Olympic Touts

First, I have been informed that "tout" is something of a British - English word, so I'll start by explaining that a tout is someone who hangs around sporting venues selling tickets.  Normally someone else's unwanted ticket that they bought.

I have to confess something here.  I am an Olympic Refusenik.  The only "benefits" of the games I have seen so far are: 

• It is much more difficult to get on the tube.  
• One only has to spend 5 minutes or so at a major train station before Boris Johnson's irritating voice comes up telling us that "This is… The big one" and advising us to go to an utterly useless website to re-plan our journeys.

However one Olympic story has grabbed my interest.  (OK, two stories if you count Boris and the zip wire!)  The twin outrage at empty seats in the arenas and ticket touts making money off the games.  As a friend pointed out on Twitter, it is wrong to draw too much of a connection between these two issues.  Most of the empty seats are, in fact, those that were reserved for the "Olympic family" of VIPs and dignitaries associated with the games.  If this is the case, it is highly unlikely that these would be the seats that touts are able to sell on.

However the attitude to touts is interesting in itself.  People do get genuinely very angry about touts, even those selling genuine tickets, and this often drives some economists crazy!  From our perspective, touts who sell genuine tickets are fulfilling an important economic function, moving goods and services from people who don't value them very much to people who place a great deal of value on them.

Let's go back to the point where tickets were being sold.  People were getting up very early in the morning to enter a "lottery" where they said which events they wanted to go to and would then "win" their tickets or not.  If you "won" the tickets, you still had to pay for them, but this way the tickets themselves could be priced below the market price so that the games could be enjoyed by everyone.  The fear is that otherwise the games will be a rich person's pleasure.

Naturally some enthusiasts entered the lottery for many events and ended up with nothing.  Others entered the lottery and won almost everything they said they'd want to go to.  People who won tickets to nearly everything they entered the lottery for would be spending far more money on Olympic tickets than they wanted. 

This is a prime example of an allocation mechanism that will create the conditions for a thriving secondary market.  On one side of the market we have people who really wanted to go to some Olympic events but ended up with tickets to far too many.  On the other side of the market we have people who wanted to go to lots of Olympic events but ended up without any tickets.  We should find some way to get excess tickets on one side to people who really want tickets on the other side.

If someone came along and offered to coordinate this process, giving of their time to match ticketless sports fans with over-ticketed sports fans and broker a deal, would we say that they were doing something wrong?  Is that something that should lead to an arrest, conviction and criminal record?  If they are doing it for free, then I, and I suspect a great many people, would say no.  It is only when they are making money from this activity that people seem to have a problem with it.  I have to admit to being puzzled as to why.  The process of brokering takes time.  Furthermore, if the tout reallocates tickets by purchasing them from those who don't want them and selling them on, then they are taking on considerable risk if they cannot find a buyer.  People need to be compensated for taking risks.

Tim Worstall suggests that it is a Victorian attitude to the grubby business of trade.  True wealth ought to be inherited rather than made.  There is something not quite right about this explanation being applied to modern Britain.  Two of the most popular television shows in the UK today are The Apprentice and Dragon's Den, where participants show off their business acumen, and these have propelled the businessmen involved to a celebrity status.  On the whole, Britain today is more comfortable with wealth creation than it has been in a long time.

I suspect that the explanation lies elsewhere.  I suspect the issue is the source of the wealth that is being generated by touts.  Tickets were sold in the primary market below market price and assigned via a lottery to ensure that the Olympic games were for everyone and could be enjoyed by everyone, not just the rich.  Had the tickets been sold at the market price, the games organisers would have made more money and the return on the investment in hosting the games for UK Plc. would be higher.  A similar argument could be made about touts at football matches and other sporting events.  The tout's profits are the profits that organisers decided to leave on the table so that the events would be "for everyone".  I suspect that this is the real source of the anger felt towards touts and it is why touting is illegal.  However, just because this is the source of the anger does not necessarily mean it is rational or sensible to make touting illegal.

While this argument may apply to other sporting events, it does not quite work for the Olympics.  The Olympic organisers chose (in the form of a lottery) an extremely inefficient means of allocating tickets that was always likely to create this secondary market.  There were alternative mechanisms that would have ensured tickets were initially held by enthusiasts for the sports involved.  Tickets could have been given away to the relevant sporting clubs across the country.  For example tickets for Olympic Judo could have been given away to local Judo clubs who would then have decided how many to sell; how many to allocate to members and so on.  If you want to find out who the e.g. badminton enthusiasts are, a badminton club is a good place to start.  Such an allocation mechanism would have been very good for the clubs allowing them to enthuse their members or raise cash for sporting equipment according to their own needs.  Such an allocation mechanism would not eliminate the problem of ticket touts, but it would have resulted in a smaller secondary market.

