Housing, Economic Development and Productivity: Literature Review

Transcription

1 Housing, Economic Development and Productivity: Literature Review DTZ Consulting & Research Greyfriars Gate 5 Greyfriars Rd Reading RG1 1NU

2 HOUSING, ECONOMIC DEVELOPMENT AND PRODUCTIVITY: LITERATURE REVIEW A Report by DTZ CONSULTING & RESEARCH for THE DEPARTMENT OF TRADE AND INDUSTRY Greyfriars Gate 5 Greyfriars Road Reading RG1 1NU Tel: Fax: & Also at Belfast, Birmingham, Bristol, Cardiff, Dublin, Edinburgh, Leeds, London & Manchester Ref:

3 Contents Page EXECUTIVE SUMMARY... i 1 INTRODUCTION HOUSING TRENDS AND CHALLENGES HOUSING POLICY AND EMPLOYMENT IMPACT OF HOUSING ON LABOUR MOBILITY HOUSING AND PRODUCTIVITY IS THE AVAILABLIITY AND COST OF HOUSING AN ISSUE THAT CONCERNS UK BUSINESSES? THE ROLE OF HOUSING IN REGIONAL ECONOMIC DEVELOPMENT CAN THE CONSTRUCTION SECTOR DELIVER BARKER'S RECOMMENDATIONS? Appendices 1. BIBLIOGRAPHY

4 Executive Summary Background 1. The Barker Review of Housing Supply highlighted a lack of evidence on the inter-relationship between housing, economic development and productivity. Recommendation 3 of the Review called for more research into these issues, acknowledging that it was a complex area and that the evidence base on these inter-relationships needed to be improved. 2. The purpose of this study is to summarise what is known about the relationship between housing and the economy in the literature DTZ have not undertaken new primary research. The information in this report is derived from a review of the existing literature undertaken between October-November The views expressed in within this paper are those of the authors and should not be treated as Government Policy. This study considers: The impact of housing on: Labour mobility Productivity Business competitiveness The role of housing in regional economic development. 3. The emphasis is on the microeconomic effects of housing, for example on regional economic convergence and regional economic development. The study does not consider the impact of housing on the economy from a macroeconomic perspective. Impact of Housing on Labour Mobility 4. Research shows that the mobility of people in higher level (particularly professional) occupations is relatively high in the UK. The mobility of people in lower level (mainly manual) occupations is much lower. This contrasts with the US where there is research showing manual workers are more likely than non-manual workers to move to a different part of the country. 5. Why is the mobility of manual workers lower in the UK than the US? Several factors are believed to play a role, one of which is the housing market in the UK. Two main channels of influence have been identified: The influence of housing tenure on labour mobility The influence of house prices on labour mobility. 6. Some academics argue that the nature of housing tenure in the UK impedes labour mobility because: There is low mobility among tenants in rented accommodation in the social sector. Levels of owner occupation are high and rising (where mobility is relatively low) Levels of private renting (where mobility is high) are low. Some believe this is an important reason for the low mobility of manual workers in the UK compared to the US, where there is a larger private rented sector. i

5 7. Regional house price differentials also create a labour mobility trap characterised by: Homeowners from comparatively low priced regions that cannot afford to move to higher priced regions. Homeowners in regions with high house prices that are reluctant to move out because then they may be unable to afford to move back. Once house prices do start to fall, people being reluctant to move into areas with falling prices, because investment in property seems unwise. A downturn in property prices making it difficult to sell, thus discouraging people from moving. 8. Academics suggest it may be owner occupied housing, rather than social housing that is emerging as the major barrier to labour mobility in the UK, particularly for those in lower level occupations. This is because levels of owner occupation are now so high and lower income households have the highest levels of housing costs as a proportion of their overall incomes. 9. However, DTZ would question if removing these housing-related barriers to labour mobility would have a significant impact on regional convergence. Frequently, areas of high unemployment are within travelling distance of areas with high levels of vacancies (for example in London). It is clearly desirable to remove housing related barriers to labour mobility but they are just one of a number of factors that lead to mis-matches between labour demand and supply. Impact of Housing on Productivity 10. There has been little consideration of the impact of housing on productivity in the UK. The discussion in this report is structured around the main drivers of productivity growth identified by the Government. Impact of Housing on Main Drivers of Productivity Growth in the UK Productivity Driver DTZ Assessment Skills Low/Some Investment Some Enterprise Some Innovation Low 11. Skills: There is limited evidence that the housing market is constraining the mobility of higherlevel skills in the economy at least in the private sector. In the public sector, skill shortages linked to high housing costs are more prevalent. 12. Investment: The evidence is mixed on whether there is a relationship between the housing market and capital investment by businesses. One hypothesis is that if businesses are facing rising labour costs due to the high cost of housing, they will have less capital to invest in the business. There is some evidence to support this hypothesis. A business survey in South East England found 13% of companies affected by high housing costs, were deferring or cancelling investment in their company due to rising costs or a lack of competitiveness. 13. However, the same survey found that 25% of companies that had experienced difficulty in recruiting and retaining staff due to high housing costs, had increased investment in capital in order to reduce their demand for labour. There is even evidence that this can take place in ii

6 people-intensive industries where it is commonly thought to be difficult to substitute capital for labour. For example, an employer in the hotel sector reduced the need for kitchen staff through investment in a large steam oven which could heat pre-prepared meals for a large quantity of people. This shows how a tight housing market can be a spur for investment and innovation in some situations. 14. There is concern that the pressure to release land for housing may make it more difficult for businesses to invest in new premises when they need to expand or change working practices. This could undermine productivity. However, there is no evidence that PPG3 or general housing pressures are constraining employment land allocations. 15. There is an issue about the protection of existing employment sites. Larger employment sites are usually well protected. However, the situation is more mixed with respect to smaller employment sites such as small office blocks, small industrial estates, workshops, car showrooms and so on and many are being developed for housing. The impact of this on high value businesses will probably be negligible. They will be able to afford space on high profile, larger developments that are well protected. The greatest impact is likely to be felt by the startup and small business sector. Of course, new businesses are increasingly in the service sector and often have little need for formal business premises many can be run from home so perhaps this will not constrain enterprise as much as it might have done in the past. 16. Enterprise: Banks are the main source of finance for start-up businesses and they are reluctant to sanction unsecured lending. Thus, the family home (which is usually the most valuable asset people own in the UK) could have an important influence on new firm foundation in this country. 17. This may be one of the reasons why business start-up rates are highest in Southern England where high house prices have given people the opportunity to build up most equity in their homes. However, this will not be the only reason why business start-up rates are high in Southern England. 18. Innovation: There is no hard evidence of a link between housing and innovation except to the extent that businesses may be encouraged to find new ways of doing things that reduce their need for staff, in a tight housing and labour market. Impact of Housing On Business Competitiveness 19. There is evidence that high housing costs are creating problems for a small (but still significant) proportion of private sector businesses: 12% of businesses are experiencing labour shortages / recruitment difficulties due to high housing costs in South East England. The main difficulty is recruiting workers at the lower end of the pay scale. 20. There is no evidence of a rapid change in business sentiment towards being located in parts of the country with high housing costs. A survey of businesses in South East England shows about 10% of businesses have considered the possibility of re-location from the South East due to high housing costs. The businesses that fall into this category tend to be in the more cost sensitive, low value sectors. For most businesses, the locational advantages of being in the South East outweigh the costs of doing business in the region. iii

7 The Role of Housing in Regional Economic Development 21. The potential for housing policy to play a role in regional and sub-regional economic development has only recently begun to be considered by practitioners. There is evidence that the quality and range of housing available in an area is an important consideration in attracting skilled labour. As the knowledge economy grows there will be increasing competition for skills, and business location decisions will take more account of whether an area has the right environment (including housing) to attract skilled workers. Already it is clear that while high quality housing alone may not be enough to attract significant inward investment, a lack of high quality of housing may preclude it. 22. There is also an important role for housing policy in tackling deprivation and social exclusion. Over recent decades, the poor have become increasingly concentrated in some social housing estates. Research has shown that concentrations of deprivation limit the life chances of people living within them, above and beyond their own personal circumstances. Put another way, area effects suggest that a poor individual living in a poor neighbourhood experiences worse outcomes than an identical individual living elsewhere. 23. Housing policy has a key role to play in reversing these trends. There is a role for policy makers to: Ensure the availability of affordable housing within new communities and prevent the development of exclusively high or low income neighbourhoods Foster a wider social mix in existing communities that lack social diversity, particularly in highly deprived areas Actively monitor neighbourhoods to prevent communities that currently have a mix of households tipping towards a homogeneous make up. Can the Construction Sector Deliver? 24. Labour and skill requirements could represent a real barrier to the expansion of the housebuilding industry. 25. Estimates (at the lower end of a scale) are that between 25,000 to 60,000 additional workers would be required to increase housebuilding in line with Barker s suggestions. This is an increase of 10-20% of the existing workforce engaged in housebuilding. 26. In the absence of improvements in labour productivity and switching of labour from other parts of the construction sector, 90,000 to 165,000 additional workers would be required. This is an increase of 30-60% of the existing workforce engaged in housebuilding. 27. Labour and skill shortages could be an important driver in encouraging greater use of modern methods of construction. 28. The advantages of MMC, which are recognised by housebuilders, are a considerably quicker build time and good quality output. The disadvantages are: Costs tend to be higher than traditional methods but overlaps in cost ranges mean that in any particular set of conditions, MMC could be as cost effective. MMC requires precision planning to maximise benefits. Traditional methods are more flexible in accommodating design changes. iv

8 29. MMC requires process discipline, good coordination and a culture that will not accept late design changes. These are sometimes lacking in the housebuilding sector currently. Policy Implications 30. There is evidence that worsening housing affordability is constraining economic capacity to some extent. DTZ believes the long term solution lies in increasing the supply of private sector housing to improve affordability. However, this will take time to achieve. In the short to medium term, affordability problems will persist and there will be a need for forms of subsidised and intermediate housing to deal with this. 31. Other issues policy makers may wish to consider in the future are: The way that housing policy can discourage work through the operation of the benefits system (particularly for people in temporary accommodation in areas with high housing costs) The low mobility of people in social rented accommodation The need to possibly increase protection for small existing employment sites which are under pressure in some areas The fact that regional housing projections still seem to be driven mainly by demographics when there should perhaps be more consideration of how the economy will affect the demand for housing Finally, the need for more emphasis on the role that housing can play in promoting economic development and tackling deprivation is less prosperous parts of the country. v

9 1 INTRODUCTION The Barker Review In June 2003 HM Treasury s Five Economic Tests for whether the UK should adopt the concluded that the incompatibility of housing structures means the housing market is a high risk factor to the achievement of settled and sustainable convergence. It was this assessment that was the prime motivation for the establishment of the Barker Review in April 2003, to conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK The Barker Review concluded that there is evidence of persistent under supply of housing in the UK and that this has contributed to instability in the housing market, and to the long run rate of real house price increases outstripping that experience in other European nations. In turn this has contributed to macroeconomic volatility, creating a more difficult environment for businesses and for economic policy makers. Macro-economic instability can deter investment with knock on effects on productivity and economic growth While concern with macro-economic stability was the prime reason for the launch of the Barker Review, the report recognises that there are also important micro-economic effects that flow from under supply of housing in some areas of the country and over supply in other areas The Barker Review notes the adverse consequences resulting from: The long-run upward trend of house prices Worsening affordability Wealth redistribution Labour market immobility and; Economic welfare costs However, the Review says relatively little about the potential links between these effects and economic growth and productivity, other than noting the potential effect of housing shortages acting as a constraint on labour mobility In part the reason why the Review does not deal with the micro-economic effects of housing supply issues is because it was a national study. It was not part of the terms of reference of the Review to consider if there was scope to redistribute the demand for housing within the UK, through more active regional economic policies. Nor was it possible to consider whether housing policy could actually be one of the levers to achieve better economic balance between the UK regions. Being a national study, it tended not to look at the regional or sub-regional dimension The Review recognised these weaknesses, and the lack of evidence on the interrelationship between housing, economic development and productivity. Recommendation 3 of the Review called for more research into these issues, acknowledging that it was a complex area and that the evidence base on these inter-relationships needed to be improved. 1 Kate Barker, Review of Housing Supply, Final Report, March

10 Barker Review: Recommendation 3 Further research should be undertaken to improve the evidence base for housing policies, for example on the relationship between housing, economic growth and deprivation at the micro level. Study Objectives 1.08 The purpose of this study is to summarise what is known about the relationship between housing and the economy in the literature. The emphasis is on the microeconomic effects of housing. For example, on regional economic convergence and regional economic development. This study does not consider the impact of housing on the economy from a macroeconomic perspective Economic prosperity depends both on the productivity of workers and the proportion of the workforce employed. Employment Rate Productivity Economic Growth 1.10 The proportion of the population in work indicates the ability of the economy to generate job opportunities for those who want them, and a higher level of income and output for the economy as a whole. Employment is a key determinant of economic prosperity and also helps to reduce deprivation by fostering social inclusion The productivity of workers is also a key determinant of economic prosperity. An economy s productivity performance ultimately underpins its ability to grow. The Government has identified five drivers of productivity growth as follows: 2 Skills Investment Enterprise Innovation Competition 2 HM Treasury (2000) Productivity in the UK: The Evidence and the Government s Approach 2

