Fields of Gold

Blame restrictions on the supply of land for new homes for rising wealth inequality

Official data released last week on London house price increases in 2016 generated a lot of interest.  Given that housing represents by far the most important component of wealth for most people, it is not surprising that stories like this are read avidly.

There is a feeling that the current situation regarding the affordability of housing, or rather the lack of it, is without precedent.  This seems to be the case if we look at, say, the Halifax House Price Index, the UK’s longest running monthly house price series.  But this only goes back to 1983.

A very thorough and impressive study of house prices going back to 1870 has just been published in the American Economic Review.  Katharina Knoll and other German economists have gathered an immense amount of primary source data to produce series for house prices for nearly 150 years in 14 developed economies, including both the UK and the US.  The authors strip out the general level of inflation, so their series show how house prices have changed in terms of affordability. Their work extends in time and space a path-breaking paper by MIT’s Matthew Rognlie, which came out in 2015.

There are two striking features of the data, which are common across all 14 countries examined.  From the late 19th century to the middle of the 20th century, house prices in real terms were effectively flat. There were fluctuations during this period, but overall, houses were more or less just as affordable in 1950 as they had been in the decades before the First World War.

Since then, house prices have risen considerably faster in all countries than prices in general.  In most countries, the trend has been accelerating.  As the authors put it: “in the final decades of the 20th century, house price growth outpaced income growth by a substantial margin”.

Knoll and her colleagues go on to analyse why this has been the case, bringing together estimates of both the cost of construction and land prices.  They find that about 80 per cent of the total increase in real house prices in advanced economies since 1950 is due to higher land prices.

Almost incredibly, the great English economist David Ricardo predicted in the early 19th century that this would happen in the long run.  In practical terms we might, for example, be able to increase the supply of land in the short term by relaxing green belt regulations.  But, eventually, the inherent scarcity of land will resurrect itself and prices will rise in a growing economy.

The results also have important implications for the ongoing debate about inequalities in wealth.  Most of the rise in the inequality of wealth which has taken place in recent decades is due to the housing market, which in turn is driven by land prices.

Thomas Piketty generated a commotion with his book Capital in the 21st Century, which essentially argued that wealth inequality was driven by the greed of capitalists.  Detailed empirical work by economists such as Knoll and Rognlie refute this view decisively.

Paul Ormerod

As published in City AM Wednesday 22th February 2017

Image: Fields of Gold by PaulPierce is licensed under CC by 2.0

 

 

 

 

 

 

 

 

 

 

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.