Paul Cheshire, an economist, is Emeritus Professor of Economic Geography at the London School of Economics. Alongside his academic work, he advises governments and international organisations; recently, he advised New Zealand’s Productivity Commission on its inquiry into using land for housing.
I interviewed Professor Cheshire about his latest book, co-authored with Henry Overman and Max Nathan: Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom (Edward Elgar, 2014). The interview is in three parts: planning and tax reforms, problems with the policy focus on mixed-incomes communities, and Cheshire’s take on other proposed solutions to the housing crisis.
Planning and tax reforms
Elinor Chisholm: The book suggests that a rules based planning system, as exists in some European countries, has advantages over the New Zealand and UK planning systems. If I were a developer wanting to build in say France, compared to the UK, how would things work differently?
Paul Cheshire: Take a master planning system, like in France, The Netherlands or Germany. Every parcel of land has a permitted use, for which there are relevant building and environmental regulations. The developer simply has to make sure that they are proposing something that conforms to what is allowed for that plot of land. It is a purely technical yes/no process to gain permission. I’ve actually got personal experience of this. We wanted to double the size of an ex-farmhouse in France. It took us 14 days to get permission, because we read the rules, we asked what we were permitted to do, and we got automatic permission.
In comparison, in Britain or New Zealand, because it’s a discretionary system, every decision that legally constitutes development requires a political agreement. So that gets politicized. People on the council have axes to grind, and they’re subject to pressures from particular voters, and so they delay or deny permission. Because they don’t have a clear plan, it’s totally uncertain what the outcome of any development proposal is going to be. It induces delays, which not only add to uncertainty but add to costs directly and indirectly because it increases the risks of an already risky business – development. So you get less built.
EC: Does local democracy have a place in planning decisions?
PC: Local democracy surely has a place, but the Netherlands is a very democratic country. People vote on their plan. Once they’ve agreed on their plan, then they abide by it until it runs out – it lasts for a particular length of time and then that’s it. Whereas in this country completely arbitrary decisions are too often made to turn a proposal down, sometimes in the near certainty that it’s going to be granted on appeal, but the local politicians don’t want to bear the responsibility because they’ll upset local voters. So they just pass the buck on to the system. That’s extremely time consuming, and a deadweight loss to society and the economy. Good for planning lawyers though. There are some very rich planning lawyers in Britain.
EC: You’ve published pieces in the UK papers and blogs about the case for building on the green belt, the strip of rural land around London’s city boundaries. Critics respond that we should keep the green belt, and build up, rather than out. Why do you think that’s insufficient?
PC: First thing is it isn’t a strip; London’s green belt stretches from the North Sea in the East to Aylesbury in the West. It covers 514,000 hectares – it’s more than three times the area of Greater London. And freezing the green belt’s boundaries is impossible. In 1580, a long time ago, there was a Tudor greenbelt around London. They weren’t allowed to build anything within three miles of the city walls of London. And then it was seven miles from the city, and if people built there it was torn down, or it could be commuted if they paid fees. So this became a tax on building on greenfield sites. But think what London would be if you’d continued to impose those restrictions. It’s not possible to restrict space as a city grows and becomes richer. When people become richer they want to consume more space, it’s part of a better life. If you push an absolute restriction on space, all that’s going to happen is the price is going to go up and up and up and you transfer real income and wealth to those who already own space: the rich and the old.
The green belt doesn’t have any environmental purpose. It’s called a green belt, so it makes people think it’s wonderful, but it does not protect access to land. The only thing it does is stop building occurring. Most of the green belt is privately owned and intensively farmed, which is environmentally unfriendly and of very low recreational value. Of course there’s a very strong argument for stopping building on areas of natural beauty or parks or heritage coastline. You don’t build on places that have environmental and social value.
There’s masses of land – as I said the London green belt is 514, 000 hectares, London is only 159,000 hectares. In Surrey, there is more land used for golf courses than houses. Golf courses aren’t environmentally friendly. We’re misusing our land as a result of there being no competition for it from housing or urban use.
EC: Do you think there is ever a place for urban limits?
PC: In my view, there should not be urban limits. There should be strong policy to preserve land that has environmental and recreational value. Obviously you don’t want to build on Hyde Park or in areas of outstanding natural beauty.
The earth does have carrying limits. I’m quite sympathetic to the idea that there are too many people consuming too much, but that’s a separate problem that should be dealt with by dealing with consumption patterns, charging for carbon emissions, and reducing the burden of consumption on the planet.
EC: There’s a lot of articles in the London papers at the moment along the lines of – I’m an artist, I’m a teacher, and I’m being forced out of my home in Hackney, or out of London altogether, by high rents. How would increasing supply, as you propose, affect people renting?
PC: However good your housing supply industry is, you’re never going to increase the stock by more than about 2.5% in any year. Even if you were to adopt really positive policies to make the system much more flexible and deliver far more houses, it would in reality take ten or fifteen years to get up to a sufficient level of housing. It wouldn’t happen overnight.