11 1.12 The picture of UK productivity performance, whether considered in terms of output per worker or output per worker hour, is that the UK lags behind competitors such as the US, France and Germany (See Figure 1.1). Figure 1.1 GDP Per Worker and Per Hour Worked 2002 (Source: ONS) Key issues for the study are: The extent to which the housing market hinders labour mobility. If labour cannot move easily around the country: There will be mis-matches in the demand and supply of labour in different parts of the country Regional economic convergence will be more difficult to achieve. (This would not necessarily be the case if high house prices encouraged employers to locate to less prosperous parts of the country where costs were lower, but the evidence suggests that this does not always happen). Employment capacity in the economy as a whole will not be maximised. The extent to which housing impacts on the five drivers of productivity growth. The impact of the housing market from an employer perspective. Is there evidence of labour shortages? To what extent can these be related to housing issues? How are employers responding? Are they operating in a sub-optimal way? Are they relocating to lower-cost areas? 3 DTI (2003) UK Productivity and Competitiveness Indicators, November

12 The role that housing policy can play in stimulating regional economic development, urban regeneration and tackling social exclusion. This is an area which has received relatively little attention by practitioners to date In addition, DTZ has been asked to consider the construction sector and its ability to respond to the recommendations of the Barker Review The information in this report is derived from a review of literature on the topics and issues set out above. The literature review was undertaken prior to the publication of the Government s Response to the Barker Review in December The documents published by the Government at this time are not, therefore, reviewed in detail in this report. The views expressed in within this paper are those of the authors and should not be treated as Government Policy. Report Structure 1.16 The rest of this report presents our findings as follows: Section 2 examines key trends in the housing market Section 3 considers how housing policy can affect employment Section 4 considers the relationship between housing and labour mobility Section 5 looks at the relationship between housing and the drivers of productivity growth in the UK Section 6 looks at the impact of the housing market on employers and the business community Section 7 assesses the role that housing can play in regional economic development, urban regeneration and tackling social exclusion Section 8 looks at the implications of the Barker Review for the construction sector 4

13 2 HOUSING TRENDS AND CHALLENGES 2.01 This section examines key trends in the housing market and sets the scene for subsequent analysis of the relationship between housing, employment and productivity. It is based on information in a recent HM Treasury Report on Housing Policy which in turn draws on information and analysis in the Barker Review of Housing Supply. 1 Home Ownership Levels 2.02 The pattern of housing tenure in England has changed significantly in the past 40 years. In the 1950s private renting was the main tenure. By 2003, owner occupation had become the predominant tenure choice, accounting for over 70% of households. Even so, 9 out of 10 households would prefer to own their own house if they could. 2 The reason why more people aspire to home ownership in the UK than many other countries, is an issue policymakers may wish to explore further in the future. Figure 2.1 Housing Tenure Patterns Source: HM Treasury 2005 Housing Policy: An Overview Growth in the Number of Households 2.03 Household formation is being increased by changing family relationships and circumstances, including increased wealth and longer lives. The number of single person households, in particular, has grown substantially. Over one million more households were formed in England between 1996 and 2003, an increase of more than 5% compared with a population rise of just 2%. This trend is set to continue (although it could possibly slow down due to lack of affordable accommodation forcing more people to share). 1 HM Treasury (2005) Housing Policy: An Overview 2 British Social Attitudes Survey , National Centre for Social Research. 5

14 Figure 2.2 Household Growth by Type, England Source: HM Treasury 2005 Housing Policy: An Overview 2.04 The increase in households is expected to be concentrated in the South of England, the area already experiencing the greatest demand for housing. These household projections are essentially trend based (projecting forward what has happened in the past). Of course, the future may not be the same as the past. Figure 2.3 Projected Annual Increases in Households Source: HM Treasury 2005 Housing Policy: An Overview 6

15 The Number of Houses Being Built 2.05 Since the 1960s the total number of homes built in the UK has been on a downward trend. Figure 2.4 Housebuilding: Permanent Dwellings Completed (by Tenure for the UK) Source: HM Treasury 2005 Housing Policy: An Overview 2.06 Key points are: A large decline in overall housing output since the 1970s. This is associated with a significant decline in public sector housebuilding since the 1970s. In particular, building by local authorities (which includes the New Town Development Corporations). The peaks and troughs in local authority housebuilding up to the 1970s probably reflect levels of New Town construction activity and government policy / resources for housing at different points in time. Private sector housing output has fluctuated in the last 50 years. The peaks and troughs follow the economic cycle to a large extent. The exception is over the last decade where output has remained relatively static. This is puzzling. Why, when the UK trend of real house price growth over the last 30 years has been 2.4% per annum (2.7% per annum since the early 1980s) compared to the European average of 1.1% per annum, has the supply of privately built homes remained so static? 3 The Barker Review set out the principal causes of this, chiefly an inadequate supply of developable land coming through the planning system, combined with insufficient infrastructure provision to support new homes Although more new social homes are now being built, the total stock of social housing is still falling. This is mainly because of right to buy sales (see Figure 2.5) though there are also parts of the country where social housing is being demolished. 3 Meen et al (2005) On the Economics of the Barker Review of Housing Supply, Housing Studies 20 7

16 Figure 2.5 Net Changes (Losses) to Social Housing Stock and Local Authority Right to Buy Sales Source: HM Treasury 2005 Housing Policy: An Overview WHAT IS THE IMPACT OF THESE TRENDS? Worsening Affordability of Housing 2.08 One of the costs of long term under-supply is higher house prices and a lack of market affordability. Higher house prices make it particularly difficult for younger, less well-off households to buy their own home. It is even difficult for people on moderate incomes to buy in certain parts of the country. Figure 2.6 shows that there have been various peaks and troughs in affordability over the last 30 years as the housing market has moved up and down. However, the long term trend is of worsening affordability. Generally, each peak is at a higher level than before. Figure 2.6 Ratio of Average Dwelling to Average Income Ratio Source: HM Treasury 2005 Housing Policy: An Overview 8

17 2.09 The time series shown above in Figure 2.6 is based on average house prices and earnings data. It should be noted that the current measure of affordability recommended by ODPM is the long term trend in the ratio of lower quartile (LQ) house prices to lower quartile (LQ) earnings The rationale for focusing on LQ house prices and LQ earnings is that affordability is a measure of access to home ownership. Thus from a policy maker s perspective there is a particular interest in the relationship between the incomes of (potential) new entrants to the market and the price of entry level properties. Use of LQ prices and earnings is a better (though still imperfect) measure of this than using mean prices and mean earnings One of the leading academic thinkers on affordability issues, Professor Wilcox, has published a number of national studies looking at the relationship between earnings and house prices across England and more recently the UK. His 2005 report has recently been published and the key findings are summarised below There are a number of distinctive characteristics to Wilcox s affordability analysis. For example, the housing costs to income ratios are based on: Working household earnings not individual earnings. The focus on working households is deliberate, since across much of the country there is more than one working person in many working households. Average house prices for first time buyers Figure 2.7 shows the trends in house price to income ratios calculated by Professor Wilcox. Despite the different approach there is a familiar message that is of worsening affordability, particularly in the last decade. Figure 2.7 Long Term House Price to Income Ratios Source: Joseph Rowntree Foundation Joseph Rowntree Foundation (2005) Affordability and the Intermediate Housing Market, by Professor S Wilcox, University of York 9

18 2.14 However, a different picture emerges in Figure 2.8 which shows instead the ratio between average mortgage costs for first time buyers and working household incomes over the same period of time. This shows that while the mortgage cost to income ratio is much higher than it was in the mid to and late 1990s, it is still a little below the acute levels experienced in the boom years of the late 1980s and early 1990s. Affordability ratios should ideally take account, not only of house prices, but interest rates too. Figure 2.8 Mortgage Cost to Income Ratios Source: Joseph Rowntree Foundation There is less analysis of affordability at a regional level. Figure 2.9 shows average regional house prices in 1997 and It shows that the highest house prices are in London, the South East, the South West and East of England. It also shows that house prices increased more in some regions than others from 1997 to Over this period there was an increase of 149% in England as a whole but a range from 113% in the North East to 168% in the South West. A similar picture emerges for lowest quartile regional house prices. Over the period there was an increase of 148% for England as a whole but a range from 110% in the North East to 177% in the South West. Figure 2.9 Regional Median House Prices Source: ODPM (2004) Quarterly House Price Focus 10

19 2.16 Professor Wilcox calculates regional affordability ratios based on mortgage costs to working household income (see Figure 2.10). This shows how the North-South divide in affordability has widened in the last decade. It also shows how affordability is now as severe in the South West and East of England as London and the South East. Figure 2.10 Regional Trends in Mortgage Costs to Income Ratios Source: Joseph Rowntree Foundation 2005 Distribution of Housing Assets 2.17 Houses are not just places to live they are assets. Research has shown that access to financial assets can affect life chances. 5 With rising house prices there is a redistribution of wealth from non-homeowners to existing homeowners. This is primarily an intergenerational redistribution of wealth. Younger households who are first time buyers or trading up must pay more while older households are able to realise wealth gains by releasing equity or trading down There are also implications for the social redistribution of wealth. Younger households whose parents are homeowners may benefit from wealth transfers in the form of inheritance or parental assistance, but those whose families are not homeowners do not have that opportunity. This reinforces inter-generational poverty. 5 For example Wealth and Welfare: the role of assets over the life cycle, IPPR, 2001, based on analysis of the National Child Development Study, Those who own or have access to financial assets in their twenties have better outcomes later in life - they spend less time unemployed, enjoy better health, and are less likely to get divorced. 11

20 2.19 Already 23% of first time buyers are relying on gifts and family loans to afford a deposit, compared to just 4% 25 years ago 6. Households without housing assets risk being left behind and this is something that concerns the Government. People Living in Temporary Accommodation 2.20 Concerted action has succeeded in reducing the numbers of rough sleepers. Despite this the total number of people in temporary accommodation is rising (see Figure 2.11). Due to the falling stock of social housing, people are increasingly being housed in temporary accommodation which is often leased from private landlords through leasing agreements set up by councils or housing associations. This is supposed to be temporary accommodation until permanent social accommodation can be found but the shortage of social housing means people are spending considerable periods of time in such accommodation. Figure 2.11 Homeless Households Placed in Temporary Accommodation Source: HM Treasury 2005 Housing Policy: An Overview 2.21 Most of this accommodation is of reasonable quality but lack of certainty about the future makes it unsatisfactory for many people. It can also have undesirable effects on tenure diversity. For example, recent research by the Joseph Rowntree Foundation shows blocks of new housing being bought by institutional investors to lease to councils / housing associations. Practices of this kind combined with existing social housing allocations, mean some new housing developments could end up accommodating a very narrow range of people. This is contrary to Government policy which is seeking to increase tenure diversity (see Section 7). 6 ODPM Press Release, 10 October

21 Concentrations of Deprivation 2.22 One side effect of right to buy and the falling number of social homes is that local authorities and housing associations have increasingly had to target only those in greatest need. This has led to increased dominance of social housing by those that are not in work (see Figure 2.12). The proportion of social tenants that are economically inactive in 2003 is considerably greater than it was in It is noticeable that only a small minority are unemployed. The rise in inactivity appears to be associated with other factors, such as more people entering retirement and more people claiming benefits such as incapacity allowance This has led to a greater concentration of poverty and deprivation in areas with the least attractive and poorest quality social accommodation. Generally, people have been most interested in buying (1) houses and (2) flats in popular areas. Estates with blocks of flats in undesirable areas have become increasingly dominated by people on low incomes who are not in work. Figure 2.12 Employment Status of Social Tenants in 1981 and 2003 Source: HM Treasury 2005 Housing Policy: An Overview Impacts on the Economy 2.24 The rest of this document considers the impact of housing trends on the economy, and employment and productivity in particular. As highlighted in Section 1, the emphasis is on the relationship between housing and the economy at the microeconomic level. 13

