AT FIRST glance London looks unstoppable. It is the most important city in Europe, perhaps the world. In the past decade its economy has grown twice as fast as Britain’s and its population 50% faster. Scratch the surface, however, and its situation looks less good. The motor of the British economy is becoming less productive and more unequal. The fundamental problem is how land is used and regulated.
Over the last full economic cycle, from 1993 to 2008, the cost of a hectare of residential land in London increased by over 300% in real terms, to more than £8m ($15m). Commercial-property prices rocketed up too. Now less-productive industries are moving out. The supply of floor space put to industrial uses such as factories and warehousing has fallen by half in the past five years, suggest data from JLL, a property firm. And London’s population is becoming more skilled. Over the past decade, the proportion of people with university degrees has increased much more quickly inside the capital than outside it.
Economists might welcome a shift from low- to high-value industries, but property prices threaten its continuance. Academics say they have been forced to move out of town. The share of employed people in inner London working in professional scientific, research, engineering and technology jobs has fallen from 6.6% to 5.4% since 2011. Public services struggle. “It’s almost impossible to hire young teachers who don’t live with their parents,” says one head. And it is not just young teachers who are throwing in the towel: between 2011 and 2014 the number of twenty-somethings fell by 3%, reversing long-term growth.
Those who cling on in the city do so at a cost. Between 2008 and 2014, Londoners’ disposable income (ie, after housing costs) fell by 4%, a steeper decline than in any other part of England (see chart). According to the Centre for London (CFL), a think-tank, the disposable income of private renters in inner London dropped by 28% between 2001 and 2011.
But while most Londoners struggle, some are thriving, in particular homeowners. Income inequality has risen faster in London than in Britain as a whole over the past decade. This is bad for the city. Costly rents and mortgages transfer wealth from poorer people, who tend to spend what they have, to richer folk, who save it. As a result there is less demand to support the economy. Decreasing diversity is another loss: if different sorts of people do not cluster together, they cannot exchange ideas and innovations so readily. In 2012 and 2013 productivity per worker fell in London, though it rose in the rest of the country. The share of total employment that comes from startups is falling, and small firms are now closing at a faster rate than more established outfits.
Poor land-use regulation is the main reason for London’s crazy prices. Two problems stand out. First, not enough space is given to new development. About 25,000 homes were built in 2015, half of what was needed. Over one-fifth of London’s land is “green belt”, open space encasing the city that is largely off-limits to developers. People imagine that green belts are pleasant spaces for walking dogs. In reality about 7% of London’s green belt consists of golf courses. Over half is agricultural.
There is enough green-belt land in Greater London to build 1.6m houses at average densities, says Paul Cheshire of the London School of Economics (LSE)—about 30 times the number of new houses London needs a year. But opposition from homeowners is strong—especially from those near the green belt, who do not much like the thought of newcomers bringing down property prices. Today, though approved applications to build on it have risen a bit, the green belt is virtually as big as it was in 2007. Many argue that developing brownfield land (land previously used for some industrial purpose) would solve London’s problems. Research by Nathaniel Lichfield and Partners, a consultancy, however, concludes that brownfield sites could accommodate less than half of the homes required up to 2030.
A plethora of other regulations also block development. By one count there are ten protected views of St Paul’s Cathedral, including one from a specific oak tree on Hampstead Heath. This imposes severe restrictions on building height across the city. Population density in central London is about half New York’s. According to Mr Cheshire and Christian Hilber, also of the LSE, restrictive planning policies inflate the price of office space in the West End by about 800%. A square foot there is twice as expensive as in midtown Manhattan.
Councils might get rid of the barmiest rules were it not for the second problem: taxation. Council tax, levied on housing, is collected by local governments. The prospect of broadening their tax bases should spur councils to allow more building.
Interactive map: Explore how house prices in England and Wales have changed since 1995
Not a bit of it, argues Mr Hilber. Residential property taxes are lower in Britain than in other countries, so housing developments create little additional revenue. Worse, the way the central government doles out grants to councils more or less eliminates any extra revenue in the medium term for local authorities that allow more development. And the cost of the additional infrastructure that building makes necessary—roads, schools and the like—is rarely met by central government, he says.
Help is on the way, maintains the government. Londoners may soon be allowed to add storeys to their home if an adjoining building is taller. It has also become easier to convert offices into dwellings. But other new policies will discourage homebuilding. From 2020 councils will have full control over business rates and receipts, which will lead them to prefer commercial development, points out Mr Hilber.
As Londoners prepare to choose a new mayor on May 5th, London’s property woes have never loomed so large. Unfortunately, neither of the leading mayoral hopefuls—Sadiq Khan, the Labour candidate, and the Conservatives’ Zac Goldsmith—is brave enough to propose a serious solution. Both have pledged to preserve the green belt, and their other plans amount to little more than tinkering.
So prices will probably continue to rise—unless Britons vote on June 23rd to leave the European Union, and demand for London property withers. The economy will slow as rent takes a bigger chunk of pay and earnings. Skilled people will move to jobs in less productive places, thus earning less. A recent paper by Chang-Tai Hsieh of Chicago University and Enrico Moretti of the University of California, Berkeley suggests that tight land regulation in America may have reduced GDP by more than 10%. A similar, perhaps larger, effect is likely in Britain. Unless London’s property market can be sorted out, people across the country will bear the brunt.