Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Month: June, 2015

Payback

Policy Scotland has been co-hosting a two day workshop with the University’s Behaviour, Structures and Interventions Research Network. The event was entitled: ‘Marginalisation, Stigma and Choice? We heard papers on poverty and aspiration failures, international studies of early years interventions, human trafficking, a panel on What Works Scotland, among others. It was diverse, multidisciplinary and provocative.

There is much one could talk about after listening to these papers. I am going to focus on just one paper, that of Stephen Machin (UCL/LSE) who did an excellent keynote presentation on ‘Changes in Labour Market Inequality’. Effectively, this was an overview of recent trends in the GB labour market, real wages and inequality. I was taking handwritten notes (an increasingly lost art) in the session so excuse my lack of precision with some of the points discussed below. The main stylised facts that emerged, for me, were as follows.

First, for median real wages, the cumulative fall since 2008 has been 10%.

Second, this fall comes after a long period of annualised growth in real median wages of 2%. The downturn in real wages came well before the financial crisis of 2008. 

Third, the most recent evidence suggests that median real wages may now finally be rising but Machin cautions this may be more the effect of very low inflation that actual change in the labour market.

Fourth, if we break down the 10% fall we find that the median real wage for men fell by 12%, for women by 7% but for the 18-24 age group the reduction was fully 16%. Interestingly, the fall for those in the lowest decile was 10% almost the same (11%) for the top decile.

Fifth, Machin noted that many have argued that the fall in productivity is even worse. In fact, as he pointed out, the productivity drop is measured against the long term trend since 2008 and adds up to a 16% reduction. If you look at median real wages relative to the aforementioned annualised 2% growth trend, the overall drop relative to trend is more like 20%.

Sixth, looking across the OECD since 2008, the UK’s wage performance in real terms was 23rd out of 26 – i.e. the fourth worst.

Seventh, the pay inequality ratio (comparing the 90:10 percentiles for full time weekly earnings) grew in the long term from 2.7 in 1980 to 3.7 in 2012. Comparable respective figures were 3.6 and 5.3 in the USA, 2.0 growing to 2.4 in Sweden but going in the opposite direction (and outlier), France went from 3.4 to 3.2.

Eighth, these median wage figures refer to individuals. IFS figures for the same period (since 2008) suggested that household income fell by 4.5% over the same period but this could be disaggregated to -8% for working age households and strikingly a 4% increase for pensioner households.

Ninth, there has been a significant divergence between total compensation trends racing ahead of average wages at the same time that average wages have moved well ahead of median real wages.

What is going on? First it is increasingly clear that unemployment is no longer a good indicator of labour slack. In the recent period we have seen the rise of low income self-employment, a sharp increase in underemployment (.e. working less hours than desired) and increasing employment of older, hitherto retired, people.

Second, jobs are of course being created but productivity is not rising. Machin thinks real wages are being squeezed because of weakened trade union power, the impact of the unemployment elasticity on real wages and, albeit without a lot of evidence, the sense that benefit conditionality is driving the unemployed to take on low wage employment that help to bid down wages. Machin worries that this may be a trend and that the new normal will be flat median real wages and secular stagnation, rather than some cyclical adjustment that will pass.

All of this takes place in a context where further working age benefit cuts are being planned. Most of the emphasis when criticising these policies has stressed social justice, poverty and inequality arguments. Machin adds to this litany the idea that it may also contribute to low or flat real wage growth – a macroeconomic low growth concern.  

Scary stuff – even if these median wage patterns are not long terms trends it will take a long time to get back to trend levels of real wages. For example, looking at those in the under 25 age group their real wages are now back at 1997 levels. A further slightly depressing thought was that the productivity problem, amongst other things, will undoubtedly make it harder for employers to act on demands for introducing the living wage.

Complete Control

In January 1989, long-awaited rent deregulation in the private rented sector came into effect across the UK for new tenancies, normalizing freely contracted market rents as the basis for private tenancies. Lease lengths under assured tenancies were standardized and the era of rent controls in the UK appeared to be over.

While the private rented sector did not really demonstrate recovery and growth for another decade or so and not strongly before 2000, most of the subsequent growth has been through the remarkable success of buy to let landlords. If there has been a policy failure in investment terms it has been the inability until very recently to encourage larger scale corporate landlords and institutional investment.

However, rental market growth has brought problems including concerns about affordability, tenant-landlord problems and the instability associated with six monthly leases. Before the last general election UK Labour promoted a case for longer lease lengths traded off with indexing rent increases for the length of the longer contract. Meanwhile in Scotland consultation leading to legislation is underway to reconstruct the private tenancy lease, including the possibility of some form of new rent restrictions.