22 3 HOUSING POLICY AND EMPLOYMENT 3.01 Does the benefits system for housing create a disincentive for people to get jobs? Stephens (2005) 1 says that although the Housing Benefit system has been heavily criticised for its possible behavioural impacts, for example work disincentives, there is little evidence to substantiate these claims However, there are issues with the system. Households must file a new claim for Housing Benefit on entering or re-entering the workforce, which may leave them uncertain about whether they can afford to stay in their current home and may also limit their incentives to move house for a new job. It could also discourage people from taking temporary employment. The Government is looking at this Stephens also believes that Housing Benefit has never sat easily alongside the various inwork benefits that have existed since 1971: Housing Benefit is still not well integrated into the new system of tax credits. The redistributive impact of Working Tax credit, as well as its (on paper) incentive for people to take relatively low-paid jobs, will be diminished by the loss of Housing Benefit. As with Family Credit before it, every 1 of in-work benefit leads to a reduction in Housing Benefit entitlement of 65p..More radical plans for a housing tax credit have yet to be developed, but will become increasingly necessary as anomalies emerge arising from the growing misalignment between Housing Benefit and other parts of the social security and tax credit system The trend to house more homeless people in temporary accommodation may be providing a particular disincentive for people to find work in certain parts of the country. For example, the shortage of social housing for rent means that thousands of households in London are living in expensive temporary accommodation leased from private landlords either directly or through leasing agreements set up by councils or housing associations A recent article highlights research by the Greater London Authority (GLA) on this issue. 3 It estimates a homeless household with three children living in temporary accommodation from the private sector must earn 960 per week before they are significantly better off in work. The corresponding figure is 385 per week for a similar family living in council or housing association property. Such high rents create a considerable disincentive for finding work because the family s net income after housing costs often remains the same or worsens compared to the income from out of work benefits says Association of London Government Housing Chair Councillor Tony Newman. He continues high levels of rent, combined with the uncertainty and instability of being in temporary housing are huge barriers to seeking and sustaining employment or training The East London Boroughs of Newham, Redbridge and Waltham Forest contain 11,000 households in temporary accommodation and some of the country s worst pockets of unemployment. Together with the GLA and East Thames (which manages homes in the Boroughs), the councils have created the Working Future pilot project. It aims to bring rents in accommodation leased from private landlords down to the average charged by 1 Stephens (2005) An Assessment of the British Housing Benefit System, European Journal of Housing Policy 5(2) 3 When Work Doesn t Pay IN London Housing, No 113 Apr

23 local social landlords. The gap is to be met through a block grant paid directly to the local authority. The majority of funding is coming from the Department of Work and Pensions which transferred 2.28 million from its budget to that of the ODPM to subsidise the rents of 100 families in temporary accommodation. It is hoped that the project will provide better work incentives in the future. 15

24 4 IMPACT OF HOUSING ON LABOUR MOBILITY Why is Labour Mobility Important? 4.01 A central question in regional economic studies is why do regional unemployment rates differ in the UK, even over the long run. Meen et al bring together much of the literature and consider this seemingly obvious question. On the one hand, industrial structures vary around the country and the skill characteristics of resident populations vary. Unemployment patterns may, therefore, simply reflect the distribution of declining industries or low-skilled workers However, in the US, where skills and industrial structures also differ, Blanchard and Katz point out that differences between states in both unemployment and wage rates have been relatively stable over the last forty years. Although in the short run, over the cycle, differences between states emerge, there seems to be some mechanism that drives state relative unemployment rates back towards a long term equilibrium. The primary mechanism by which regional economies adjust to change is through migration, which appears to be relatively strong in the US for all types of workers In the UK, it is less clear that the same relatively smooth process of adjustment occurs. Regional economic disparities are significant, and to date, neither the market nor government intervention has succeeded in significantly reducing the gap over time. These regional differences are not new; unemployment in the North East was more than double that in the South East for most of the twentieth century. One reason for this could be lower levels of labour mobility in the UK than the US. Figure 4.1 shows that less people move in the UK than the US (note the data is for all moves). Figure 4.1 Mobility Rates: International Comparison Source: Performance and Innovation Unit (2002) Geographic Mobility 1 Meen et al (2001) The Economic Role of New Housing, The Housing Research Foundation 2 Blanchard and Katz (1992) Regional Evolutions, Brookings Paper in Economic Activity 16

25 4.04 What are the barriers that impede labour mobility in the UK? There are a number of factors but it is clear that the housing market has some role to play. First, an overview of labour mobility trends in England is presented. This information is derived largely from a report by the Performance and Innovation Unit. 3 Labour Mobility Trends in England 4.05 Each year in England about 10% of households move house, of whom 1% move between regions. These could be under-estimates as the Census may have missed many of the more mobile sections of the population Mobility changes over an individual s life course. The most mobile section of the population are young, single adults. Figure 4.2 Proportion of People Who moved house Within a Year (Average of Years ) Source: Performance and Innovation Unit (2002) Geographic Mobility 4.07 The most common reasons for moving over long distances are for education or work (see Figure 4.3). 3 Performance and Innovation Unit (2002) Geographic Mobility 17

26 Figure 4.3 Distance Moved by Reason for Move Source: Performance and Innovation Unit (2002) Geographic Mobility 4.08 If jobs and education are the key reasons for people moving further away, higher socioeconomic groups with the best access to education and jobs, would be expected to have the highest rates of mobility. This is indeed the case. Table 4.1 shows that those in professional occupations are almost twice as likely to move as those in unskilled jobs. Table 4.1 Mobility (House Moves) by Social Class 1990/91 % who moved 1990/91 Professional 12.8 Managerial and technical 10.9 Skilled non-manual 10.2 Skilled manual 8.5 Partly skilled 9.6 Unskilled 7.6 All economically active 10.0 Source: Performance and Innovation Unit (2002) Geographic Mobility 4.09 McCormick (1997) looked at inter-regional migration rates for manual and non-manual households using data from the Labour Force Survey for Households were classified according to the main job of those who were employed and the previous job of the unemployed. Key points from this research are: McCormick found a wide variation in regional unemployment rates among manual workers, whereas among non-manual workers there was little variation. Thus, McCormick suggested that regional unemployment is a manual worker phenomenon. 4 McCormick (1997) Regional Unemployment and Labour Mobility in the UK, European Economic Review 41 18

27 Gross regional migration rates for UK manual workers are low relative to nonmanuals. McCormick reports that 18 in 1000 non-manual workers move to a different region per annum, compared to only 6 in 1000 manual workers. A migration rate for non-manual workers three times that for manual workers contrasts sharply with the US where across either a county or state boundary, manual workers are about 30% more likely to migrate. Thus, the key issue appears to be low mobility of people in lower level occupations in the UK and why this is so different to the US? 4.10 Another study (Champion et al 1998) 5 confirms these findings. It reports research by Owen and Green (1992) showing that higher level occupational groups have a much higher propensity to move to a different region than lower level occupational groups (see Table 4.2). Table 4.2 Occupational Differences in Inter-Regional Migration Rates Inter-Regional Moves (GB=100) Managers and administrators 141 Professionals 174 Associate professionals and technicians 152 Clerical and secretarial 93 Craft and skilled manual 48 Personnel and protective services 159 Sales 85 Plant and machine operatives 48 Other occupations 67 All How does inter-regional migration affect population and household growth? Figure 2.3 (in Section 2) showed that future household growth is expected to be concentrated in the South of England. Figure 4.4 shows that most of the population growth in London is expected to be driven by natural change (births over deaths) and international migration. There is expected to be a significant out-flow of people from London and this will be a major factor in population and household growth in the South of England (outside London). It is important to stress that these projections are essentially trend-based. They project forward what has happened in the past to a large extent. 5 Champion et al (1998) The Determinants of Migration Flows in England, University of Newcastle for DETR 19

28 Figure 4.4 Components of Change in Population by Region to 2011 Source: Performance and Innovation Unit (2002) Geographic Mobility 4.12 Figure 2.5 shows the pattern of intra-regional migration in the UK from to It shows some of the trends on which the projections in Figure 4.4 are partly based. Figure 4.5 Net Within-UK Migration: to Source: ONS (2005) Focus on People and Migration 20

29 Impact of Housing on Labour Mobility 4.13 There is little evidence that housing impacts significantly on the migration / adjustment process in the US from the work of Blanchard and Katz (1992) 6. An increase in the demand for labour in a state leads initially to a rise in real wages in that state, which attracts migrants from other areas. This will tend to restore both unemployment rates and real wages towards original levels, although total employment is higher. Implicitly, housing markets impose few constraints on inter-state adjustment Academic research suggests that the housing market does have an impact on labour mobility in the UK. Two main channels of influence are identified: The influence of housing tenure on labour mobility The influence of house prices on labour mobility. Housing Tenure and Mobility 4.15 The best known articles on the effect of tenure on migration are a series of papers by Hughes and McCormick (1981, 1985, 1987, 1990 and 2000). 7 The earliest paper suggested that council house tenants had a lower propensity to migrate over longer distances than either owner-occupiers or private tenants; the second paper suggested that this was due to institutional structure rather than the nature of the tenants themselves The research published in 2000 updated their original work to include the 1990s. Key findings are shown in Table 4.3 below. The table refers to a movement rate and a migration rate. The movement rate is the number of households changing accommodation in the relevant period. The migration rate is the number of households that moved to accommodation in a different region in the relevant time period. The migration rate is therefore smaller than the movement rate. Thus, Table 4.3 shows that 107 in 1000 households moved to different accommodation between but only 15 in 1000 moved to accommodation in a different region. Table 4.3 Mobility Per Annum in England Per 1000 households, Migration Rate Movement Rate Migration Rate Movement Rate Migration Rate Movement Rate Migration Rate Movement Rate Overall Owner Occupier LA Tenant RSL Tenant Private Tenant Source: Hughes and McCormick (2000) Housing Policy and Labour Market Performance, DETR. 6 Although their work looks at the impact of house prices rather than new housing construction Do Council House Policies Reduce Migration Between Regions, Economic Journal 91; 1985 Migration Intentions in the UK: Which households Want to Migrate and Which Succeed? Economic Journal 95; 1987 Housing Markets, Unemployment and Labour Market Flexibility in the UK, European Economic Review 31; 1990 Housing and Labour Market Mobility in J Ermisch (ed) Housing and the National Economy; 2000 Housing Policy and Labour Market Performance, DETR. 21

30 4.17 Key points are as follows: The overall migration rate has increased from the 1970s ( ) to the late 1990s ( ). Local authority tenants were the least mobile in the 1970s ( ) and continue to the least mobile in the late 1990s ( ). However, the migration rate has improved in the local authority sector from 2.6 per 1000 households in the 1970s ( ) to 5.6 per 1000 households in the late 1990s ( ). Private tenants have the highest levels of mobility. Migration rates for this form of housing tenure have increased over time. Owner occupiers are only slightly more mobile than local authority tenants in the period and the migration rate for this group has been relatively static over time Analysis of low income households (who were most likely not to be in work) showed that, all else equal, private tenants were about fifty times more likely to migrate than low income local authority tenants Some academics argue that the nature of housing tenure in the UK impedes labour mobility because: There is low mobility among local authority tenants. Levels of owner occupation are high and rising (where mobility is quite low) Levels of private renting are low (where mobility is high). Some believe this is an important reason for the low mobility of manual workers in the UK compared to the US, where there is a larger rented sector There is much debate on the low mobility of local authority tenants: It could reflect difficulty in moving between local authority districts as preference is given to people in the local area already on waiting lists. DTZ would say this is certainly the case, especially for moves to Southern England, where social housing is in short supply. It could reflect the fact that tenants are more likely than average to be unemployed or low-skilled and thus, have fewer opportunities to get work in other parts of the country. Again, DTZ would agree with this. It could also reflect a lack of information on job opportunities in other parts of the country. Lower skill jobs tend to be advertised only locally. Social networks are also important in finding out about job opportunities (particularly for lower skill jobs) but these may only work well for local authority tenants at a local level. Again, DTZ would agree with this. 8 Champion et al (1998) The Determinants of Migration Flows in England, University of Newcastle for DETR 22

31 4.21 The Government is supporting the expansion of choice-based lettings with the aim of achieving nationwide coverage by 2010 so as to give tenants the maximum possible choice over where they live. However, to have real choice, people need jobs as well as homes. So the government is launching moveuk an online service that brings together information about jobs and housing nationwide, giving the people a better chance to improve their life in another area The low mobility of owner occupiers is often said to be due to the high transaction costs of moving house. Hughes and McCormick (2000) found that stamp duty reduced the mobility of owner occupiers. However, there is evidence that transaction costs are low in the UK relative to other countries (including the US which has high levels of labour mobility (see Table 4.4 overleaf). It should be noted the data on transaction costs is from 1993 and is based on a 80,000 property. Stamp Duty in the UK for a similar property would be higher now but would be unlikely to rise transaction costs to the levels in other countries (unless these too have changed recently). Table 4.4 Transaction Costs and Labour Mobility 10 Source: Transaction costs and taxes, except USA: Woolwich Building Society (1993); USA: Economist (1992). Inter-regional mobility: Eurostat (1996; 1997). USA: OECD. (Extracted from MacIennan, Muellbauer and Stephens (2000) Asymmetries in Housing and Financial Market Institutions and EMU, in Jenkinson (ed) Readings in Macroeconomics, Oxford University Press. Notes: 1. on 80,000 property , except USA, Regional House Prices 4.23 It is likely that regional variations in house prices and expectations about the future of the housing market have a greater effect on the mobility of owner occupiers than transaction costs Meen et al (2001) 11 say the regional aspects of housing markets in the UK did not receive much attention from economists until the late 1980s, although the national and urban dimensions had been studied in much greater depth. 9 HM Treasury (2005) Housing Policy: An Overview 10 MacLennan, Muellbauer and Stephens (2000) Asymmetries in Housing and Financial Market Institutions and the EMU, Jenkinson (ed) Readings in Macroeconomics, Oxford University Press 11 Meen et al (2001) op cit 23

