London calling – how NIMBY attitude might have lead to Brexit

The “city trilemma” may separate the winners and loser of globalization and could also partially explain Brexit voting patterns…

By Csaba Pogonyi and Istvan Zsoldos

There was an interesting post on the “housing trilemma” in the USA at the Oregon office of Economic Analysis a couple of months ago. It said that you can only have the maximum of two out of the following three characteristics for a city in the USA: economic strength, quality of life and housing affordability. Only 8 cities were in the top 50% of the rankings in all three measures, and none were in the top 20% in all three. And those 8 cities were from the Great Plains, which hints at the possible mismeasurement of the quality of life there (but we may be biased against boring backwater places :).

The post identified migration as the force that in pleasant cities with good jobs prospects pushes up housing costs. That is fair enough, and there is a net positive migration to those 3 cities in the middle, especially to Oklahoma City and Des Moines, where population increased by 3.7% over the past 5 years due to internal (within US) migration.

Everybody wants to live in the city centre

More and more people want to live in the city centres. One reason for this is that economic development is becoming more and more knowledge focused. These industries (IT is the classical example, but finance and services as well) value proximity to each other more than classical industries like manufacturing or construction. A programmer has more benefit from working in the centre than a manufacturing worker; therefore, it is in the interest of both the company and the worker to be in the centre. New technologies like videoconference did not diminish the need for face-to-face communication. In fact, virtual communication is complementary to physical meetings. The easier it is to stay in touch with others, people have more and more relationships and these require face-to-face meetings as well.

Rental prices increased by 22.7% in US metropolitan areas between 2006 and 2014. In the same time, average median nominal income increased by only 11.3%. Rental price increase was even higher in the most successful cities where high-tech industries put their HQ’s. Knowledge workers have high salaries and they are bidding up the cost of housing for everyone. The result is that except for the very rich, people can less and less afford to live in the centres, and the gap between the “chosen class” of very high earning knowledge workers and regular citizens has been widening. This polarization in earnings causes geographical polarization.

Increases in rental prices between 2006 and 2014. source: TheAtlantic

Good cities offer a combination of economic and non-economic “rent” (and we are not talking about the rent that people pay for housing) that is tempting to be competed away in some form or acquired by some group. This rent can be the opportunity for networking, learning, enjoying culture and better health care or just a nice walk in a well-preserved park. Pretty much anything what is on the positive side of living in a city.

Different cities will result, depending on how the “rent” disappears. Because rents have a tendency to disappear, one way or another. One way to reduce rents for newcomers is not to build enough new housing for those that want to move to the city, and let the increasing property prices select the most eager/richest to come. In that case, the rent is acquired by previous property owners. This is the model that is at work in San Francisco or London, where there are serious restrictions on new building. But there can be other ways of dissipating “rents”. Houston allows a lot of new building, which limits housing cost increases despite fast population growth, but results in urban sprawl. “Rents” there partly go to those who move in, and are partly eaten up by longer commuting times and a less pleasant, sprawling city.

Americans are still moving to the South and near the sea…Picture source: Business Insider

Another way of trying to “preserve” an attractive city is to restrict immigration to it. Of course this is a non-starter in the US, where internal movements are not restricted, and difficult to implement even in more authoritarian societies like China. But there the government is trying to restrict migration nevertheless, and create second class citizens in the process, who are not entitled to healthcare or education benefits. These second class citizens are not allowed to reside in the centre, so they have to commute long hours every day. In this case, rents largely go to the original inhabitants, but less in the form of higher property prices and more in the form of being a privileged class of citizen (who can enjoy the services of cheap “immigrant” labor without much rights). And restricting immigration will eventually undermine the excellence of the given city, which can only select from existing inhabitants versus the whole world/rest of the country.

Attractive cities are expensive internationally too

If you look at cities internationally, the top 10 on Mercer’s quality of life index have a property price (of a 90 square meter apartment) to gross income ratio of 10.3 on average – that is, it takes more than 10 years of gross local income to buy a flat in the city (Data source: Numbeo). These top cities are: Vienna, Zurich, Auckland, Munich, Vancouver, Dusseldorf, Frankfurt, Geneva, Copenhagen, Sydney.

 Attractive cities are expensive. Picture source: Daily Mail

The cheapest in terms of housing among the top 10 is Dusseldorf with a price to income ratio of 7.2. These cities are expensive even compared to the incomes people earn there. On the other hand, Houston, Texas has a ratio of 2.5 but it is only 65th on Mercer’s list of quality of life. Oklahoma City is even cheaper at 2.2 – for little more than 2 year’s income, apparently you can buy a (by American standards, small) apartment there. But Mercer did not rank it among its 230 international cities.

Is there no way out of this trilemma? Good urban policies can push out the frontier and result in a better overall outcome: avoid sprawl, but build new housing and transport and other infrastructure, which means higher living density but still a good quality of life. High rises with public parks and bicycle lanes and good public transport. But good policies usually happen in cities where the local population is engaged, and that is usually associated with a certain degree of “Not In My Back Yard” (NIMBY) attitude – so additional building is usually limited to some extent, and property prices do tend to be high even compared to incomes in attractive cities. Boulder, Colorado is a good recent story demonstrating this, and there are many more.

And the natural inclination of humans is to replicate the living conditions of the Rift Valley (where we all came from): small communities living on a verdant hill, close to natural waters, a lot of sunshine and temperatures at around 26 degrees centigrade in the shade. High rises with parks are second best solutions compared to suburbia in the South of the US, everything else equal. The movement to the South can be a delayed response to air conditioning making summers bearable there, or it may be that as people get richer, they value nice weather more.