It is in this context that longstanding polarized positions on rent controls are being dusted down and rearticulated. This week, Retties posted a blog setting out a variant on the traditional economics critique of controls. Andrew Meehan’s piece raises two main issues for me: one, the extent to which the analysis is sound; and, two, the questions it raises for economics and economists.

Meehan sets out the fall and rise of private renting in the UK, the standard economics critique of rent controls buttressed by a few choice quotes from economists and a straw man argument that we cannot rely on the German case as a defence of rent controls for the UK. What is the essence of his argument?

• Decline of the UK PRS is associated and probably caused by rent controls after 1915. I think this underplays mortgage market growth supporting affordable home ownership and the waves of new council housing that followed – these things are all connected but it is not the case that all happened because of one albeit important cause.
• There have been different kinds and levels of rent controls (hard and soft or first, second and third generation rent controls) with different effects and consequences; however, the supply and demand analysis is based on a very simple absolute rent ceiling type of argument.
• The conclusion is that rent controls and the end of no fault possession will reduce rental returns, development and risk social bias and legal disputes. To the extent that new regulations usher in political risks and uncertainty that would clearly be bad for investment but if it is able to create a stable environment that may encourage long term income generation based models of renting (rather than on capital gains) – this may actually help support a better quality sector.

Let’s go back to the analysis. A conventional demand and supply curve model with a price ceiling set below the equilibrium rent will cause misallocation of resources, shortage and deadweight loss – it must do so by its own internal logic. That is why, as someone with economics training, I am all too familiar with and have sympathy for the argument that rent controls that are set in this way are bad for housing supply, investment and tenants. Exactly the same argument applies for setting a national minimum wage above the equilibrium wage in a competitive labour market – it will cause a degree of unemployment.

A rent ceiling below the equilibrium rent will reduce new investment and encourage disinvestment to the extent that landlords can get possession. They may also choose to maintain profit levels by reducing maintenance spend – hastening quality declines and probably also worsening relations with their tenants. And there is not only a redistribution of profit between landlord and tenant, there is a redistribution of welfare between current tenants enjoying lower rents and those excluded because of shortage and disinvestment – a classic insider outsider problem. The welfare benefit enjoyed by the tenant in situ may also mean that they do not move when their housing requirements change simply because they have less economic incentive to encourage mobility.

But it is fundamentally an empirical question as to whether these textbook effects occur in this way and, moreover, whether other features of the regulations, may cause further confounding or reinforcing effects.

The interesting reflections on the standard model of rent controls for me are: first, is it an accurate representation of the market and second, is it an accurate representation of actual rent regulation in practice? With Alex Marsh, I was involved in compiling a reader on housing economics which include a series of interesting papers on rent controls analysis including two excellent studies by Richard Arnott and by Bengt Turner & Steve Malpezzi. It is worth pointing out that while Arnott and Malpezzi are quintessential neoclassical microeconomists – their conclusions on the impacts of controls on rents are not nearly as straightforward as the received wisdom would suggest. The discussion below draws on those two papers.

Is the textbook picture consistent with how the market actually operates? Perhaps not. Supply (particularly) and also demand are more inelastic or unresponsive that the standard model would suggest – which means that the deadweight loss may not be as large nor the short term shortage (it depends on the empirical parameter values). Also, leading housing economists have studied rent controls and thought it quite appropriate to depart from the conventional model. Richard Arnott for instance makes a convincing case to model the rental market from an imperfect competition and not a perfectly competitive model. Equally, Turner and Malpezzi, conduct an international evidence review and make a case for the use of bargaining models under asymmetric information and other models based on contract theory – because these are more useful and realistic settings to study rent regulation in private rental markets.

Arnott argues that there are models of rent controls that may benefit the overall working of the housing system. The empirical evidence is often flawed and real world models are so different from the textbook that they need to be carefully analysed in their own right. And that is the point – it is fundamentally an empirical question as to the impact of such regulations. Turner and Malpezzi agree that empirical analysis of the newer conceptual models are rare but that is increasingly what is required and suggests that we cannot simply rule these regulations out on the basis of economics 101. We should certainly be skeptical about new regulations but there is much distance between the abstract market model framework and a more nuanced representation of an imperfectly competitive market and how actual rent/ tenancy length/ rules for possession policies would actually operate in practice.

I am squarely against badly designed policies that have detrimental effects and consequences. Rent controls have had and can readily produce such bad effects. However, policies that seek to reduce tenant exploitation through licensing good landlords and policing or correcting the behaviour of bad landlords – may have administrative costs but they can set a floor that most would widely support (ie the social benefit exceeds the cost). At the same time, negotiating a context for longer leases and for those contracts to have subsequent indexing of rent increases within that contract, alongside reasonable rules over possession and eviction – need not be anti-investor or anti-landlord, particularly over time. Limiting rent increases to inflation plus X% for the life of a longer tenancy but not the initial contracted rent may also be helpful for the housing system as a whole, create much more certainty for all players in the housing system and in the long term provide genuine competition and choice for those who would rent housing.

