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This article appears in the following Oxford Review of Economic Policy issue: HOUSING MARKETS AND THE ECONOMY [View the issue table of contents]
Spatial patterns of development and the British housing market
* London School of Economics, e-mail: t.leunig{at}lse.ac.uk
** London School of Economics and Centre for Economic Policy Research, e-mail: h.g.overman{at}lse.ac.uk
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Abstract |
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The government wants 3m houses built by 2020. Economic theory tells us their locations matter for living standards. Economics cannot tell us the optimal locations, but does show that houses are usually socially more valuable in high land-price areas, because additional workers are more productive in such places. Land-price data and evidence on urban agglomeration economies point to a significant rise in the optimal sizes of some UK cities and that optimal locations have moved from industrial-revolution cities towards the South-east. As a result, significantly expanding London, its commuter satellites, and other high-skill places in the UK, but particularly in the South-east, is likely to generate substantial rises in wages and living standards. In these places the planning system dramatically constrains the economy from responding with nineteenth-century dynamism, when new economic opportunities led some towns to grow dramatically.
Key Words: agglomeration economies • housing location • market potential • migration • spatial economics • urban economics
We thank John Muellbauer, Pat Rice, Jonathan Wadsworth, and participants in the Oxford Review of Economic Policy Housing Markets Seminar at Saïd Business School on 12 September 2007 for comments.
1 Regional GVA is essentially the sub-national equivalent of GDP. It measures the output produced in a region. When corrected for commuting, it comes closer to national income: the amount of output produced using the factors of production located in a region.
2 We use the term ‘city’ to refer to all urban places.
3 The role of changing transport costs has been formalized in a recent branch of spatial economics called ‘new economic geography’ (Fujita, et al., 1999; Baldwin et al., 2003). Combes et al. (2005) present this in the diagrammatic framework used here.
4 As we write, the government is considering replacing S106 payments with a planning gain supplement (CLG, 2007). Alternative methods of achieving the same aim are covered in Cheshire and Sheppard (2005) and Leunig (2007).
5 Note that this depends on S106 or some other mechanism being used to ensure developers take into account the cost of providing new infrastructure (schools etc.). This is important to ensure that private developers are internalizing the cost to society of providing new infrastructure, including, potentially, the cost of abandoning existing infrastructure elsewhere.
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