Tuesday, 20 March 2018

Who benefits from neighbourhoods designated as conservation areas?

Homeowners and people nearby benefit, though the implications for society are less clear, writes Gabriel Ahlfeldt

Opinions on conservation areas are split. Proponents would argue that conservation areas protect the visual appearance of historic neighbourhoods, by preventing owners from making changes that would be detrimental to character. Opponents would counter that this form of protection, in practice, means a severe restriction of property rights and, as a result, owners cannot adapt their homes to changing needs. For example, it is difficult to expand the living area after having children, e.g. by means of an attic extension, or to improve the energy efficiency by having new PVC windows. There is also a concern that such restrictions make the property less attractive to potential buyers, depreciating its market value. By the same logic, however, it can also be argued that the prospect of neighbourhood stability that comes with conservation area designation adds to the value of a location and increases the market value of properties located in the area.

Theoretically, there could be a trade-off between the desire to preserve cultural heritage for future generations and current homeowners’ interests. However, whether the policy makes properties more or less attractive to homeowners today is an empirical issue that cannot be answered based on theoretical considerations alone.

In a recent article, we analyse the causes and consequences of conservation area designation. To structure the problem and ensure that the empirical analysis is as transparent as possible, we develop a new formal political economy model whose predictions we then take to the data. The key idea is that residents with a taste for architectural distinctiveness stand to benefit from preservation, since it solves a coordination problem. The problem arises where individual homeowners make undesirable alterations to their properties or fail to keep them well-maintained. While removing a troublesome tree here or installing double-glazing windows there may make sense for an individual homeowner, such changes quickly destroy the character of the neighbourhood if everyone makes them. Therefore, if local homeowners like the character of their neighbourhood, it is worthwhile imposing strict regulation and maintenance obligations in the form of a conservation areas.

Our model predicts that if homeowners are able to game the system, then neighbourhoods will be more likely to be designated in areas where residents have a greater preference for architectural amenities. Moreover, in terms of timing, designation is likely to happen in gentrifying neighbourhoods because the inflow of wealthy heritage-affine residents will make it more likely that the perceived benefits of designation exceed the costs of restricted property rights.

Because conservation areas are designated as soon as they become worthwhile from the perspective of local owners (i.e. when the benefits have risen to equal the costs), the model predicts that no effect on prices of properties inside a conservation area will be associated with the incidence of a designation. However, there could be a positive price response outside the designated conservation area. This is because homeowners just outside a conservation area enjoy the benefits when passing through or looking at a protected area, without facing the cost of property rights restrictions.

The empirical results are in line with the predictions from our theoretical model. We find that an increase in the number of affluent residents, and residents who hold a university degree, significantly increases the chances of an area being given conservation status. Concretely, a 1 per cent increase in the degree share is associated with an 11 per cent increase in the designated land share – a strong effect.

Using more than a million property transactions from Nationwide Building society, we also find that the designation of conservation status has no immediate effect on properties prices inside conservation areas, but there is sometimes a positive price effect just outside.

In analysing price effects, we control for various property characteristics (size, number of bathrooms, type of heating system, etc.) and compare the price trend inside to-be-designated conservation areas to other areas with similar characteristics that do not experience a change in designation status (a control group). Figure 1 demonstrates that there is no significant discontinuity in the price trend at the time of designation (year zero). If anything, there is an increased price growth over time.

Figure 1: Relative prices in to-be-designated conservation areas

Notes: Figure shows the difference in ln prices adjusted for property attributes between areas to be designated (in year zero) and matched areas that do not experience a change in designation status. Dots denote differences by year, solid black lines are the linear predictions from a difference-in-difference regression model allowing for an impact of the policy on levels in trends, and dashed black lines are the 95% confidence intervals.

Do these results support conservation area policies? Our findings suggest that the regulation helps homeowners solve a collective action problem, preventing some owners or landlords to freeride on others who invest in the historic housing stock. This means that the policy generally works in favour and not against the interests of local homeowners. It is not that current homeowners pay the price for preserving some heritage for future generations.

Yet, the implications for society as a whole are less clear. There are benefits, e.g. to commuters or tourists living in other areas, and costs, e.g. due to limited supply of new housing and affordability problems for first-time buyers, to residents living outside conservation. Our results suggest that the system essentially delegates the decision of whether or not to designate a neighbourhood as a conservation area to local homeowners. While this is good for homeowners in the area, the downside is that the costs and benefits to residents living outside such areas are ignored.

This blog post is based on the author’s paper Game of Zones: The Political Economy of Conservation Areas, co-authored with Kristoffer Moeller, Sevrin Waights and Nicolai Wendland, The Economic Journal, October 2017.

Blog reposted from LSE Business Review 

Monday, 12 March 2018

Empty homes, longer commutes: the unintended consequences of more restrictive local planning

Posted by Paul Cheshire, Christian Hilber, and Hans Koster

We have argued for a very long time that the fundamental problem with housing in Britain is a lack of supply: we have been underbuilding for two generations. Updating the simple estimate one of us made in 2014, the shortfall in building in England just since 1994 has gone up from about 2m homes to 2.5m. And we go on building the wrong sort of houses in the wrong places. We built more than twice as many per person in low-demand areas like Doncaster and Barnsley over the past 15 years than in Oxford and Cambridge.