Of course, the policy proposals may be different to what I have discussed above and we have to consider objectively whatever policy plans emerge and look critically at their empirical content. It remains to be seen if and to what extent the textbook model of rent controls will be relevant.

Note: Alex Marsh and Kenneth Gibb, K (editors) (2011) Housing Economics Volume 5. Sage: London. The original papers were by Richard Arnott (1995) Time for revisionism in rent control?, Journal of Economic Perspectives vol. 9 (1), 99-120; and , Bengt Turner and Steve Malpezzi (2003) ‘A Review of Empirical Evidence on the Costs and Benefits of Rent Control’, Swedish Economic Policy Review, Vol. 10, 11-56.

Housing and Wellbeing – blueprints and more

Earlier today I was part of a report launch jamboree in Edinburgh. This was the official presentation of the Commission on Housing and Wellbeing: A Blueprint for Scotland’s Future. This has been a two year programme of work supported by, but independent of, Shelter Scotland. I have been a research consultant to the project team throughout, tried to input into discussion and provide briefings, attended all the commission meetings and thoroughly enjoyed the process throughout.

The Commission was chaired and led by Bob Black. Bob has been a great colleague and a quietly dynamic figure keeping the process both moving forward and energised throughout. My project team colleagues Richard Grant and Paul Bradley were also a pleasure to work with throughout, as was everyone at Shelter Scotland. The members of the Commission were drawn from far and wide and only in one case had an explicitly housing-based career or expertise. This made for quite fundamental and first principle discussions, which were often daunting. I enjoyed talking through the diagnosis and the proposals with the commissioners greatly and will retain for a long time the particular challenge that Phil Hanlon gave us to be clear, succinct and unambiguous about how we characterised problems we perceived, understood and explained transmission mechanisms and potential solutions.

The launch involved presentations, ideas, Q&A and a keynote speech from the Cabinet Secretary, Alex Neil. The main messages I left with were, first, that there is considerable support for the thrust of the report and its proposals from Government and from the minister in particular. Second the report was a common sense call to arms that sought to place housing as a priority because of its wider preventative benefits to health, education, community and employment. Third, a focus on well-being is useful precisely because it makes us think about housing as home, as something inter-temporal and intergenerational that is at the heart of our neighbourhoods and places. Fourth, there are some grounds for optimism that will not just sit on the shelves alongside other worthy and less worthy times. We think this because of its obvious resonance and good timing with Government but also because it is likely to feature strongly in the forward Shelter Scotland strategy. There is also a specific future actions plan in the report itself

We had a question and answer session at the end and I had a chance to reheat some favourite themes: insider-outsiders in the housing market acting in self interest in opposition to long term and succeeding generations; rising house prices are not good things per se but the outcome of insiders capturing the political ground without considering the wider housing system; and, of course, the need for long term consensus to affect required policy transition e.g. from demand to supply subsidy systems.

The report has fully 47 recommendations but within them 18 ‘priorities’. These include:

1. Notional annual new supply target of 23,000 units until we have a better sense of needs and demand estimates.
2. Increase the social and affordable housing supply target from 6,000 to 9,000 a year, which would cost indicatively about an extra £160 million (net).
3. Mid market rental programme should be opened up to private landlords.
4. Community anchors should be established in all housing renewal areas and areas where there are demonstrable problems with the local neighbourhood.
5. Effective partnership arrangements should be worked out and implemented at the neighbourhood level.
6. The Scottish Government should implement an improved property tax. A land value tax should be introduced either nationally or locally as well, perhaps to replace LBTT – but could readily seek to be revenue-neural overall.
7. RICS Scotland proposals on a land agency for Scotland should be progressed, as should their proposals for more effective land supply.
8. The Scottish Government could provide more resources for housing services such as handyman tasks for the elderly. The Government should also move ahead with the rationalisation of the funding of adaptations.
9. The Scottish Government should review the funding requirements for the 2030 milestone for delivering a step change in the provision of energy efficient homes. Regulations requiring owners to insulate their homes should play a part in achieving the necessary improvements in insulation standards.
10. The Scottish Government should establish an independent advisory body, chaired by the minister, to annually review housing system outcomes and performance reporting to the Parliament against wellbeing objectives (and linked directly and centrally to the Scottish Government’s national outcomes framework).

There has been a bit of a media blitz today but the real test will be how this work influences and challenges government in the months to come. The Cabinet Secretary was encouraging about supply and thinking systemically about housing. But we will see.