32 4.25 However, the nature of research changed dramatically in the late 1980s with the unprecedented rise in the divide between house prices in the North and South of the country. Bover et al (1989) 12 brought to prominence the influence of regional house prices on the labour market. Bover et al agreed with Hughes and McCormick and others that housing tenure was a major explanation of low rates of labour mobility in the UK, but suggested that widening regional house price differentials also: Restricted labour supply / mobility Added to wage pressure in the economy Muellbauer (1990) 13 found that one of the most significant determinants of net migration between the South East Region and the Rest of the UK was the regional house price / earnings ratio. High relative house prices in the South East discourage in-migration and encourage out-migration to cheaper areas Muellbauer and Cameroon (1998) 14 in a later paper report extremely strong housing market effects on migration rates in models that incorporate proxies for house price expectations, in addition to the conventional relative house price effects. Basically, high relative house prices discourage in-migration to a region, though expected house price rises may offset this, if people see housing as a good investment opportunity (reducing the user cost of housing). Conversely, high relative house prices encourage out-migration from a region but, if people expect house prices to rise, they may be reluctant to move to a lower cost region. For much of the period since the 1970s house prices have signalled that expensive, successful locations are relatively cheap in terms of user cost, attracting investment to them on top of their intrinsic merits Champion et al (1998) 15 who conducted research for DETR on migration flows in England believe it has generally been shown that there is a negative relationship between regional house prices and migration in Britain, and describe a mobility trap characterised by: Homeowners from comparatively low priced regions that cannot afford to move to higher priced regions. Homeowners in regions with high house prices that are reluctant to move out because then they will not be able to afford to move back Once house prices do start to fall, people being reluctant to move into areas with falling prices, because investment in property seems unwise. A downturn in property prices making it difficult to sell, thus discouraging people from moving. 12 Bover, Muellbauer and Murphy (1989) Housing, Wages and UK Labour Market, Oxford Bulletin of Economics and Statistics 51(2) 13 Muellbauer (1990) The Housing Market and the UK Economy, Housing and the National Economy J Ermisch (Ed). 14 Muellbauer and Cameroon (1998) The Housing Market and Regional Commuting and Migration Choices, Scottish Journal of Political Economy 15 Champion et al (1998) The Determinants of Migration Flows in England, University of Newcastle for DETR 24

33 4.29 Champion et al (1998) suggest that it may be owner occupied housing, rather than social housing, that is emerging as the major barrier to labour mobility in the UK, particularly for those in what they call the secondary labour market (lower level occupations). This is because low income households have the highest levels of housing costs as a proportion of their overall incomes Undoubtedly, labour mobility is affected by the housing market. However, it is only one of a number of factors that affects labour mobility. It is also important to bear in mind that improved inter-regional migration flows would necessarily bring about greater regional convergence. Frequently, areas of high unemployment are within travelling distance of areas with high levels of vacancies. For example, parts of London have extremely high levels of unemployment and deprivation despite being close to areas with thriving economies and lots of vacancies / jobs. Often many of these vacancies / jobs are for people with relatively low skills but still remain hard to fill If unemployed people are unable to compete successfully for existing nearby vacancies, it could be argued that increased regional migration might only have a limited effect on regional labour markets. Housing and Commuting 4.32 Commuting is one way in which barriers to labour mobility caused by high house prices can be overcome. Commuting can act as a significant safety valve to offset the pressures the housing market can exert on the operation of regional labour markets (Muellbauer and Cameroon 1998). Of course, commuting comes at a cost generating externalities in the form of congestion and pollution There is evidence that levels of commuting have increased considerably in response to high house prices. A 2003 survey of employers in the South East Region asked whether they thought that high local housing costs were contributing to a rise in extended commuting. Extended commuting was classed as over one hour duration. The survey showed that: 19% of private sector employers believed that commuting was being extended due to high local housing costs 44% of public sector employees believed that commuting was being extended due to high local housing costs (though the sample size was small) However, it is important to bear in mind that long-distance commuting is not all down to a lack of co-location of housing with employment opportunities: There are a growing number of dual career couples and they seek locations which give partners maximum locational choice of jobs, with one or both partners being prepared to commute long distances as a result. Individuals are willing to commute longer distances for managerial and professional positions (and there are many such jobs in South East England where the survey referred to above was conducted). Conclusions 4.35 An important mechanism by which regional economies adjust to change is through interregional migration. Levels of migration are lower in the UK than the US and this is often cited as one of the reasons why regional economic disparities persist in the UK. 25

34 4.36 It has been suggested that regional unemployment is mainly a manual worker phenomenon. There is wide variation in regional unemployment rates among manual workers but relatively little variation for non-manual workers Thus, it is important to distinguish between migration rates for manual and non-manual workers. Research shows that the gross regional migration rate for non manual workers is three times that for manual workers in the UK, which contrasts sharply with the US where manual workers are 30% more likely to migrate across either a county or state boundary Why is the mobility of manual workers lower in the UK than the US? Several factors are believed to play a role, one of which is the housing market in the UK. Two main channels of influence have been identified: The influence of housing tenure on labour mobility The influence of house prices on labour mobility Some academics argue that the nature of housing tenure in the UK impedes labour mobility because: There is low mobility among tenants in rented accommodation in the social sector. Levels of owner occupation are high and rising (where mobility is quite low) Levels of private renting (where mobility is high) are low. Some believe this is an important reason for the low mobility of manual workers in the UK compared to the US, where there is a larger private rented sector There is much debate about the low mobility of social tenants: It could reflect difficulty in moving between local authority districts as preference is given to people in the local area already on waiting lists. DTZ would say this is certainly the case, especially for moves to Southern England, where social housing is in short supply. It could reflect the fact that tenants are more likely than average to be unemployed or low-skilled and thus, have fewer opportunities to get work in other parts of the country. It could reflect a lack of information on job opportunities in other parts of the country. Lower skill jobs tend to be advertised only locally. Social networks are also important in finding out about job opportunities (particularly for lower skill jobs) but these may only work well for social tenants at a local level Regional house price differentials also create a labour mobility trap characterised by: Homeowners from comparatively low priced regions that cannot afford to move to higher priced regions. Homeowners in regions with high house prices that are reluctant to move out because then they will not be able to afford to move back 16 Although this is based on 1980s data. 26

35 Once house prices do start to fall, people being reluctant to move into areas with falling prices, because investment in property seems unwise. A downturn in property prices making it difficult to sell, thus discouraging people from moving It is suggested that it may be owner occupied housing, rather than social housing, that is emerging as the major barrier to labour mobility in the UK, particularly for those in lower level occupations. This is because levels of owner occupation are now so high and lower income households have the highest levels of housing costs as a proportion of their overall incomes However, DTZ would question whether improved inter-regional migration flows would necessarily bring about greater regional convergence. Frequently, areas of high unemployment are within travelling distance of areas with high levels of vacancies (for example in London). If unemployed people are unable to compete successfully for existing nearby vacancies, increased regional migration may have only a limited effect on regional labour markets. 27

36 5 HOUSING AND PRODUCTIVITY 5.01 The Government has identified five main drivers of productivity growth in the UK: Skills Investment Enterprise Innovation Competition There has been little consideration of the role of housing on productivity in the UK to date. Certainly, it has not been identified as a key driver of productivity growth. The purpose of this section is to consider the impact of housing on productivity in the UK. The discussion is structured around the main drivers of productivity growth set out above. Skills 5.03 There is evidence that the growth potential of private sector businesses in certain parts of the country is being constrained by high housing costs and (related) labour shortages / high unit labour costs (see Section 6). However, evidence suggests that high income, skilled employees are relatively mobile, and aided by attractive re-location packages, are not discouraged strongly by high housing costs 1. We know that inter-regional migration rates have been increasing (see Table 4.3) and that those with higher levels of qualifications and skills are the most mobile (see Tables 4.1 and 4.2). Also, there is evidence that employers who are experiencing recruitment difficulties due to high housing costs are not generally encountering problems with the recruitment of people in higher level occupations (with the exception of new graduate positions). The greatest recruitment difficulties are finding people to take-up lower skilled / paid occupations (see Section 6) Thus, although there is evidence that housing is one of the factors that restricts labour mobility in the UK, there is little evidence that it is constraining the mobility of higherlevel skills in the economy at least in the private sector The situation is different in the public sector. Labour shortages linked to high housing costs are being experienced across all job levels in South East England. This is having an impact on productivity in the public sector and the quality of service that public sector organisations can provide. In the long run, this could have repercussions for growth and productivity in the economy as a whole if it affects quality of life and reduces the attractiveness of South East England to potential investors It is also important to consider the interplay between regional planning policy, the housing market and jobs/skills. The Barker Report says that many contributors to the Review made a case for constraining housing growth in the South East in order to encourage economic growth in other regions, using planning as a regional economic development policy tool. However, Barker said this was too simplistic. There is evidence that high levels of house price appreciation in the South have, perversely, made housing there a more attractive option than housing in other regions. This is because people expect a better rate of return from housing in expensive areas. Thus, restricting supply (which would increase prices further) would not necessarily have the desired effect of encouraging more investment and growth in other regions. 1 Meen et al (2001), The Economic Role of New Housing, The Housing Research Foundation 28

37 5.07 Meen et al (2001) 2 developed an indicative model to look at the impact of housing construction on regional economies. They found that restricting housing development in the South East was unlikely to produce compensating gains in the North. It is understood that the ODPM Affordability Model Research Project may explore issues of this kind in more depth Despite the general consensus that regional planning and housing policies should reflect the needs of the economy (and not restrict supply to divert economic activity elsewhere), there is concern that this is exactly what some Regional Spatial Strategies are doing. Or alternatively, that they are boosting housing targets to drive jobs growth In the South East of England, business organisations and SEEDA have expressed concern that the Draft South East Plan does not provide sufficient housing to match employment expectations. They argue that this will lead to higher house prices and more labour / skill shortages which will constrain economic growth in the region Conversely in North East England, people have questioned whether the region can realistically create enough jobs for the additional housing that is planned in the future ODPM has recently published a Guide to Improving the Economic Evidence Base Supporting Regional Economic and Spatial Strategies 4. The purpose of the document is to provide guidance on improving the use of economic evidence in preparing Regional Spatial Strategies (RSSs) and Regional Economic Strategies (RESs). Five main areas are identified where there is considered to be significant scope for strengthening the economic evidence for base for regional planning: Understanding underlying causes: there can be a tendency to produce large statistical compendia on the regional economy with little in-depth analysis of causal factors and relationships (the drivers of change). Using longitudinal evidence: much evidence is weighted towards description of current conditions, taking the form of baseline studies, rather than examination of past trends and future projections. Better interpretation of data analysis and modelling Testing the economic implications and market reality of policy: in some regions the strategy appears to be driven by unchallenged assumptions of business as usual or pre-conceived political aspirations. There is a danger the policy makers do not ask fundamental questions about the economic implications of adopting specific policy positions on the scale, type or location of development. In formal options testing processes, environmental and social issues have tended to outweigh economic considerations and evidence. There are generally no clear mechanisms for testing the market reality of the strategy, and there is significant scope to improve the quality of the engagement with the private sector in this respect. 2 Meen et al (2001) op cit 3 Findings from this research were published in December 2005 alongside the Government s Response to the Barker Review 4 ODPM (September 2005) Guide to Improving the Economic Evidence Base Supporting Regional Economic and Spatial Strategies 29

38 Integrating evidence across different policy areas and policy-making exercises: RDAs and RPBs need to consider how to synthesise evidence on different topics. For example, improving understanding of how housing provision impacts on economic competitiveness One section of the document looks at the importance of understanding housing-economy links so that housing strategies support regional economic growth. The view is that many housing assessments are relatively standardised evidence based studies. On the supply side, they include spatial analysis of permissions and completions, and housing capacity studies. On the demand side, work is detailed on affordable housing needs, but less detailed on private housing demand (except from a demographic perspective). The demand for private sector housing is still based mainly on demographic projections with limited consideration of how future developments in the economy could affect the demand for housing. It is concluded: The challenge is to link these analyses to economic considerations and to go beyond a capacity driven approach. Achieving a better understanding of housing economy links requires synthesis of different types of evidence across different topic areas, and the inputs of stakeholders from different sectors For example, a policy of focusing new housing development on previously developed land does not necessarily sit well with maximising economic growth. Areas with significant levels of vacant brownfield land are often those where the economy has been in decline. Investment 5.14 The evidence is mixed on whether there is a relationship between the housing market and capital investment by businesses. One hypothesis is that if businesses are facing rising costs due to the high cost of housing (and hence wages), they will have less capital to invest in the business. There is some evidence to support this hypothesis. A business survey in South East England found 13% of companies affected by housing costs, were deferring or cancelling investment in their company due to rising costs or a lack of competitiveness However, the same survey finds that 25% of companies that have experienced difficulty in recruiting and retaining staff due to high housing costs, have increased investment in capital in order to reduce their demand for people. There is even evidence that this can take place in people-intensive industries where it is commonly thought to be difficult to substitute capital for labour. For example, evidence from the hotel sector shows how the need for kitchen staff has been reduced by investment in a large steam oven which can heat pre-prepared meals for a large quantity of people. The hotel manager stated that this represented a significant improvement in efficiency. This shows how a tight labour market may be a spur for innovation in some situations There is debate about whether housing policy constrains business investment in premises and property. The McKinsey study on productivity said that one of the reasons for low productivity in the UK was planning regulations which prevented the most productive companies from expanding, and prevented prospective new competitors from entering the 5 SEEDA (2003) The Economic Impacts of Housing Affordability 30