The counterargument to that is that if people saw that effective action was being taken it would probably change expectations. Part of the reason for the high price of land and housing in this country is that the real price of housing has been doubling every decade for 50 years, so you were mad if you don’t buy a house as soon as you possibly can. Housing has been turned into an asset, so if you effectively changed expectations by adopting sensible policies, that might induce a change in behaviour, which would lead to a step down in the cost of housing. You might get a substantial fall and than a gradual levelling off. But that’s dangerous in itself because you’ve got a lot of assets held against the value of housing and land. So you’d have to manage that financial transition.
EC: People resistant to housing developments often say it’s important that their neighbourhood stays the same because of its heritage value. Does heritage have a value? How you decide what’s heritage and worth protecting?
PC: Dutch studies show that people are willing to pay extra to live in or close to conservation areas. There’s a social and economic demand for attractive older areas in European cities. The fact that there is that doesn’t mean we have an optimum amount of it. Take the city of Westminster. Seventy-five per cent of it is a conservation zone, which means that you can’t change the exterior form of any building. So it prevents rebuilding and redevelopment if the value of the land, and the social use of the land, suggests it should be redeveloped at a higher density.
My own view, which is perhaps a subjective one, is that there’s quite a lot of housing classified as Conservation Area in Britain that is pretty marginal. There’s a colleague of mine who has shown that the process of designation of conservation zones is politicized in this country. You tend to get middle class people coming in, who then campaign to get conservation zone status, because that increase the value of their houses and helps with the process of gentrification. In The Netherlands a technical committee judges whether it should be conservation zone. It’s less politicized.
EC: In the book, you argue that regeneration of deprived areas in a city, which for example might seek to create jobs, improve homes, and improve transport links, doesn’t actually help the communities it claims to help, and that public money could be spent in better ways.
PC: There are two aspects of it. One is “locally targeted economic improvement zones” of some sort or another. I’ve got a colleague who’s just done some very rigorous work that shows that these simply move jobs from one place to another place. So there’s no net effect, and it costs resources. Two, regeneration confuses the symptoms of a problem with the causes of a problem.
The qualities of a neighbourhood are very important in determining the price of housing: whether there’s good access to high paying jobs, low pollution, a low crime rate, good local schools. All these things are capitalised in prices, and if you’re poor you can’t afford to buy them. That’s why poor people end up in poor, cheap housing, in poor neighbourhoods, and mixing people up doesn’t solve the problem. Improving the physical appearance of the area, or improving transport so that these people can get to jobs – all this does is increase the price of housing in that area, make the neighbourhood more attractive, and cause richer people to move in. If the poorer people are owner-occupiers, and that’s not very common, then there is some benefit – they get the capital gain at least. But if they’re renters they’re just forced out somewhere else and there’s no net benefit whatsoever.
I remember evaluating an upgrade of an area in London called Harlesden, which is a pretty awful area. The council spent a fair amount of money putting on some very basic and quite effective training. They’d delivered all that and at the end of the period unemployment was higher than it had been at the beginning relative to other areas. Why was that? They’d been a systematic actual movement of people who’d upgraded themselves in the labour market. They’d got some skills, they’d got jobs, and the last thing they wanted to do was to live in this pretty unattractive area. So they’d been replaced by people with even worse skills. Neighbourhoods are not fixed. Neighbourhoods are like buses. People get on and get out all the time.
There was a big programme in the US called Moving to Opportunity, where they devised a programme where they gave quite a significant financial incentive plus professional help to a control group of residents of poor areas to move to richer areas. And then there was a matching group who got the money but no particular help, and they could buy anywhere they wanted, and another group who were simply left to themselves. At the end of the day, moving to a rich area made no statistically significant difference whatsoever to the outcomes for those poor people. There was some indication that younger girls did better in education if they moved to richer areas but that was offset by a statistically significant deterioration in how younger boys did. There were possibly a few health benefits but they measured so many health outcomes that you’re bound to find one that’s significant.
EC: What do you make of the state trying to develop mixed communities in public housing communities? This is an aim in Britain, to deal with so-called “sink estates”, and in New Zealand, where Housing New Zealand want to have no more than 15% state housing in any one community. Do you think these polices are going to help public tenants?
PC: That would only be true if there was some sort of difficult to measure or observe externality where a poor person who lived next door to a richer person somehow benefited from this process. There’s no evidence that this is true. It’s a patronizing piece of politics, which is not supported by any evidence. What there is evidence of is that one of the advantages of a relatively large group of similar people in the same place is they’ve got the same interests and require the same sort of services and infrastructure. Rich people benefit from having an expensive restaurant or an upmarket supermarket close by, but poor people do not. There’s evidence that among less skilled people, one of the main sources of finding jobs is through neighbourhood interactions. There’s no advantage for someone who wants a manual job living next to a doctor or a university professor – unless they’re going to be a cleaner.
EC: People often argue that having people of different incomes living in one place is good for societal cohesion.
PC: Yes, but [such people] usually don’t live there themselves. The idea comes down from a sort of utopian planning mind-set of the mid to late 19th century. You could trace it back to the English history of urbanism, certainly back to the Garden City movement, and some of the very first purpose built suburbs of London – Bedford Park, or Hampstead Garden Suburb, which were built intentionally with houses for poor people alongside houses for rich people. Within a few years the people said they didn’t want that, and they built no more of these houses.