Cities select people who earn more when surrounded by others

But everything else is not equal. Different people benefit differently from being in cities, so cities “select” certain types of people. Cities select those who benefit most from being there. In short, cities select competitive and “creative” types. Creative types like and benefit from the company of other people who are the source of ideas and inspiration. For them, other people are complementers rather than competitors. As discussed above, they value the opportunity of bumping into others who are also creative and top of their class. Competitive types like the opportunity for higher incomes and a concentrations of others to measure themselves to (and learn from). These types are unlikely to heavily oppose immigration from either domestically or abroad – the more the merrier for them.

Skyscrapers in my backyard? Only through my dead body! Image source: Imagen

London’s transformation and the Brexit vote

All these mechanisms were at play in London in the past 25 years, which became a very different place as a result. The city was relatively cheap internationally after the pound devaluation and the housing bust of the early 90s, yet by that time labor and financial markets were liberalized in the UK. For a first time buyer, it took 2.6 years of gross earnings in 1995 to buy a flat in London (hah! :). Now it takes 10.4 years (data from Nationwide). Population increased by 26% since 1991, and would have increased by more, had housing remained cheap – but NIMBYsm prevented a massive increase in housing. Almost 40% of the population is foreign born, and the place feels like a different country compared to the rest of England. Young creative types love it, while public servants can no longer afford the property prices.

This transformation of London may also partly explain the apparent paradox that London (and other large cities) voted to stay in the EU, while most of the rest of England voted out at the recent referendum, which was to a large extent about immigration. London has a high concentration of people who are likely to benefit from immigration (the “complementer”, creative types), while the rest of the country probably has a lower proportion of those. Also, the rest of England may feel that their old London was taken away from them: it has become foreign, expensive and full of weirdos. They may have voted “out” because they feared that their part of the country would undergo a similar transformation, not because it already did…

Good regulation can help – the Tokyo example

Minato-ku is the centre of Tokyo. high population growth, restrained price increases there. Source: FT.com

Tokyo is a successful city where population has been steadily rising. In fact, it is the biggest metropolitan region in the world both by population and economic output. This city proves that with clever regulation it is possible to battle against NIMBY attitude.

The city’s population grew by 15% in the last 20 years (San Francisco grew by 16%) and standard of living is still high: in Mercer’s city ranking Tokyo shares the 44^thplace with New York (and it was the most liveable city in Monocle’s ranking both in 2015 and 2016). Still, housing prices stayed basically flat in the last 20 years, as regulation made it possible to increase housing stock. Starting from a bubbly high level obviously helped: in the late 80s some anecdotes (surely apocryphal) put the value of land surrounding the Imperial Palace higher than the land in the whole of California.

Tokyo experienced the same troubles in the 80s as Western cities today, or even more, resulting in the mother of all housing bubbles. The bubble eventually burst in the 90s and the government took the opportunity to relax development rules. Office and manufacturing sites were repurposed for residential housing, hallways and public areas excluded from the calculated size of the apartment and, most importantly, the city authorities strengthened the right of landowners to build whatever they wanted regardless of their neighbours’ demands. City planning laws are set at the national level, while local governments are having almost no power over development.

Tokyo is not exactly cheap even now: inner city square meter prices are the third highest on Numbeo’s list of almost 600 cities globally, after London. On the basis of “property outside the city center” it is 11^th. But the Imperial Palace grounds are now definitely worth less than California, and in terms of rental prices, Tokyo is far cheaper than many of the large cities around the world, which is not bad for the largest city.

The key to Tokyo’s success is that they have reduced barriers to change. It is relatively easy to repurpose a declining neighbourhood and start building residential houses. Houses are built for a couple of decades, and it is natural for locals that after 30-40 years they are demolished giving way to new developments.

Two American economists estimated that easing restrictive housing regulations could have boosted the US GDP by 9.5% during the last 50 years. Most of this loss was caused by constraints on housing supply in the most productive cities (New York, San Francisco and San Jose). They argue that lowering regulatory constraints to the level of a median American city would enable these cities to grow their workforce and thereby increase economic activity.

The applicability of this model in old Western city centers, proud of their existing housing stock is, to put it mildly, questionable – and maybe that is no bad thing. But there is plenty of space outside historical city centres that can be developed, and with good transport connections they can become very attractive, or even new centres of gravity. This model seems to be more fit in coping with the changing economy and large amounts of people who want to live in or at least close to the city centre. If one of the housing bubbles eventually burst in the West, maybe that would be a good time to relax development rules and to mitigate the NIMBY effect in areas where there are no nice historical buildings to protect.

City states to come?

There are other parallel stories (inner cities becoming safer, low real interest rates etc.), but the geographical separation of the winners and losers of globalization is underway all around the world. There is some backlash already, in the form of calls for rent control in San Francisco for example, or even in Silicon Valley itself. But it is difficult to fight market forces and NIMBYsm. Expect more tension between nice cities and the rest of the country, and between old city dwellers and potential new ones. Moreover, global cities are competing with each other in attracting companies and people. Being better in housing regulation can make a city a real winner. And this may rewrite politics too. We used to have a lot of city states in Europe. London floated the idea of independence after the referendum. For now it is unrealistic. But if cities continue to become very different places from the rest of the country, they are likely to demand more political power, and eventually some may even achieve independence…

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Tags: housing trilemma, urban economics