39 market 6. There is concern that the pressure to release land for housing may be having a similar effect on business investment National policy in PPG3 establishes a direct link between land for employment and housing. It says that Local Planning Authorities (LPAs) should review their non housing allocations and consider whether some of this land might be better used for housing or mixed use development In 2002, ODPM published research on the implementation of PPG3. 8 This looked at the release of employment land for housing. It found that just under a half of Local Plan reviews of employment land led to the reallocation of land designated from employment to housing. In terms of regional variation a significant proportion of studies undertaken in Eastern England (63%), the West Midlands (40%) and Yorkshire and Humberside (33%) identified a surplus of employment land suitable for release for housing. Conversely, regions where a significant proportion of employment land reviews did not identify a surplus include the South West (46%), the South East (45%), the North West (42%), and the West Midlands (40%). In the North East, almost a third of local employment land reviews identified a surplus of employment land, but concluded that it was not appropriate to release this land for housing The research revealed a number of different methodologies for carrying out employment land reviews and recommended that good practice guidance was needed to ensure a consistent and robust approach. In 2004, the ODPM published a Guidance Note on Employment Land Reviews. 9 It said that it had become common practice, in existing local plans, to: Identify sites for particular types of employment (eg B1, B2 and B8) Identify sufficient sites to provide businesses with a choice of sites and to provide for the expansion of key local employers Seek to protect key or strategic sites currently in, or designated for, employment use; and Carry forward undeveloped allocated employment sites from the previous plan period without appraising their current fitness for purpose In some areas, this had resulted in Local Plans that identified numerous employment sites, some of which would never be developed or returned to employment use, since they did not match existing or foreseeable market requirements. In light of PPG3 (and other policy developments) it was important for all local authorities to carry out thorough reviews of employment land provision. 6 McKinsey Global Institute (1998) Driving Productivity and Growth in the UK Economy 7 PPG3, DETR ODPM (2002) Delivering Planning Policy for Housing: PPG3 Implementation Study 9 ODPM (2004) Employment Land Reviews Guidance Note 31

40 5.21 DTZ has been involved in undertaking a number of employment land reviews for local authorities prompted by this guidance. These have been mainly for local authorities in Southern England (including London). Key points from these studies are: Local authorities are coming under increasing pressure to release employment land for housing. This is not only from PPG3. Draft Supplementary Planning Guidance on Industrial Capacity in London recommends that hectares of employment land per annum should be released across the capital to bring demand and supply into equilibrium (and to enable surplus employment land to be re-used for other development). Generally, the demand for office floorspace is expected to increase and the demand for industrial floorspace is expected to decline in the future. This is a trend that has been happening for many years (see below). In general, there will be a growing surplus of industrial land (some of which could possibly be released for housing). Office floorspace is generally less land intensive since development occurs on multi-storey buildings. A key issue is to ensure there is sufficient high-quality provision for new office development in the future. This cannot necessarily be achieved by re-allocating industrial land for office use. In general, local authorities are keen to maintain a good stock of employment land and there is no evidence that PPG3 or general housing pressures are constraining employment land allocations However, there is an issue about the protection of existing employment sites. There is mounting pressure from developers and landowners to turn existing employment sites into higher value uses (ie housing and/or retail). Local authorities vary in the extent to which there is protection for existing employment sites in the local plan. Most local authorities protect larger existing employment sites. However, the situation is more mixed with respect to smaller employment sites ie. small office blocks, small industrial estates, workshops, car showrooms and so on. One local authority (in an area of high housing 32

41 pressure) has said that no change of use from employment to residential will be considered unless it can be demonstrated that there has been no interest in an employment use for the site for five years. However, we are aware of other local authorities (also in areas of high housing pressure in Southern England) who have no policies to protect sites of this kind. Consequently, some are being developed for housing Whether or not local authorities have policies to protect existing employment sites (aside from their larger sites) seems to depend on whether or not they wish to promote economic development. Some local authorities are keen to have a strong local employment base even if many residents do not depend on the local area for employment. Others are more ambivalent about economic development and sometimes favour change of use to residential because it means less housing pressure on greenfield land It is possible that policies of this kind may constrain business investment in terms of companies being able to find appropriate premises / property. However, it is likely that the impact on high value businesses is relatively small. They will be able to afford space on high profile, strategic developments which are well protected The greatest impact is likely to be felt by the small business sector. In particular, trends of this kind are likely to lead to a shortage of affordable space for new business start-ups. In the long term, this could constrain new enterprise (which is one of the Government s key drivers of productivity growth). Problems of this kind will be most acute in areas of high housing pressure (mainly Southern England), which is a particularly important area for new enterprise (see Figure 5.1 overleaf). Of course, new businesses are increasingly in the service sector and often have little need for formal business premises many can be run from home so maybe this issue will not be as important for new enterprises as one would think. Enterprise 5.26 There are large regional differences in business start-up rates across the UK. People in London and South East England are much more likely to start a business than their counterparts in other regions in the UK, particularly the North East of England, Scotland and Wales. 10 This has been a feature of the last two decades and the gap between the regions with the highest and lowest rate of new VAT registrations has actually widened over this period (see Figure 5.1). 10 HM Treasury (2001) Productivity in the UK: The Regional Dimension 33

42 Figure 5.1 Business Start-Ups Per 10,000 Resident Adults by Region Source: HM Treasury (2001) Productivity in the UK: The Regional Dimension 5.27 It is interesting to consider whether there could be a relationship between housing and business start-up rates which could help to explain this variation in business start-up rates across regions There is evidence that the availability of collateral (which in the UK is normally equity in the family home) does have an influence on new firm foundation. Black et al (1996) 11 cite previous research by Binks et al (1988) 12 which found that for 85% of UK business loans, the ratio of collateral provided to the size of the loan exceeded unity. In other words, the value of the security was greater than the value of the loan. For loans below 150,000 the average ratio of collateral to advance was 5.6 on overdrafts and 3.1 on fixed term loans. For example, a 10,000 overdraft would be secured by 56,000 of personal assets and a 10,000 fixed term loan would be secured by 31,000 of personal assets The research revealed that the interest rate charged on small business loans was relatively small: it averaged less than 3% over base rate and was virtually never in excess of 6%. An investigation by the Bank of England in found virtually the same distribution of interest rate margins. Low interest rates do not imply that starting a business is a low-risk activity. What it implies is that banks perceive their own risk exposure is limited due to 11 Black, Meza and Jeffreys (1996) House Prices, the Supply of Collateral and the Enterprise Economy, The Economic Journal Binks, Ennew and Reed (1988) Small Business and Banks: A Two Nation Perspective 13 Bank of England (1993) Small Businesses and Their Banks 34

43 their insistence on collateral. Further support for this interpretation is the study by Cressy (1993) 14 which revealed that 95% of overdrafts in excess of 20,000 were secured by personal assets The research studies above indicate that banks are the main source of finance for start-up businesses. Binks et al (1988) reported that 73% of external finance received by small businesses originated from banks. Evidence from Cressy (1993) suggested that 50% of start-ups requiring finance have some form of bank loan. If banks are the main source of finance for start-up businesses and they are reluctant to sanction unsecured lending, the family home (which is usually the most valuable asset people own in the UK) may have an important influence on new firm foundation in this country Black et al s own empirical work suggested that lack of collateral was a major constraint on the level of business starts. Work by others also points to the importance of collateral in explaining entrepreneurship. Research in the US has shown that borrowing power helps to explain business formation A more recent paper by MacLennan, Muellbauer and Stephens (2000) 15 supports the importance of collateral in promoting enterprise. It reports that finance for small businesses is largely from retained earnings, bank finance and private loans. It also reports that banks in the UK place greater emphasis on collateral in their lending practices than banks in many parts of continental Europe where relationship banking seems to be more important Thus, there is evidence that the housing market may have a role to play in the rate of new firm foundation. This may be one of the reasons why business start-up rates are highest in Southern England where high house prices have given people the opportunity to build up most equity in their homes. But this will not be the only reason why business start-up rates are high in Southern England - this part of the country also has the highest skill levels - and this will have a significant influence on levels of enterprise. Innovation 5.34 A major driver of innovation is business investment in research and development. As discussed above, if high house prices are pushing up labour costs, it is possible that firms may cut back expenditure on research and development (although there is no hard evidence of this). The evidence on whether high house prices cause businesses to increase or reduce capital investment is mixed as explained earlier Workforce skills are another important driver of innovation and creativity. The housing market could undermine innovation by making it difficult for people to live where they can be most creative and productive. However, the evidence is that although the housing market does have some impact on labour mobility, highly qualified and skilled people are relatively mobile and are not discouraged by high housing costs from locating where they can use their skills to best effect However, this may change in the future. The evidence is that affordability has worsened in the last few decades and will continue to get worse in the future. ODPM research suggests 14 Cressy (1993) Loan commitments and Business Starts: An Empirical Investigation of UK Data, Warwick Business School. 15 MacLennan, Muellbauer and Stephens (2000) Asymmetries in Housing and Financial Market Institutions and the EMU, Jenkinson (ed) Readings in Macroeconomics, Oxford University Press 35

44 that by 2026, the proportion of 30 something couples able to afford to buy their own home is set to fall to approximately a third, compared to half of couples today and two-thirds in the late 1980s if the country carries on with current building rates. 16 Even now around 25% of first time buyers are relying on gifts and family loans to afford a deposit, compared to just 4% 25 years ago This could have a dramatic effect on all the drivers of productivity growth in the future, including innovation, if it leads to talented young people leaving the UK to find a better quality of life elsewhere. CONCLUSIONS Skills 5.38 Although there is evidence that housing is one of the factors that restricts labour mobility in the UK, there is little evidence that it is constraining the mobility of higher-level skills in the economy at least in the private sector In the South East of England, business organisations and SEEDA have expressed concern that the Draft South East Plan does not provide sufficient housing to match employment expectations. They argue that this will lead to higher house prices and more labour / skill shortages which will constrain economic growth in the region in the future. An issue is that housing projections seem to be driven mainly by demographics with limited consideration of how the economy could affect the demand for housing. Investment 5.40 The evidence is mixed on whether there is a relationship between the housing market and capital investment by businesses There is concern that the pressure to release land for housing may make it more difficult for businesses to find new premises when they need to expand or change working practices. This could undermine productivity. However, local authorities are keen to maintain a good stock of employment land and there is no evidence that PPG3 or general housing pressures are constraining employment land allocations There is an issue about the protection of existing employment sites. Larger employment sites are usually well protected. However, the situation is more mixed with respect to smaller employment sites ie. small office blocks, small industrial estates, workshops, car showrooms and so on and many are being developed for housing. The impact of this on high value businesses will probably be negligible. They will be able to afford space on high profile, larger developments that are well protected. The greatest impact is likely to be felt by the start-up and small business sector. Of course, new businesses are increasingly in the service sector and often have little need for formal business premises many can be run from home so perhaps this will not constrain enterprise as much as it might have done in the past. Enterprise 5.43 There is evidence that banks are the main source of finance for start-up businesses and that they are reluctant to sanction unsecured lending. Thus, the family home (which is usually 16 ODPM Press Release, 10 October

45 the most valuable asset people own in the UK) is likely to have an important influence on new firm foundation in this country This may be one of the reasons why business start-up rates are highest in Southern England where high house prices have given people the opportunity to build up most equity in their homes. But this will not be the only reason why business start-up rates are high in Southern England - this part of the country also has the highest skill levels - and this will have a significant influence on levels of enterprise. Innovation 5.45 There is no hard evidence of a link between housing and innovation. However, if affordability continues to worsen to the extent predicted by Barker and the ODPM, this could lead to large numbers of talented young people leaving the UK to find a better quality of life elsewhere. This would have a dramatic effect on all the drivers of productivity growth in the future, including the capacity of businesses to innovate. 37