However, to an extent we have to accept that the premise of making the games something that was "for everyone" is a bit shaky.  We have the problem of touts because the people we are trying to "help" by giving them low cost tickets to sporting events would prefer to have the market value of the ticket rather than the ticket itself.  It is entirely possible that there are some people who lack sufficient disposable income to pay the market price of a ticket, but would not sell it at the market price if you gave it to them.  The question is how to distinguish them from the people who would sell their tickets at the market price.  Asking them to put their hands up does not seem to have worked.  

However, even if we could perfectly identify them, there would still be a secondary market.  Life happens and plans change, the events people thought they could make when the bought their tickets they can no longer get to.  Under these circumstances, it is understandable that they should want to get as much money as they possibly can for their ticket, and, in some ways, tickets like this should be reallocated through the price mechanism.  We could view this as redistributive - moving money from richer sports fans to (on average) poorer sports fans.  It might be better to accept that the secondary market exists and to start regulating it to protect punters from fraud rather than trying to stamp it out.

Unintended Consequences?

I am returning to the theme of Housing for this post, but will concentrate exclusively on the rental sector.  Oxford City Council have introduced new licensing conditions on what are called Houses of Multiple Occupancy (HMOs).  Nationally, an HMO needs to be licensed if it is "large" and is considered to be "large" if:

• There are five or more tenants.
• the house has three or more floors.

See the relevant part of DirectGov.  

However in Oxford, the Council has decided to tighten these regulations.  They will consider an HMO to require a license if:

• There are more than two tenants.
• The house has two or more floors.

The licensing system in Oxford is not being funded by the general tax payer, but by a system of fees on the HMO licenses themselves.  The fee is proportional to the size of the house in question, but can rise to around £500.

So what will be the economic effects of this policy.  First, in the short run, landlords who do apply for the license will actually be unable to pass the tax on to their tenants!  This might well be surprising for some, but the economic logic here is as follows.  The scarcity of housing means that landlords are effectively already extracting from their tenants the maximum willingness to pay of each tenant.  So there is no room to extract more.  However, in the longer run, landlords may decide that the bureaucratic costs of applying for the licenses and making any changes that the council requires as a result are just too great and stop renting their properties to multiple tenants.  Indeed, this is just what seems to be happening in this story from the Oxford Mail.

Once landlords start leaving the HMO market, then rents will rise as the (already too small) supply of rental housing contracts.  But what happens to the houses that were being rented as HMOs?  Will they be rented or sold to families and singletons?  Will this drive down the rents or prices that families and singletons have to pay?  Unlikely.  The fundamental problem of scarce housing still exists.  Indeed, high housing costs are one of the reasons that people delay starting families and live with friends in HMOs for longer.

It is more likely that in order to extract maximum value from their properties, landlords will instead divide them up.  They will turn each floor into a separate flat with its own toilet and kitchen facilities etc, so that they are not HMOs and rent out the floors separately.  In order to create the extra kitchens and bathrooms this will require, the total number of bedrooms will fall.  So the total housing supply falls leading to higher rents for the younger people starting out in life who will be renting these properties.  Naturally this process will take time; cost money; and require planning permission.  But if the council is serious about limiting HMOs (see below), it may well become the best option for those who own homes in Oxford.

For tenants forced out of their homes, this is a tragedy.  Such consequences of a policy are often referred to as "unintended consequences", this is the term used in the Oxford Mail story.  However in this case, the consequences are so transparently obvious that it is difficult to call them "unintended".  Indeed a brief perusal of Oxford City's website and the website of the local political party that controls it reveals that, far from being an unintended consequence, forcing out people like the tenants from the Oxford Mail's story is the point!  Note that Oxford City's website includes a section "Why are HMOs a problem in Oxford?"  The phrasing of the question itself reveals more information than the answer.  The controlling party boasts of having "... taken action to ensure local communities have a balance of housing, rather than HMOs taking over entire areas."  The prejudice against HMOs and the young people who normally live in them is clear.

Why is the local council trying to reduce the number of HMOs?  Oxford City's website highlights two general problems with HMOs.  To paraphrase:

• Across the entire country, the landlords can be a bit dodgy and neglect safety issues.
• There tend to be a lot of complaints about the people who live in them.

There is no satisfactory reason why we should expect that the first problem is unique to HMOs.  Indeed it shows a somewhat disturbing set of priorities in some respects.  If a dodgy landlord doesn't get the boiler checked we want to stop them renting to a group of young professionals or students and would rather they rented to a family?  Really?  Wouldn't it be better to ensure that all tenants knew their rights and that they could demand that the landlord get an annual gas safety certificate?  Wouldn't it be better to encourage tenants to report anything in their property that was unsafe?  (To align incentives, they could be encouraged to do so at the end of a tenancy during negotiations over return of the deposit).  If the point of these rules is really to help tenants, it strikes me that evicting them is an "innovative" strategy.