Personally, I have greatly enjoyed this process over the last two years, especially meeting and working with such interesting people. It has required a different set of techniques and challenges to what I am used to in the traditional research project environment. On the other hand, it is this kind of input that is increasingly what I do as part of What Works Scotland and also within the knowledge exchange world of Policy Scotland. So, all in all, it has been a good time to be involved in such an undertaking.

Reflecting on the Play-Offs

I have just been through my first experience of the SPFL play-offs. I hope it will be the last for a while – I don’t think my nerves could stand it. I am a Motherwell supporter, in case you didn’t know. More than 20 years of season tickets: a lot of games and a fair share of triumph and disaster; pain and delight.

It had been a pretty awful season. Partly it was because, if I am honest, that we exceeded all reasonable expectations in 2013-14 and massively over-performed to come second in the league (chiefly I think because of a good winning run in the middle of the season and unaccountable stuttering by other teams later on). This season was a mirror-image: a really bad losing run in the middle of the season and other clubs around us, notably Ross County, performing heroics when it mattered. The fact is on most days any result is possible between almost all premier league sides and it all too easy for things to go wrong and subsequently for problems to compound. It had to happen to Motherwell eventually.

Two further issues compounded our difficulties – a lot of injuries to a small squad (something we have managed to escape in recent seasons) and considerable off-field change. After Stuart McCall’s departure of a club in late Autumn when we struggling on the pitch, we were also groping towards new ownership of the club. Since then and in rapid succession:
• Ian Baraclough took over as manager
• Alongside an entirely new coaching and scouting team, the club was taken over by a philanthropic buyer (Les Hutchison) pledged to run things until the community in the form of the Well Society could take over majority ownership.
• The new manager brought in a virtual team of new players in the January window including the return of Steven Pearson and Scott McDonald. After a good start we went on a long losing streak as the team got to know each other.

There were some green shoots: on three of four occasions in the last third of the season we played really well; I would argue better than we did most of the previous season. We had two fast wide men, a much more purposeful midfield and some threat in attack. But it was never quite enough to achieve escape velocity and we tumbled into the play-offs in eleventh position. The inevitable re-acquaintance with McCall at Rangers loomed large in everyone’s minds.

The last two weeks of the domestic season leading up to the play-off final were surreal. First of all we had a meaningless game against Partick Thistle and the manager took no risks with injuries by playing a vastly different team to what had become the norm. Second, we had to stand back and wait while the teams that finished 3rd and 4th in the Championship played off (the quarter final between Rangers and Queen of the South), and then the semi-final between Rangers and Hibs (who had finished 2nd). This meant that by the time we did meet Rangers, they were playing their fifth of six play-off games in a matter of a couple of weeks or thereabouts.

The received wisdom is that the play-offs favour the team seeking promotion but this year that has not been the case with several of the teams from the higher division winning, despite, obviously, having poor seasons. Alan Burrows, who is Motherwell’s general manager, said after the final that Scotland should move to the English model and have two leg semi finals and a one off final at a neutral venue. That does seem fairer. However, this may all be undercut by rumours of further league reconstruction.

And what about the final with Rangers? I watched the first leg on TV and went to the second leg at Fir Park. In a strange way I was pleased that the game at Ibrox, although strongly to our advantage, was not definitive. Somehow defending a two goal lead would not make us over-complacent (and there was in truth no danger of that when you felt the palpable tension at the second leg). Nonetheless the period between the two matches was incredibly tense and I took to doing all manner of work-related things to take my mind off the game.

The second thing that I will retain was the Fir Park crowd. Decades of going to games against the old firm has made me used to a large away support, often I think exceeding the home support. Sunday was different because, as is well known there was a dispute between the clubs about away supporters and Motherwell had most of the ground to themselves. And, undoubtedly because of the importance of the game and the first leg, we had a noisy committed full house in the rest of the stadium. Our average gates have been on a downward trend for a while (despite the success of recent years) so it was great to have such an atmosphere.

The game was never going to be a high quality affair and it was nervy, competitive and settled by two deflected goals and a last minute penalty. The joy of staying up was well worth all of that tension but you’ll understand, if I hope we are not in such a situation next season. I will not add to the many things said about the after match fighting between players and the partial pitch invasion that ensued (and always does on the last day of the season).

The manager is now rebuilding, has already signed a player and is in talks with others. Several of the existing squad are now gone too. He has been vindicated in his approach – and I do hope we persist with the fast counterattacking down both flanks. If we can sort out our defence we might well be on to something. For once we will avoid the usual early exit from European football and thus have a normal pre-season. The footballing future is not so bleak after all.