46 6 IS THE AVAILABILITY AND COST OF HOUSING AN ISSUE THAT CONCERNS UK BUSINESSES? 6.01 Scarce and/or expensive housing may affect business competitiveness by causing higher wages and/or labour shortages, which in the case of key workers may impose social costs as well. These effects are much discussed but there has been little rigorous research about them. Research on Planning, Competitiveness and Productivity 6.02 In 1998, the McKinsey Global Institute 1 argued that land use regulations played an important part in explaining why UK productivity lagged other nations. The labour productivity gap has four root causes..product market and land use regulations prevent the most productive companies from expanding, allow less productive companies to remain in business, and prevent or discourage prospective new competitors from entering the market Many in the UK agreed with the McKinsey Report saying that the planning system was a major impediment to business. In response, the House of Commons Housing, Planning, Local Government and the Regions Select Committee announced an Inquiry into The Effects of Planning on Competitiveness and Productivity in October As part of the Inquiry, the Committee commissioned an external review of the literature on this issue, which was then considered at a peer review seminar The key finding from the literature review (published in December 2002) was there is no evidence that planning is a significant explanatory factor for the UK s low productivity compared to its main competitors. The oral and written evidence received supported this statement and the Select Committee (which reported in January 2003) concluded our evidence shows that planning is not a significant factor in determining productivity, even in the retail sector. Skills, innovation and investment are the most important The literature review undertaken for the Select Committee Inquiry looked specifically at the impact of housing supply on business competitiveness. It concluded in the present state of knowledge, so far as we can tell, there is no conclusive evidence to say whether the price and availability of housing have a significant impact on business competitiveness. The literature review did, however, refer to a study that the consultants were undertaking for SEEDA, investigating the economic impacts of housing affordability in the South East. This was published in 2003 and provides a useful analysis of the impact of housing on business competitiveness. The Economic Impacts of Housing Affordability, SEEDA, The study surveyed employers in both the private and public sectors in South East England. In the private sector, 200 employers were interviewed. In the public sector, 1 McKinsey Global Institute (1998) Driving Productivity and Growth in the UK Economy 2 House of Commons (2003) Select Committee Report on Planning, Competitveness and Productivity (Session ) 3 Roger Tym and Partners (2002) Planning, Competitiveness and Productivity: Literature Review 4 SEEDA (2003) The Economic Impacts of Housing Affordability, Roger Tym and Partners 38

47 interviews were undertaken with 27 organisations. Although the sample of public sector organisations is small many had wide-ranging human resources responsibilities such as Local Education Authorities and NHS Trusts. Key findings from the study are summarised below. The Private Sector 6.07 The survey showed that 28% of private sector businesses were experiencing difficulties in recruiting the staff they needed. Of these, 44% said that high local housing costs had a bearing on those difficulties. This represented 12% of those surveyed These findings are supported by a survey undertaken by Runnymede District Council in 2001 which received 252 responses. The Runnymede research was designed to establish whether or not employers had a problem with recruitment and retention of staff, and whether this was specifically related to the availability and cost of housing. 40% of respondents said they were having problems with the recruitment and retention of staff and of these, 36% ascribed their problems in the main or in part to housing costs (15% of employers overall). The survey included both private and public sector employees The SEEDA research showed that in the private sector, difficulties were being experienced in recruiting workers mainly at the lower end of the pay scale (see Table 6.1), although new graduate recruitment was also a problem for many. Table 6.1 Private Sector Recruitment Difficulties by Wage Level / EmploymentType % of those reporting recruitment difficulties Lower 50 New Graduate 38 Management 13 Senior 0 All Levels % of employers reported that they had increased pay in response to local housing prices. This increased to 33% among those who had experienced difficulty in recruiting, indicating a definite link between the cost of housing and wage levels Retention appeared to be less of a problem than recruitment for employers in the private sector. Only 5% of employers reported staff retention problems as a result of high housing costs An issue is whether high housing costs lead businesses to re-locate to other parts of the country (which would be beneficial in terms of achieving greater regional convergence). Historically, there is evidence of this process taking place, with research indicating that the late 1980s boom period saw an outward shift of people and firms from parts of London and the South East in search of cheaper locations and less congested environments. The survey undertaken for this study indicates that the situation may be different this time, perhaps due to the scale of the late 1980s shake-out Business location decisions are taken on the basis of a number of factors, including the availability of skills, site operating costs and proximity to markets. Location decisions are often the result of a trade-off between these factors. The survey found that only 10% of companies had looked into the possibility of relocating outside the South East due to high 39

48 housing costs. Companies reporting recruitment difficulties were no more likely to be considering re-location than those not reporting recruitment difficulties. The survey suggests that for most businesses, the locational advantages of the South East (access to knowledge clusters, access to high quality labour pools, access to key infrastructure, proximity to Europe) outweigh the costs of doing business in the region For example, research-led companies in Oxford are highly sensitive to location. One reported being willing to pay a high price for an Oxford address that establishes the company s credentials around the world; another stated they would not move due to the value of having close proximity to other cluster companies; and a third stated they were looking to move, but would not move more than 30 miles as they wished to stay in touch with the cluster Businesses which are considering re-location due to high housing costs tend to be in the more cost-sensitive mature markets: Manufacturing one manufacturer in Reading agreed strongly that housing had a negative impact on business performance and recruitment was a problem across the board. The company decided to re-locate the engineering department to the Midlands where rent and labour rates were cheaper. Staff were offered re-location packages or redundancy. Engineering one engineering company said housing costs will definitely have a long term effect on salary expectations impacting on our competitiveness, which will accelerate any decision to move manufacturing to a low cost country PC Manufacture due to the tight labour market, one PC company representative stated that new employees were generally being taken on at the company s offices in the south of France. The representative also said the company would be expanding in Romania or somewhere similar Thus there is evidence that high housing costs may drive some employment from the South East (and other high cost locations), but there is not likely to be a mass exodus. This is not necessarily a bad thing for the economy. It may help to increase productivity and prosperity if: Such businesses are replaced by higher value-added industries where housing costs are out-weighed by the benefits of being located in the South East (in terms of proximity to skills, clusters etc). Such businesses locate to less prosperous parts of the country and create jobs where they are badly needed. However, the evidence from this survey is that jobs will not necessarily move to other parts of the UK, but overseas to even lower-cost locations. The types of businesses that are affected (lower value added manufacturing activities) can operate just as easily in other countries with lower cost bases. The Public Sector 6.17 The survey showed that the public sector s recruitment difficulties are more intense than those experienced by the private sector. The survey showed that 78% of public sector respondents were experiencing difficulties in recruiting the staff they needed. Of these, 89% said that high local housing costs had a bearing on those difficulties. This 40

49 represented 63% of those consulted. The majority of respondents believed the problem was due to the cost of housing to buy rather than rent The survey showed that in the public sector, difficulties were being experienced in recruiting workers at all levels, not just mainly in lower paid jobs as in the private sector. Table 6.2 Public Sector Recruitment Difficulties by Wage Level / EmploymentType % of those reporting recruitment difficulties Lower 6 New Graduate 6 Management 25 Senior 19 All Levels Public sector interviewees were asked whether the quality of their services was being affected by recruitment and retention problems. About a third felt that the quality of their services was being affected. Strategies for coping with recruitment problems were as follows: Grade inflation is becoming more common employers appoint individuals to grades in advance of their particular experience which can mean a significant addition to salaries for some workers. Agency staff are being more widely used agency staff are generally paid significantly more by the agency than they might expect if they were in the post as a standard full-time employee. This is in effect a de-facto breakdown of the national pay bargaining system for some sections of the public sector workforce. There is increasing use of workers from abroad NHS Trusts are increasingly recruiting from abroad. One NHS interviewee reported that overseas staff tend to be more willing to tolerate cramped living conditions than their UK counterparts. State of Housing, Sussex Enterprise, A recent business survey in Sussex confirms some of the findings from the SEEDA research A survey of 1400 employers indicated that 17% of employers were experiencing difficulties in recruiting the staff they needed. Of these, 28% said that high local housing costs had a bearing on those difficulties. This represents about 5% of those surveyed The figures are smaller than for the SEEDA research probably reflecting the fact that housing costs are not such a great issue in Sussex as across the South East Region as a whole which includes hotspots such as Surrey, Buckinghamshire and the Thames Valley Businesses were also asked about the extent to which lack of affordable housing was affecting their business generally. Only a small proportion said it was a major constraint to growth but about one in five said it was constraining their ability to improve their 5 Sussex Enterprise (2005), State of Housing, June

50 effectiveness to some extent (similar to the proportion citing housing costs as a barrier to growth in a recent CBI survey as discussed below) The research supports a number of key findings from the SEEDA research: Recruitment problems due to high housing costs are more intense in the public sector. The research found the sectors most likely to have experienced recruitment difficulties because of high housing costs were: Public sector Retail, transport and financial services also reported some difficulties. The problems relate mainly to the recruitment of lower paid staff: Customer facing staff (call centres, retail assistants, hospitality occupations) Low skilled staff (such as baggage handlers) Skilled technicians / trades people. Brighton and Hove: The Barriers to Economic Development This research undertaken by the Cambridge Centre for Housing and Planning Research into the demand for affordable and key worker housing in Brighton includes some discussion on the impact of high housing costs on the recruitment and retention of staff in the city. Key points are: Although it is difficult to estimate the overall scale of the problem, there is evidence of staff shortages and high vacancy rates in the Brighton and Hove area, particularly in the public sector. Private sector employers are also feeling the effects of Brighton s high housing costs. Call centres, for example, rely on large numbers of relatively low-paid workers. While there will always be a need for hospitals and schools to serve the local population, many private sector businesses are not similarly tied to the area. There is already evidence that one major employer has relocated some of its operations to India, using its Brighton based staff to train them. Regional Survey of UK Economic Trends, CBI, A recent CBI business survey (undertaken in March 2005) shows that housing costs are a factor inhibiting business growth in the private sector (see Chart 6.1). 6 Cambridge Centre for Housing and Planning Research and Enterprise LSE (Christine Whitehead, Kath Scanlon, Sarah Monk and Christina Short) Brighton and Hove: The Barriers to Further Economic Development CBI (2005) A Results Overview of the Regional Survey of Economic Trend, June

51 Figure 6.1 Top Ten Factors Inhibiting Growth in GB (% of companies) Regulation / Red Tape Finance Shortage Inadequate Business Support High Unit Labour Costs Hard to Attract Staff to Region Transport Costs Skill Problems Housing Cost Planning Restrictions Lack of Appropriate Workspace Source: CBI 6.27 Not surprisingly, housing costs are a greater issue for businesses in more expensive parts of the country. In the South East, 26% of businesses consider housing costs to be a restrictive factor on business growth. It is also an important issue in the East of England (21%) and London (20%) There is no analysis of what types of businesses are experiencing these problems, whether it would lead them to re-locate from the region and where they would go High unit labour costs (which are affected by housing costs) are also a significant barrier to business growth particularly in South East England. Again, however, there is no further analysis of what types of businesses are experiencing these problems, whether it would lead them to re-locate from the region and where they would go. Conclusions 6.30 There is a concern that a point may be reached where the high cost of housing has a significant impact on business competitiveness leading to a rapid change in business sentiment towards being located in particular parts of the UK, or in the UK at all Despite this concern, it is not necessarily a bad thing if businesses move from prosperous parts of the country to less prosperous areas. It may help to increase economic growth by giving a boast to less successful regions that need more employment. There are also benefits in more successful regions losing lower value businesses so they do not crowdout the more successful ones that derive most positive benefits from being in high-cost parts of the country. 43

52 6.32 The evidence is that high housing costs are creating problems for a small (but still significant) proportion of private sector businesses: 12% are experiencing labour shortages / recruitment difficulties due to high housing costs in the South East; 10% of private sector businesses have considered re-location from the South East due to high housing costs. The businesses affected are in more cost sensitive, lower value sectors. As highlighted above, their re-location could be beneficial if they moved to other lower cost parts of the country. However, the evidence (albeit limited to a single study) is that much employment squeezed out of the South East could leave the country altogether In the private sector, labour shortages / recruitment difficulties linked to high housing costs are mainly being experienced at the lower end of the pay / occupational scale, although new graduate recruitment is a problem for many. It seems that people in more highly skilled and better paid jobs in the private sector can afford housing in more expensive parts of the country, and are not deterred from working in South East England or elsewhere In the public sector, labour shortages linked to high housing costs are more severe. Levels of pay are lower in the public sector are relatively low for many occupations and it seems that this does deter people from working in the public sector in more expensive parts of the country. Also public sector organisations have less scope to increase pay in response to high local housing costs (due to national pay agreements). These problems generate social costs in terms of the quality of service it is possible to provide to local residents. In the long run this could have a significant effect on the economy if it reduces quality of life and the attractiveness of the area to existing businesses and potential investors. 44

53 7 THE ROLE OF HOUSING IN REGIONAL ECONOMIC DEVELOPMENT 7.01 There is much debate about how housing affects the efficient operation of the labour market in the UK, by restricting labour mobility. However, greater labour mobility is not necessarily the key to addressing regional economic imbalances and increasing economic growth There is a danger that increased mobility could increase social polarisation by reinforcing powerful existing forces of growth and decline. If more people move from declining to booming areas, the declining areas lose valuable resources (especially skilled labour) making it more difficult for them to attract investment in the future. A vicious circle of decline begins which can lead to deep-seated problems of deprivation and decline in the future. The National Evaluation of the SRB Programme found that many of the problems of deprived areas could be traced back to key employers leaving an area and subsequent out-migration of people and resources The importance of housing policy in economic development at the regional and subregional level, and the potential for housing policy to play a role in regional and subregional economic development, has been little considered by practitioners. DTZ believes housing can contribute to economic development in a number of ways: It can contribute to the process of physical regeneration bringing redundant and derelict sites back into use, and therefore improving the overall urban environment. Housing development can reinforce efforts to upgrade town and city centres. The creation of a resident population in city and town centres reinforces the demand for services in those areas, thus helping achieve the twin objective of vitality and viability. It can improve the range and quality of housing in an area which is an important part of an area s quality of life offer. The type and mix of housing development can help to attract particular types of inmigrants, and change the socio-economic profile and skills profile of an area. This in turn affects the prospects for securing both leisure and retail investment and business investment. It can help to contribute to the creation of mixed income communities, and help offset the difficulties that arise from having large concentrations of particular groups in one area, particularly of low income groups This section firstly considers the potential role that housing can play in promoting economic development (bullets 1-4 above). It then considers the role that housing can play in tackling deprivation and social exclusion. THE ROLE OF HOUSING IN ECONOMIC DEVELOPMENT EVIDENCE BASE Competition for Skilled Workers is Influenced by Housing 7.05 Crucial to the relationship between housing and economic development is the link between skills / human capital and housing. Meen and Andrew (2005) 1 report research by Glaeser 1 Meen and Andrew (2005) The Role of Housing In City Economic Performance, in City Matters (Ed Boddy and Parkinson) 45

