it. Surprisingly, it doesn't look as if gentrification really does push out existing residents very much – involuntary movement out of a gentrifying neighbourhood is about 0.6 percentage points higher than city-wide averages:

Instead of displacing people, gentrifiers tend to add to a local area’s population through new builds and property conversions (like warehouses and former industrial buildings). Although rents might rise for existing tenants as overall demand for the area rises, the involuntary displacement rate is very small - in one US study, it is 1.4% compared to a city-wide average of 0.9%. . . .

And gentrification brings benefits for locals, with better jobs opening up:

It often feels like the staunchest opponents of gentrification are other gentrifiers who got there a bit earlier. The evidence from the US and the UK is that gentrification raises the incomes of people living in affordable homes and improves their credit scores.

And this is not even to mention the reduction in crime that usually takes place as well. Read the whole thing here.

Post-war town planning: how to kill a city

In the UK the end of the second world war led to increased efforts by planners to shape the direction of cities. Destruction in the Blitz was to many town planners and architects 'a blessing in disguise', allowing them to reconfigure cities in a more rational way. But cities are a good candidate for an example of 'spontaneous order'—that amorphous concept popular with libertarians—where information is dispersed so widely that central plans don't work as well as a common knowledge framework and private direction.

What I hadn't realised until recently was that this process went on extensively even in the USA. The University of Oklahoma's Institute for Quality Communities has a wonderful set of pages comparing aerial photographs of cities 60 years apart—in the 1950s and the early-2010s—and the destruction wrought by planners is evidence even from a cursory glance. The pictures of Midwestern cities are particularly striking.

Kansas City, which in 1955 has the look of a hardboiled-era Los Angeles from above, all consistent blocks, leafy but fairly densely populated, is saddled with an incredible set of highways and junctions right through the middle of the city (I-70 and I-435). Some Spaghetti Junction-esque interchanges required what looks like a dozen blocks to be bulldozed.

In the US, this movement came partly from Harry Truman's Housing Act of 1949 and surrounding bills. This provided huge federal funds ($3trn in today's dollars) to buy up and demolish housing—local government would pay the remainder to get new buildings up. It also came partly from Dwight Eisenhower's Federal Aid Highway Act of 1956, which did a similar thing but for giant roads.

Perhaps the most striking lesson from these illustrations is one that should already be well-learned: density needn't be unattractive. Just as Pimlico and Chelsea are packed with people but among the most desirable places in the world, the 1950s versions of great US cities were denser but prettier. A lot was lost when trying to reconstruct them from the top.

Tube strikes: Driving London insane

They say that lightning doesn't strike twice, but unfortunately tube drivers never seem to stop. It is expected that there will be three more tube strikes in the coming five weeks (on 27 January, 15 and 17 February), for a number of predictably dubious reasons, with the main ruckus surrounding driver’s pay and the Night Tube. The tube driver’s union, Aslef, is up in arms about the fact the government has refused to sit down with them since November to discuss the pay of their drivers -and it’s no wonder they don’t want to. This same debate has been dragging on for what seems like forever, back and forth between London Underground and some very uncompromising Union leaders.

The Night Tube was originally planned to open back in September 2015, but unfortunately it was pushed back as no agreement could be reached. The latest round of proposed strikes come after the government has already offered a 4-year pay plan for existing drivers (a compromise up from their original 3-year offer) and an agreement to hire new part-time drivers to manage the Night Tube service, in order to avoid ‘overworking’ current employees.

It all sounds rather frustrating, but the real argument behind why these strikes are so misguided comes when we break down the figures. The introductory salary for a newly-qualified tube driver is an incredible £49,673 a year, with the average driver working on average only 36 hours a week. They also enjoy other perks such as 43 days annual leave, and drivers can expect to earn as much as £60,000 after five years service. Those figures are ones that the average person yearns for. Compared to other public sector jobs, tube drivers also have a pretty nice income. The average starting salary of a teacher is only £22,023 and a fire fighter earns £21,583, despite the fact that they work 20 hours more a week and get 15 fewer days annual leave a year.

At this point, many people have lost a lot of sympathy for the tube drivers, but it gets worse. The Union leaders have repeatedly rejected London Underground’s various pay package offers, including a 2% pay rise, followed by guaranteed pay rises for the next three years, and there was even talk of a bonus scheme of up to £2000 for drivers offering to work night shifts on the new service. But when this was still met with of cries of concern about ‘forcing drivers to work anti-social hours’ (because 36 hours a week is already so strenuous), London Underground changed their strategy.

They have instead proposed to open applications to external candidates to work part-time on the night shifts. Steve Griffiths, the chief operating officer for London Underground, has said that the new part-time drivers will be “on permanent, part-time contracts with the same rates of pay and the same benefits as existing drivers.”. Sounds like a win-win situation for everyone, right? Drivers won’t be forced to work night times, and the night tube can go ahead, generating 200 new jobs and potentially contributing£6.4 billion directly to the London economy within the next 15 years.

But no, Aslef are still unhappy with this agreement, which Boris Johnson has called a “no-brainer”. Boris also said that since applications have opened for 200 new part-time drivers, more than 6,400 applications have been received- showing there’s clearly plenty of people willing to work for the current pay, and making the Union’s demands look even more unreasonable.

Striking is obviously not the answer here, and is a sign of an overly-powerful union in an industry where competition is impossible to achieve. The balance between protecting worker’s rights and the public interest is a delicate one, and in the case of the tube strikes it is becoming an increasingly important issue to resolve. Drivers already earn over double what other public workers do, for nearly 20 fewer hours work a week. It seems foolish that although Aslef’s demands continue to be met, each day of striking is expected to cost other workers and private enterprise £300 million in lost productivity, and delaying the opening of the Night Tube continues to withhold economic growth in London. It’s about time the union leaders piped down on the whole issue- if drivers are unsatisfied with their jobs, there are 6 and a half thousand others who would happily take over. Open up the labour market for tube drivers and the issues surrounding pay will quickly subside.

A Garden of One’s Own: Suggestions for development in the Metropolitan Green Belt

Our new paper on where to build on London's Green Belt is out now. Below is part of the press release we sent to the media; for the full press release, click here. To read the whole paper, click here. London must build on low quality Green Belt spaces around existing commuter infrastructure to solve its housing crisis, according to a new paper from the Adam Smith Institute.

Building on 20,000 acres of the Metropolitan Green Belt (roughly 3.7%) would create room for the 1m new homes needed, estimating 50 houses per acre; nearly all of which could be built within 10 minutes walk of a station.

The paper, A Garden of One’s Own: Suggestions for development in the Metropolitan Green Belt, identifies specific areas where tens of thousands of dwellings can be built, and points out how providing the housing Londoners need does not require ‘concreting over’ the countryside, destroying amenity, or overcrowding.

The author of the paper, Tom Papworth, considers the five main justifications given for the green belt: to check sprawl; to prevent towns merging; to safeguard the countryside; to preserve historic towns; and to force land recycling; and notes that many pieces of land currently designated that way do not meet any of these.

For example, there is an area of land between Hainault, Barkingside, Chadwell Heath and Colliers Row, totalling about 1,200 ha—or 60,000 dwellings at standard densities outside of London—where none of these purposes apply. It is already swallowed by Redbridge, it would have no impact on merging with London, there are no historic towns, and land recycling is irrelevant.

The table below lays out the total land available of different types that could be used to fill the 20,000 hectare demand, assuming standard densities. At inner London densities of 120 dwellings/ha it would take much less land, and at lower densities of 30-40/ha it would take more.