In the pursuit of 'urban density' and 'building on Brownfields' we build too many cramped flats and maisonettes in less attractive cities or city neighbourhoods but almost no family friendly homes with gardens within reach of high paying jobs. We are spending £18bn on CrossRail but once it gets over the Green Belt boundary can build no houses. There is a price to pay for building on Brownfields and not allocating enough land: a crisis of affordability and a hugely inequitable transfer of housing assets to the rich and the old. Our housing crisis is a long-term crisis of supply: an endemic lack of supply interacting with rising demand.

One of the many arguments used for allocating less land for housing is 'all those vacant homes'. Even one of the least restrictive English Regions, the East Midlands, argued in their Regional Spatial Strategy that they could allocate less land because they assumed they would reduce housing vacancies by 0.5 percentage points (that is by about 12.5% of the long term average). Islington Council moved to use the planning system to tackle the 'scandal of empty homes' in 2014.

A logically equivalent assertion was made by Lord Rogers, the long standing advocate of urban density, in arguing against allowing offices to be converted to housing to help with London's housing supply: '…why should we rush to convert office blocks when we already have three-quarters of a million homes in England lying empty…?.

The trouble with interventions in the housing market is that however well-intentioned, they often generate all sorts of unintended consequences. Markets respond by generating new and sometimes perverse incentives. Reflecting this, one of our most recent research findings, just published in the Journal of Public Economics, is that more restrictive local planning actually has the net effect of increasing the proportion of vacant homes.

Having fewer empty houses is in itself a good thing. We have a shortage of houses and using the stock more intensively is a way of increasing efficiency. That is just how cut price airlines operate: they keep their seats full and their aircraft in the air. But they do not just assume planes will spend more of their lives in the air and seats will be fuller. They have an analysis of how to achieve this. 

Unless we understand why houses are vacant, we cannot rationally hope to reduce the numbers that are empty just by being more restrictive. It would come as no surprise to economists to observe that in well-functioning labour markets there was unemployment. Workers search for jobs and employers seek (better) qualified workers. Attempting to regulate unemployment away makes no sense. Vacant houses are equivalent to unemployed workers so it makes no more sense to try to 'regulate' vacancies away. That does not, of course, mean that we should not have policies to try to minimise their number (what those policies should be is material for another blog).

What really happens if, by tightening planning restrictiveness (saying no to more development proposals) a Local Authority makes housing even scarcer? Well on the one hand it will make housing in its area more expensive. This will increase the incentive to occupy housing, so reduce vacancies. 

Unfortunately more restrictive planning also makes it harder to modify homes or build new ones in different places or with different features to adapt the characteristics of the housing stock to the constantly changing patterns of demand. Jobs grow in a locality, so demand for houses there increases; the local school gets better so the demand for family sized homes increases; people buy a car, so want parking, a garage; they have fewer children or separate, so they want smaller homes - the list is potentially endless. The result of this is that in more restrictive locations people wanting a home find it more difficult to match their preferences to what is available. So they have to search longer or further afield. The result of that is there are more empty houses in the more tightly regulated places and more people living and commuting from the less regulated places further afield. Both this 'mismatch' and the price effects work at the same time but in opposite directions. So which dominates is an empirical question.

In our paper we go to great lengths to deal with problems of reverse causation and endogeneity. We have 30 years of data for 350 English Local Authorities and our results show with substantial reliability that the net effect of more local restrictiveness is not just to increase the proportion of empty homes but to increase it substantially. A one standard deviation increase in local restrictiveness causes the local vacancy rate to increase by nearly a quarter. That is not all. Because it makes finding a suitable house locally more difficult, it also increases the average distance people have to travel to work. The same increase in local restrictiveness causes a 6.1 percent rise in commuting distances.

So attempting to regulate housing vacancies away by allocating less land or being more restrictive with respect to new building or adaptation of existing structures, in fact increases the proportion of local homes that are empty as well making people who work in the area commute further. The absolute opposite of what the advocates of the policy want to achieve.

It is the mismatch between the preferences of households and the housing stock on offer that leads, other things equal, to higher vacancy rates in the more regulated - typically more desirable - places. Such constraints will likely cause a significant welfare loss. This is because too much housing stays empty in the most regulated, most desirable and, by implication, most productive places with the strongest demand and highest valuations for living space. So people are induced to commute further, while living in the "wrong" places.

The policy lesson would seem to be that planners should not allocate less land for development on the grounds that there are empty houses; nor should they make it more difficult to build or adapt houses. Rather they should encourage more flexibility with the number, location and type of houses.

There is moreover a nice irony for advocates of the 'compact city'. The most common policy to attempt to implement this ideal is to impose growth boundaries, making land scarcer, and implemented via Green Belts in Britain. Such policies also imply more restrictiveness with respect to adaptations of the existing stock or new construction in the areas in the Green Belts or beyond the containment boundary. Aiming for a compact city, in other words, makes planning policy more restrictive. Our results show this will have exactly the opposite to the intended effect because average commuting distances will lengthen as residents search further afield for housing they can afford and more closely matches their preferences.

[This post first appeared in CEP's CentrePiece, Spring 2018]