54 and Shapiro (2001) 2 in the US which found that the growth rates of cities in the 1990s were closely correlated with resident s education. Lee and Murie (2004) 3 believe the most successful cities and regions in the future will be those that have clusters of creative and high value added businesses which compete and collaborate and draw upon a highly skilled and talented labour force Lee and Murie believe that highly skilled workers in the knowledge economy will increasingly exercise choice about where they want to live. This is because they will not be tied to a particular place of work as much as in the past. Also there will be lots of competition for their skills in the new knowledge-based economy. If skilled workers cannot find the quality of environment they want in one location (and housing is one of many factors in this), they will move to places where they can find them Lee and Murie believe these skilled workers will generally seek owner-occupation. In Britain, the majority of people aspire to be owners. Knowledge workers may use high quality rented housing for short transition periods but are likely, in the longer term to want to invest in properties that will appreciate in value and be an asset later in life. They will also want access to good quality neighbourhood facilities including schools, and environments that are safe and tolerant Basically, places that provide a wide range of attractive housing are more likely to appeal to knowledge workers. Lee and Murie say these types of considerations have begun to have an impact on policy. Concern with the competitiveness of locations is no longer seen as simply relating to infrastructure issues. Comparative advantage is being associated with more attractive environments and better housing opportunities. Good quality housing is increasingly a driver of economic success rather than a consequence of it. Locations that want to be in a position to adjust most effectively to the development of the knowledge economy will be those places which provide attractive places for middle and higher income households to live A Regional Housing Aspirations Study has recently been undertaken in the North East. 4 The background to this research is concern that the region does not have the right mix of housing and that this is a barrier to economic growth and in-migration. Figure 7.1 shows that the North East has a low proportion of detached housing which is seen as a barrier to attracting higher and middle income households. 2 Glaeser and Shapiro (2001) City Growth and the 2000 Census: Which Places Grew and Why? Center on Urban and Metropolitan Policy 3 Lee and Murie (2004) The role of Housing in Delivering a Knowledge Economy, Built Environment Vol 30(3) 4 Nathaniel Lichfied and Partners (2005) Regional Housing Aspirations Study 46

55 Figure 7.1 Regional Housing Stock Profile Comparison Source: ODPM Statistical analysis shows there is a clear urban / rural split in the region: The undersupply of detached housing within urban areas in combination with the degradation of the physical environment have created significant push factors that encourage out-migration of higher and intermediate socio-economic groups. Conversely, the availability of larger detached housing and a more attractive environment in rural and suburban areas has created important pull factors. Increasingly, higher and intermediate socio economic groups are moving to rural and suburban areas to achieve their housing aspirations A telephone survey of 3000 households within the region was undertaken as part of the research to explore housing aspirations. Households were divided into five socio-economic categories: Wealthy Achievers Urban Prosperity Comfortably Off Moderate Means Hard Pressed Households were asked to consider the types of housing development they would prefer. The findings are shown in Table

56 Development Type Waterfront apartments e.g. Hartlepool Marina New developments in town centres New developments within areas of older terraced housing New developments within existing suburbs of predominantly Council/rented housing New developments within existing suburbs of predominantly private housing New houses or flats in new estates on the edge of existing towns New urban developments near to open space/parkland/woodland Rural market towns e.g. Barnard Castle, Great Ayton Table 7.1 Types of Development People Would Consider Wealthy Achievers Urban Prosperity % Would consider by ACORN Group Comfortably Moderate Hard Off Means Pressed AVERAGE Rural Village NB: Least favourite option for each ACORN group highlighted in red, favourite in blue 7.13 Key points are: The most affluent households prefer rural locations, presumably because of the availability of larger detached housing and other quality of life factors Intermediate socio-economic groups are happy to live in urban areas but only if the right conditions are met. In particular, that they are in good locations with a high quality environment The survey confirms that higher and intermediate socio-economic groups prefer particular types of housing, and areas which cannot meet these requirements are likely to struggle to attract high income households in the future The North East Housing Aspirations Study suggests that town centre housing development is not popular. However, it is acknowledged that this type of housing is likely to appeal to 48

57 young professionals who are also a key group that need to be targeted in the new knowledge economy Meen and Andrew report that many city centres are experiencing a revival in prosperity by appealing to young, high income, professional people. They report a case study of Central Manchester (Robson et al 2000) 5 which showed: 40% of households were single person households and over 50% were two person households (few contained children); most were employed in the professions in Central Manchester; and 35% had been drawn to the city from outside the North West. This shows how it is possible to attract particular types of migrants and to change the socio-economic and skills profile of an area, through creating attractive housing and associated leisure / entertainment/ retail facilities. Competition for Business Investment is Influenced by Housing 7.17 The factors that determine an area s attractiveness to businesses are varied and it is usually a mix of factors that determine the final location decision. However, there is evidence that the quality of housing is an important consideration, both directly (in terms of the quality of life) and indirectly (in terms of the availability of a skilled workforce) DTZ has reviewed research for previous studies to establish the most influential factors for investing companies. The most commonly recurring themes throughout the literature are, in order of importance: Economic diversity, industrial structure and strength of the local economy; Availability of a skilled workforce and human capital; Level of connectivity and telecommunications capacity; and Quality of life Although core issues for relocation are labour market considerations and suitability of the local business environment, a 2004 study by the Office of the Deputy Prime Minister (ODPM) 6 concludes that: The evidence is that it is the overall mix of factors which matters most. Quality of life may not be the absolutely critical variable like innovation, diversity or connectivity. But like governance and strategic capacity it does increasingly matter 7.20 The ODPM questionnaire to policy-makers explored these quality of life issues in some depth. A number of features were rated as important including: Nationally and internationally recognised facilities for events; Sophisticated cultural infrastructure and services; A centre of European distinctiveness; A wide range of high quality residential choices; 5 Robson et al (2000) The State of English Cities, DETR 6 ODPM (2004) Competitive European Cities Where Do the Core Cities Stand? 49

58 Fiscal incentives available; The impact of national government policies, including their strategic support for development and the powers and resources allocated; A reputation for environmental excellence and responsibility; and A reputation for effective governance and efficient services While it is acknowledged that the key influences remain the labour market (which is influenced by housing as discussed above) and local economic climate, the ODPM explicitly states the increasing importance of these softer additional drivers including the quality and range of housing It is clear that while high quality housing alone may not be enough to attract significant inward investment, a lack of high quality of housing may preclude it. THE ROLE FOR HOUSING IN TACKLING DEPRIVATION AND SOCIAL EXCLUSION 7.23 The UK economy has benefited from strong economic growth, but as in most other industrialised nations, the most well off households have benefited most from this prosperity. From , incomes for the top tenth of individuals rose by nearly 70%, even as incomes for the bottom tenth fell by 8%. The gap between rich and poor has grown more slowly in recent years than in previous decades, but income inequality in the UK still reached a 40 year high in (see Figure 7.2). Figure 7.2 Share of Income Held by Top and Bottom Deciles of Household Income Distribution Source: ONS and Berube (2005) 7.24 Over recent decades, the poor have become increasingly concentrated in some social housing estates. Berube (2005) 8 explains that whereas the social sector once housed members of the affluent working class, today it contains high concentrations of the poor and workless. In the 1970s, only 11% of households living in social rented homes had no 7 Berube (2005) Mixed Communities in England, Joseph Rowntree Foundation 8 Berube (2005) op cit 50

59 earner, by that proportion had risen to 69%. As a result, the income profile of social tenants shifted dramatically, such that today about two-thirds of social sector households have incomes in the bottom three deciles nationally (see Figures 7.3 and 7.4). Figure 7.3 Income Profile of Social Sector Households 1970 Source: Page (2002) and Berube (2005) Figure 7.4 Income Profile of Social Sector Households 2003/04 Source: ODPM 2003/04 and Berube (2005) 7.25 Several factors account for this concentration of deprivation in the social housing sector. First, growth in home ownership (in part brought about through right to buy sales) siphoned off middle-income households from the social sector. Second, investment in new social housing declined and there has been pressure to focus remaining provision on the most disadvantaged and vulnerable groups. 51

60 7.26 Research has shown that concentrations of deprivation limit the life chances of people living within them, above and beyond their own personal circumstances. Put another way, area effects suggest that a poor individual living in a poor neighbourhood experiences worse outcomes than an identical individual living elsewhere For example, high levels of workforce inactivity in areas of deprivation mean individuals are isolated from people in work. This effectively excludes them from informal social networks that are crucial to helping people find jobs and advance in their careers. 9 Research from the US also suggests that high levels of worklessness may also affect long term employment outcomes because the community (including children) fail to regard work as a social norm and do not invest in the skills necessary for labour market success. There is also evidence that concentrations of low income pupils affect achievement. The probability of pupil success at primary school level is strongly related to intake characteristics and neighbourhood wealth, more so than teacher qualifications and expenditure per pupil Housing policy has a key role to play in reversing these trends. Berube says if policymakers were to follow a truly robust agenda on this front, it would include three strands: Ensure the availability of affordable housing within new communities and prevent the development of exclusively high or low income neighbourhoods Foster a wider mix in existing communities that lack economic diversity, particularly in highly deprived areas Actively monitor neighbourhoods to prevent communities that currently have a mix of households tipping towards a homogeneous make up Several recent initiatives mean the first strand above is beginning to happen in new developments: PPG3 asserts that LPAs should encourage the development of mixed and balanced communities in order to avoid areas of social exclusion. Proposed revisions to PPG3 look at how new development should achieve a mix of housing by size, type and affordability. Much new affordable housing, while funded through social housing grant and other subsidy programmes, is built as a result of Section 106 agreements and other obligations negotiated through the planning process. In this way, social housing is part of communities containing new market housing. High profile new developments supported by the Government have underscored its commitment to building mixed communities ie. the Millennium Village initiative However, such policies do little to change the social mix of existing communities. If housing policies embrace the notion of mixed communities for new build, should they not also seek to foster a greater mix in existing communities, especially those with high 9 The main way in which people obtained their current job was through hearing about if from someone else (Labour Force Survey 2002) 52

61 concentrations of social (mostly local authority) housing that characterise areas with the worse levels of deprivation? 7.31 There are a range of social and housing market processes that tend to lead to greater social segregation, rather than diversity. Work recently undertaken by DTZ in Northumberland and North East Hampshire has highlighted these processes, illustrated in Figures 7.5 and 7.6. Figure 7.5 A Potential Vicious Circle Social Rented Sector Greater chance of getting social housing Less attractive for tenants to pursue RTB Encourages low income households to register for housing Encourages in-migration of low Income households High proportion of social housing dwellings Keeps prices low, and more affordable attracting lower income & younger households Poor Social Sector Housing Results in larger waiting lists and potentially more demand Lower cost area for development of social housing Makes some areas less attractive to high income groups More social housing Is developed 7.32 Figure 7.5 shows how areas which start off with poor social housing can end up attracting more housing of this kind. They are areas where: Tenants are less likely to exercise right to buy So there is more chance of getting social housing Which encourages more low income households to move to the area to register for social housing Which leads to more social housing being developed (partly because of demand but partly because it is a lower cost area for development) Which attracts more low income households and so the cycle continues. 53