The Swedes had this policy of forcing ethnic mix. Migrants that came in were intentionally distributed among the Swedish population. There’s a very powerful piece of Swedish research which tracked people through time, and which came to the clear conclusion that the migrants that happened to escape this policy and managed to get into fairly migrant-dominated local neighbourhoods, did a lot better in adjusting to Swedish life and getting jobs. Which is not surprising, because it makes it easier to make contacts in the local economy.
Other solutions to the housing crisis
EC: There are some ideas that are proposed by other commentators as part of the solution to the housing crisis in the UK as well as in New Zealand. You don’t mention them in your book. I’d like to throw out a few of these ideas so as to hear your take on them. First up: inclusionary zoning (regulating so that developers have to include a proportion of affordable housing in every development).
PC: That’s the same thing as we were just talking about [with mixing communities]. It certainly doesn’t solve the housing crisis, it’s aimed at solving the poverty crisis, but it doesn’t. It’s a displacement activity that costs you resources that you could actually putting into trying to help poor people.
EC: Rent control.
PC: Rent controls are a disaster. Once you put them on they’re difficult to take off, but it means that over time you don’t have sufficient supply of housing for rental and you create huge distortions in the market. I’m old enough to remember rent controls in this country. Have you heard of Rachmanism? Rachman was a notorious landlord in West London in the 50s and 60s. Because of rent control, we had a lot of houses with people paying far below the market rent, and Rachman was using violence to evict them. Rent control produces incentives for really bad behaviour by landlords in order to get access to the properties, and it also reduces supply.
Rental now is far better than it was [under rent control]. It’s policed and regulated. You have to treat tenants with respect. They’ve got legal rights, and landlords have to respect them. Landlords also have rights. I’m not saying that rents aren’t too high. They’re incredibly high because basically rental is a substitute for owner occupation and housing is far overpriced, which is due to a shortage of supply.
EC: Subsidies to help low-income people buy homes.
PC: Unless you build more houses it just puts up the price of houses and makes them less affordable, which doesn’t help. And that’s what we’re doing at the moment with the help-to-buy scheme.
EC: A land value tax.
PC: The attraction to an economist of a land value tax or a site value tax is it encourages more efficient use of the land. At the moment in Britain and New Zealand the property tax one pays has little relationship to the value of the property or the value of the land. The value of a plot of land in Auckland increases because Auckland is growing and there’s competition for space. It might be that it could be more valuably used, for example for more dense housing or commercial use. Paying a tax that’s related to that value produces an incentive to develop the land in an appropriate way. Whereas if you pay a fixed amount of tax that’s irrelevant to the site, then you don’t have such an incentive.
I think a land value tax would be helpful on the margins, but it’s not a major part of the solution. More importantly, in New Zealand and in this country, local authorities are more or less fined if they allow development to occur, because they have a statutory obligation to provide services, but they don’t get any revenue from the developments. At the moment there’s no easy way to pay for infrastructure, because more housing creates more demand and that’s a burden on the existing residents. So you should incentivize local communities to allow development and also to pay for the infrastructure.
EC: More council housing.
PC: I think there’s always going to be a significant group who aren’t going to be able to organise their lives or put together enough money to get into market housing. So it’s very reasonable to argue that you’re always going to need a social housing sector that is protected, and which is a type of social services activity. We’ve been serving this sector very badly in this country, because we’ve almost abolished council housing because of the right to buy and the fact that local authorities aren’t funded to build housing. We have housing associations, but they’re being forced into behaving more and more like private landlords. And because of the fact that housing is so expensive we’re not effectively supplying social housing.
I don’t follow the economic logic that says we can’t do this effectively though a largely public funded agency [rather than through private organisations]. I’m not saying that local councils are the best instrument or agent for producing that because if they did have that expertise, it’s been eliminated over time. [It could work well to have] a housing corporation that served a whole local housing market – the London housing market is basically most of the south east of England – so you have to think about housing supply in that whole area rather than just in Westminster or in Hackney, or wherever it may be.
This interview was edited for clarity and length.
 Ahlfeldt, Gabriel M., Kristoffer Moeller, Sevrin Waights, and Nicolai Wendland. 2013. Game of Zones: The Economics of Conservation Areas. London: Spatial Eocnomics Research Centre, London School of Economics. http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0143.pdf
 Einio, Elias, and Henry Overman. 2012. The Effects of Spatially Targeted Enterprise Initiatives: Evidence from UK LEGI. London: Spatial Economics Research Centre, London School of Economics. http://www-sre.wu.ac.at/ersa/ersaconfs/ersa12/e120821aFinal00166.pdf.
 Edin, Per-Anders, Peter Fredriksson, and Olof Åslund. 2003. “Ethnic Enclaves and the Economic Success of Immigrants—Evidence from a Natural Experiment.” Quarterly Journal of Economics 118 (1): 329–357. http://qje.oxfordjournals.org/content/118/1/329.abstract?sid=3d69cd66-f911-400e-b723-895f3c03f376