LSE Economist Paul Cheshire on Urban Containment and Housing Affordability


Paul Cheshire, Professor Emeritus of Economic Geography at the London School of Economics, has distinguished himself as one of the world’s pre-eminent housing economists. This article discusses his recent interview with Ahir Hites, a senior research officer in the International Monetary Fund (IMF) Research Department, reported in The Unassuming Economist Global Housing Watch Newslettter.

Cheshire exhibits an optimistic view of cities:

“My assessment is that cities are the most welfare enhancing human innovation in history: they empowered the division of labour, the invention of money, trade and technical inventions like the wheel – let alone government, the arts or culture.”

Cheshire notes that, after a period of modest land values relative to land and house values, residential land has become much more expensive:

“… by 2010 residential property, mostly the land on which houses sat, was worth three times as much as British GDP. By the end of 2013 houses accounted for 61 percent of the UK’s net worth: up from 49 percent 20 years ago.”

Cheshire said that there were two main reasons for the increase in land values.

“The first is the increasing importance of agglomeration economies fueling demand and the second is restrictions on urban land supply. The now dominant service sector has major agglomeration economies: think of business, financial or cultural services, the media or even tourism. Add this to the growth of human capital and two worker households and agglomeration in consumption, and you have the resurgence of large cities.

The Role of Urban Containment: Green Belts

But policy increasingly restricts the supply of urban land with growth boundaries or Green Belts. Historically we made lots of urban land. We built commuter rail, then highways. So, at the urban fringe, land supply was perfectly elastic. The supply price of land for housing was essentially the price of farmland plus a mark-up for infrastructure.”

But, according to Cheshire, new regulations on the urban fringe were imposed:

“Britain imposed its first Green Belt in 1955 and now, if re-zoned for building, farmland at the built edge of London has an 800-fold mark-up. There was no secular trend in housing land prices in Britain until the mid-1950s, but after Green Belts were imposed real prices increased some 15-fold. More than houses because you can substitute land out of house production. There is a similar pattern in Canada, New Zealand or the West and East coasts of the United States where policies restrict land supply.”

Impact of Urban Containment and Densification on Mobility

Questioned about his recent book, (Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom), co-authored with Max Nathan and Henry Overman, Cheshire said:

“We know cities keep on getting more productive the bigger they are but some costs – the price of space, congestion, for example – also increase with city size. So urban policy should offset for those costs. Instead it mainly increases them. Popular policies of densification and containment restrict the supply of space, increasing its price as cities grow so we forego socially valuable agglomeration economies. Another popular policy – height restrictions – reduces gains from ‘vertical’ agglomeration economies.”

He notes how such policies can interfere with providing housing, even with mega-improvements in transport infrastructure:

“In London … we are investing £18 billion on a new rapid transit system – CrossRail – opening up huge areas for housing but not a single house can be built once you cross the boundary into the Green Belt, well inside the administrative area of London itself.”

The "Squeezed Middle Class" (OECD)

Professor Cheshire’s concerns about the role of regulation in driving up house prices are particularly appropriate given the recent OECD report “Under Pressure: The Squeezed Middle Class,” on the decline of the middle-class.

“Middle-class households feel left behind and have questioned the benefits of economic globalisation. In many OECD countries, middle incomes have grown less than the average and in some they have not grown at all. Technology has automated several middle-skilled jobs that used to be carried out by middle-class workers a few decades ago.”

OECD finds that the rising costs of housing has been the main driver of higher middle-income household spending:

“The cost of a middle class lifestyle has increased faster than inflation. Housing, for example, makes up the largest single spending item for middle-income households, at around one third of disposable income, up from a quarter in the 1990s. House prices have been growing three times faster than household median income over the last two decades.”

OECD concludes that “owned homes contributed the most to the rise in housing spending,” while rents and utilities have risen in cost, but to a lesser extent than owned homes.”

Similar housing cost impacts were identified in our 2018 COU Standard of Living Index, which found that three-quarters of the difference in the cost of living between high cost metropolitan areas and the national average cost of living is due to housing cost differences.

Addressing the Problem: Urban Containment Policies

The real house price escalation in London that Cheshire associates with the Green Belts, and those of other markets with urban containment policies have led to huge gaps in land value, sometimes virtually across the street. This can be observed in the "land value gap" between nearby land parcels on either side of an urban containment boundary. Land inside the boundary is far more expensive, reflecting the policy induced value of planning permission (see A Question of Values: Middle Income Housing Affordability and Urban Containment Policy, pages 17-18). Land values tend to increase from their agricultural or other rural values at the urban periphery to their peak in the center, or in the modern polycentric urban area, in their centers. It is unlikely that any housing affordability policy will succeed materially so long as urban containment policy strangles urban land and residential markets.

Wendell Cox is principal of Demographia, an international public policy and demographics firm. He is a Senior Fellow of the Center for Opportunity Urbanism (US), Senior Fellow for Housing Affordability and Municipal Policy for the Frontier Centre for Public Policy (Canada), and a member of the Board of Advisors of the Center for Demographics and Policy at Chapman University (California). He is co-author of the "Demographia International Housing Affordability Survey" and author of "Demographia World Urban Areas" and "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life." He was appointed by Mayor Tom Bradley to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member. Speaker of the House of Representatives appointed him to the Amtrak Reform Council. He served as a visiting professor at the Conservatoire National des Arts et Metiers, a national university in Paris.

Photograph: London inside the Green Belt (by author)