Postcode auctions, not postcode lotteries

There’s a lot of talk about postcode lotteries, but we don’t have lotteries, we have postcode auctions.

This is because when services or amenities are tied to a location we end up paying for them through higher house prices. This is very clear with schools: many state schools are just as good as fee-paying independent schools, so being able to send your child to one is like having a free ticket to a private education. Parents who can afford it will pay a bit more for a house that’s within the catchment area of one of those good state schools, ultimately driving up the price to be close to the expected value of sending their child to that school. This effect is called 'capitalisation' and, right enough, when we look at the empirical evidence it’s fairly clear that house prices rise, at least to a large extent, to reflect the value of schooling in an area, especially in areas with very good schools.

This seems to hold when we look at Local Authority grants in general. This study looked at grants given to marginal Labour councils during the 2000s by central government – a proxy for money used by the central government to buy off voters in swing constituencies. (Naughty.)

What it found was that, where the supply of housing was constrained, house prices rose almost fully to reflect the value of the grant. That’s a sign that the grants benefit landowners in these places in a fairly direct cash transfer to them, from people elsewhere. As the quality of the area rises, so does the price of their homes.

The same effect exists when we raise or cut property taxes like business rates or council tax in an area – property values and rents fall or rise in proportion to the rise or fall in the tax, meaning that it’s landowners who benefit rather than the renting business or resident. This seems to capitalise into property values very quickly.

Why does this matter? On the one hand, it’s not necessarily a bad thing for people to pay more for things like attractive neighbourhoods. The problem is that, when the money for this is coming from taxpayers from outside these areas, it’s a transfer from them to landowners in those areas. There’s no reason to think that this should be a welfare enhancing transfer, and if it forces renters to move by raising rents then it might well be welfare reducing.

Another problem is equity: most people value good schooling for their kids and living in low crime areas very highly, but can’t afford to pay. If better-than-average state schools are only accessible to parents who can pay through higher house prices, lots of the public expense is benefiting people who can pay, and are.

The final problem is over-entanglement. For example, if quiet and leafy parts of town also happen to be the ones with good schools, you’ll have a situation where some people who really like quiet neighbourhoods but don’t have children are wasting money by having to pay for access to good schools, too, or are being priced out needlessly, and vice-versa for parents who just want the best schools for their children.

There’s no straightforward answer to this, because some of it is unavoidable, and some of it is exactly what we want – house prices should be higher in more desirable areas so they go to people who value them most.

But attaching services to these locations is probably a bad idea because it concentrates them on people who can afford it. A school voucher-like system without catchment areas, and patient choice where people can go anywhere they want to access healthcare if a practice or hospital can admit them, could help to diminish the concentration of good services on people who can pay for it, and might drive up standards overall.

In terms of equity, doing this where possible might make the system more like a lottery (and so more open to poorer people than our auction-like system is now).

Remember that one of the main points of the education and healthcare systems is to cover people who would not be able to afford them otherwise. If lots of this is actually being captured by wealthier people and the taxes used to pay create additional deadweight costs, it might not be a highly efficient system. And it may be a good reason to prefer giving cash transfers to the poor and let people pay for services directly, so that we can better target the people we really want to help.