62 Figure 7.6 A Potential Vicious Circle Market Sector Attracts first time buyers a and lower income purchasers More affordable homes to purchase In migration of lower income groups Knock on effect on schools town centres and neighbourhoods High proportion of older smaller dwellings Historic Stock of Housing Deters high income groups from purchasing Reinforces bias of stock to smaller cheaper properties in core area and up market housing in outer areas New development reflects predominant demand Fosters out-migration of households wanting and able to afford more space 7.33 Figure 7.6 shows how a similar process can take hold in areas with unattractive, poor quality housing stock in the market sector In the US, the HOPE VI programme has sought to break this vicious circle which leads to increasing social segregation in the social rented sector. In 1992, a US Congressional Commission concluded that approximately 6% of the nation s public housing stock qualified as severely distressed. The HOPE VI programme initially focussed on redeveloping inner-city, high-rise public housing into lower-density, higher quality properties with more economically active families As the HOPE VI project evolved, however, it central premise became to help families relocate to better neighbourhoods and to create truly mixed income communities in place of distressed developments. Berube highlights significant improvements in the areas redeveloped under HOPE VI. Median incomes and labour force participation in the neighbourhoods containing HOPE VI projects far out-paced those occurring city-wide, or metropolitan area wide, in the 1990s The Government has invested over 2.4 billion since 1997 on programmes such as the New Deal for Communities and the National Strategy for Neighbourhood Renewal to reverse the cycle of decline in some of the country s poorest neighbourhoods. However, for some of the most deprived areas and estates, it recognises that a more radical approach may be required to regenerate the area, improve outcomes for residents and reconnect it with the wider economy It is planning nine mixed communities demonstration projects based on the HOPE VI programme, remodelling selected social housing estates through tenure diversification plus improved public services and local environments. The first three schemes were announced 54

63 at the beginning of 2005 and will be in Harpurhey in Manchester, Gipton in Leeds and Canning Town in East London, all of which are in the 2% most deprived neighbourhoods in the UK Berube commends this initiative but says a lasting commitment to the idea is needed. It is not just about special initiatives but embedding the concept in the routine planning, housing and regeneration decisions made each day by regions, local authorities and communities. For example, it would require the Housing Corporation and other funders of social housing to change their perspective on value for money considerations so as to develop more social housing in up-market neighbourhoods. But this would be expensive because land values are high in such areas. It is also likely that there would be great community opposition to such development. Conclusions 7.39 Comparative advantage in the knowledge economy will be gained by locations that have a highly skilled and talented labour force. Locations that want to be in a position to adjust most effectively to the development of the knowledge economy will be those places which provide attractive places for middle and higher income households to live. The range and quality of housing provided will be a key factor in this High quality housing may not be absolutely critical to attract business investment, but it does increasingly matter. There is sufficient evidence to suggest that areas / regions without a wide range of high quality housing may miss out on investment In the 1970s, the social housing sector accommodated a wide range of people. Today it contains high concentrations of the poor and workless. Research has shown that concentrations of deprivation limit the life chances of people living within them. Put another way, a poor individual living in a poor neighbourhood experiences worse outcomes than an identical individual living elsewhere. For example, high levels of workforce inactivity in an area means individuals are isolated from people in work. This means that the social networks that are so important to helping people find jobs, do not work well in such areas. It may also mean that people no longer see work as the social norm Housing policy has a key role to play in reversing this trend. On new developments, action is being taken to encourage more mixed and balanced communities However, such policies do little to change the social mix of existing communities or the social and housing market processes that tend to reinforce social segregation over time. The Government recognises that more needs to be done to tackle this, especially in the most deprived estates and areas in the country. 10 ODPM (2005) Sustainable Communities: People, Places and Prosperity 55

64 8 CAN THE CONSTRUCTION SECTOR DELIVER BARKER S RECOMMENDATIONS? 8.01 Why does housing output not respond to price signals? Barker concluded that the underlying constraint on housing output was the supply of land, due to a number of factors: In some areas not enough land is allocated for development. House building is often politically contentious and assessing both the costs and benefits of development is difficult, as the incentives facing decision-makers do not reflect those costs and benefits. Local costs of development can be high and those already housed have a much stronger voice than those in need of housing. There are also a number of barriers to the development of allocated land. For example, the availability of infrastructure and the costs and complexities sometimes associated with developing previously used (brownfield) land. Finally, the housebuilding industry itself, which at times holds back production rates The rest of this section summarises what Barker said about the housebuilding industry and considers its capacity to deliver increased housing output in the future, THE HOUSE BUILDING INDUSTRY 8.03 The Barker Review Interim Report 1 said the UK housebuilding industry was characterised by: Low levels of responsiveness to demand A cautious approach to investment Low levels of innovation This behaviour is influenced by a high level of risk in the housebuilding sector. Two types of risk are identified: Market risk associated with the volatility of house prices. Site specific risk associated with land acquisition, getting planning permission and construction A 1% increase in house prices can increase gross development profit on some sites by almost 8%. Predicting and catching the market at the right time is a critical skill for housebuilders seeking to maximise profits. The close correlation between housebuilders profits and house prices highlights this relationship (see Figure 8.1 overleaf). 1 Barker (2003) Review of Housing Supply Interim Report 56

65 Figure 8.1 Housebuilder Profits and Real House Price Inflation Source: Barker (2003) Review of Housing Supply Interim Report 8.06 The affect of risk in the housebuilding industry is to: Increase the value of adopting a wait-and-see approach to releasing homes. Barker considered whether housebuilders hoard land based on expectations of higher prices. The evidence suggested that they were not hoarding land for speculative purposes. However, there was evidence that housebuilders sometimes control production rates, on large sites in particular, to maintain house price increases. This restricts housing output. Reduce the incentive to invest for the long term in new technology, innovation and in the skills of the workforce, who are frequently employed on a sub-contract basis. Again, this restricts housing output. SKILLS IN THE HOUSEBUILDING INDUSTRY 8.07 If the Review s recommendations succeed in increasing the supply of land for development, prices should be more stable in the future and there will be less scope to make profits through speculative gains. The only way for housebuilders to improve profitability will be through increasing output, maximising efficiency and improving the quality of their output. This should address many of the issues which restrict housing output currently. 57

66 8.08 However, the impact of increasing the supply of land for housing will be severally limited if there is a shortage of skilled labour (as acknowledged by the Barker Review) Recent research has sought to address three key questions 2 : Will labour shortages hold back extra housebuilding? Which skills, if any, will be most limited and will they mainly be in manual or nonmanual occupations? What are the implications for construction industry training? 8.10 In 2004, around 190,000 new homes were built (housing starts) in the UK. The research makes estimates of how many people would be needed to build 250,000 and 300,000 dwellings a year. The author states these are two plausible housebuilding targets in line with estimates set out in the Barker Review The research says the best estimate of the current housebuilding workforce, including office staff as well as on-site workers, is 285,000 with a sensitivity range from 275,000 to 320,000. With UK housing output at 190,000, this gives a central estimate of labour inputs at 1.5 per dwelling Key findings from the research are: A requirement to build 250,000 dwellings per year would require an additional 90,000 workers a 32% increase assuming current working practices and productivity levels. A requirement to build 300,000 dwellings per year would require an additional 165,000 workers a 58% increase assuming current working practices and productivity levels. The greatest requirements (for on-site workers) are for: Bricklayers this reflects both the taste of British consumers for brick-faced dwellings even with timber, concrete and other framing materials and the tradition of using brick-and-block for many low rise housing structures General operatives reflecting the use of general labourers The greatest requirements for office-based workers are for: Managers General office staff. Further information on skill requirements is provided in Table Professor Michael Ball, UPE Consultancy (2005) The Labour Needs of Extra Housing Output: Can the Housebuilding Industry Cope? CITB-construction Skills and the House Builders Federation. 3 Barker suggested 70,000 more homes would be required to deliver a trend in real prices in England of 1.8% and 120,000 would be required to achieve a trend in real prices in England of 1.1%. 58

67 Table 8.1 Extra Jobs by Type over Baseline 2003 Figures Thousands Housing Output Overall Labour requirements Trades Bricklayers Electricians Floorers Glaziers Painters & decorators Plant mechanics Plant operatives Plasterers Plumbers Roofers Scaffolders Steel erectors Wood trades Other trades General operatives Office Staff General office staff Managers Civil engineers Building & civil engineering technical Other engineers Town planners Architects Architectural & town planning technical Quantity surveyors Other professionals Draughtspersons Building inspectors Estimators, valuers & assessors Financial technicians Other technicians incl. IT Source: Professor Michael Ball, UPE Consultancy (2005) The Labour Needs of Extra Housing Output: Can the Housebuilding Industry Cope? CITB-construction Skills and the House Builders Federation Given that the Barker Review highlighted existing skill shortages in the housebuilding industry, these labour and skills requirements could represent a real barrier to the expansion of the housebuilding industry for many years to come. However, Professor Ball argues there are reasons to expect significant changes in skill demands beyond a simple proportionate scaling up of labour needs caused by higher levels of housing output. He estimates that additional labour requirements could be reduced to: An additional 25,000 workers for an output level of 250,000 dwellings if relatively modest productivity improvements and some labour switching from other parts of the construction sector are assumed (40,000 without labour switching) 59

68 An additional 65,000 workers for an output level of 300,000 dwelling if relatively modest productivity improvements and some labour switching from other parts of the construction sector are assumed (about 100,000 without labour switching) 8.14 The productivity improvements are assumed to arise mainly through more adoption of modern methods of construction and through a significant share of the additional housebuilding being undertaken by more efficient larger housebuilders Professor Ball comments: These numbers are substantial but not impossible to achieve. So, while training issues are important in the expansion of housebuilding, it can be concluded at the same time that skill shortages are unlikely to represent a barrier to the expansion of the housebuilding industry There will, however, be a need for additional training capacity and adjustments to existing training programmes to cope with the planned increases in housebuilding. His recommendations include: Addressing the additional requirement for manual trades, particularly for bricklayers. Addressing the substantial requirement for more site managers. Many site managers come up through the trades but, in future, more might come via college or university routes as the share of young people in further/higher education increases and skill requirements for site managers grow, particularly on large, complex sites. Current provision for site managers probably needs significant expansion. A greater focus on housebuilding in construction-related training (both for trades and professions). Whole life potential for career entry. Many housebuilders consulted as part of the research highlighted the fact that a career route into housebuilding was primarily a choice made by teenagers. Older people had limited possibility of refocusing their career towards construction and housebuilding In October 2005, the Government announced there would be a National Skills Academy for the construction sector (as well as for the manufacturing, food & drink and financial services sector) aiming to be open by September Innovation 8.18 Professor Ball says it is fashionable to talk about low productivity in the construction sector, but there is actually no reliable hard evidence on productivity change in either construction or housebuilding on which to base such views. He references a DTI publication which states it is extremely difficult to measure productivity in construction and housebuilding because of the heterogeneous nature of construction products and the complex organisational structures of the industry, which means that much output and employment itself is derived from approximate estimates. 4 4 Ive et al (2004) Measuring the Competitiveness of the UK Construction Industry Volume 1, University College of London, Davis Langdon Consultancy, DTI. 60

69 8.19 Nevertheless, the Barker Review found that domestic housebuilding is more labour intensive compared with other European countries. This reflects predominately brick and block construction in England and Wales whereas other countries are more innovative in using alternative housebuilding techniques. In essence, these techniques involve the use of steel, timber or concrete structural frames in place of traditional brick and block, or greater use of off-site manufacturing facilities Barker said most housebuilders did not see commercial sense in a rapid expansion of alternative construction techniques: At the present time, traditional brick and block methods of construction remain cheaper, in may cases, than modern methods of construction, including off-site manufacture. The time savings available do not currently provide a compelling financial reason to switch production However, the government sees modern methods of construction (MMC) as a way of producing more, and better quality, homes in less time. Thus, helping to accelerate housing provision. It is committed to promoting the use of MMC in home building with various parts of government having different responsibilities for this: Housing Corporation (sponsored by the ODPM) has a target that 25% of new build in the RSL sector should use MMC English Partnerships (sponsored by the ODPM) encourages MMC across all its programmes. It is running a competition to build homes for 60,000 or less, with many short-listed entries involving MMC. DTI promotes innovation in industry, including MMC A recent study by the National Audit Office (NAO) has investigated the scope for building homes more quickly and efficiently using MMC. 5 Professor Ball s research also considers MMC and presents information from a survey of private sector housebuilders 6. The rest of this section considers: The labour and time benefits from MMC The extent of cost variation between building methods Quality and risk issues. 5 National Audit Office (2005) Using Modern Methods of Construction to Build Homes More Quickly and Efficiently. 6 Professor Michael Ball, UPE Consultancy (2005) The Labour Needs of Extra Housing Output: Can the Housebuilding Industry Cope? CITB-construction Skills and the House Builders Federation. 61

70 8.23 In terms of labour and time savings, the NAO found that MMC: Requires considerably less on-site labour than traditional brick and block construction. It should be possible to build up to four times as many homes with the same on-site labour. More people are required for factory based production work but this does not draw on the same labour pool as on-site construction. Thus, it is an important way of addressing potential skill shortages in the future. MMC can halve on-site construction duration compared to brick and block methods. One approach was found to reduce on-site build time for a whole development to 16 weeks compared to 39 weeks for brick and block. There are even more dramatic savings in the time taken to achieve weather tight structures. This is beneficial because bad weather does not disrupt the work of following trades and existing work is protected from damage by bad weather. However, these time savings are only achieved when detailed process plans are prepared and adhered to. Everything needs to be agreed at the outset and late design changes must be avoided. In this sense MMC is less flexible than traditional brick and block construction Key points in relation to the cost of MMC are: MMC other than open panel techniques 7 continue to be slightly more expensive than more established techniques but the cost ranges overlap substantially (see below). 7 Panellised units are produced in a factory and assembled on-site to produce a three dimensional structure. Open panels consist of a skeletal structure only. 62