Regarding the second issue, the council are being exceptionally short sighted and this is possibly a case of unintended consequences.  From this perspective, the problem of HMOs is not the houses or the landlords, but the people who rent them.  The people who rent them are unlikely to leave Oxford and camp outside the ring road.  Rather it is more likely, in the long run, that they will be the people who rent the same houses again once they have been converted into flats.  In that event, I would expect the number of complaints to actually increase.  Currently entire houses are rented and people who live in them know each other.  Noise travels between the floors, but differences and arguments about this can be worked out between the various house mates who all know each other and are friends.  Friends are able to resolve these differences relatively amicably.  The noise externality is "internalised" in economics speak.  However once these houses have been converted into separate flats, noise will still travel between them, but the people who live in the different flats won't know each other and won't be friends.  They are therefore more likely to involve the council in disputes about noise and so on.  This policy will further reduce community cohesion rather than increase it!

I once thought National policy on Housing in the UK was misguided.  (See previous post on housing).  Compared to some local policies, it now appears positively insightful.  And that is saying something...

Cash in Hand

David Gauke, a minor Treasury Minister from the Conservative side of the coalition has said it is "morally wrong" to pay cash in hand seeking a discount.  This did not actually have the connotation of a pronouncement from on high that some of the later press coverage has imputed.  The minister was answering questions after a speech.  The phrase "morally wrong" was not chosen by the minister, it was chosen by the journalist asking the question.  The minister seems to have been saying (somewhat clumsily) two things:

1. People should not ask for a discount if they pay in cash in the knowledge that the tradesman will use the cash without declaring it; and
2. Stopping tax avoidance is important, but the "hidden economy" is a "very substantial" part of it as well.

One of these points is interesting; the other is mundane.  The attention each has received looks to me to be the wrong way around and that says something about us and our priorities.

The mundane point is that people should not say to their plumber or cleaner something along the lines of "I'll pay you in cash; you then don't need to report the income; and you can give me a share of the money you save on taxes through a discount from your usual rate".  As statements go, it is difficult to see why this has attracted the attention it has.  All it is really saying is that you shouldn't ask someone to commit a crime on your behalf, albeit a relatively minor one given the amounts involved.

Note that this is quite different from what I suspect usually happens when cash in hand payments go undeclared, which is where the tradesman offers a discount if you pay in cash.  This is a bit more of a grey area.  Not being a Philosopher, I think I'll leave off this point and move onto the second part of what the minister was (mis)communicating.

The minister was saying that stopping tax avoidance schemes at the top of the income distribution was important, but the hidden economy of tax evading plumbers and cleaners is just as important.  There was a sense in which the minister was equating the two and suggesting that if we are going to crackdown on one, we should also crackdown on the other.  Again, as I am not a Philosopher, I shall leave the ethical analysis to others and just consider the economics of this statement - in economic terms, this is palpable nonsense!

According to the HMRC, the median income is approximately £19,600 per year.  Whereas the income of the 99th percentile (this is the minimum income to claim membership of the top 1%) is £149,000.  The post-tax median income is £17,200.  The post-tax income of someone at the 99th percentile is £105,000.  A very rough and ready calculation (assuming the order of taxpayers remains the same before and after tax) suggests that the median taxpayer pays £2,400 per year in tax and the taxpayer at the 99th percentile pays £44,000 per year in tax.  So (on a very rough and ready calculation) catching a tax avoider or evader at the top of the income distribution will recover for the Treasury more than 18 times as much money as catching a tax avoider or evader in the  middle of the income distribution.  So the minister is right only if with the same effort and cost that it takes to catch one tax avoider at the top of the income distribution, we could catch around 20 tax avoiders in the middle of the distribution.  This may in fact be the case, and so there may be greater net benefit to the treasury from going after tax avoiders in the middle of the distribution, but that needs to be part of the discussion and it wasn't.

There are, of course, factors which should be considered but have been left out of this analysis for lack of data.  One example that would make the calculations even less favourable for the Minister is that we shouldn't be comparing the 99th percentile with the median, but the mid-point of the top 1% with the 25th percentile which might have a higher concentration of self-employed tradespeople.  That would put a much higher threshold on how much easier it would have to be to catch people at the lower end of the income scale in order to make targeting them worthwhile.  However, in the Minister's favour, there are a greater number of people at lower points of the income scale, and there may be economies of scale in targeting these groups that improve the economic argument for doing so.  There may be some reason to believe that tax evasion is more common at lower income brackets, though the Minister has not stated any reasons why we might think this, but if it were the case, that would change the analysis somewhat.  Some combination of these two points seems to have been what the Minister was driving at when he referred to "the hidden economy" being a "very substantial" part of the problem.  Although this does raise the question: If this part of the economy is "hidden", how do we know how big it is?

There is one final point to consider in all of this and I shall have to try not to sound too much like I am gloating.  The ideas of providing a "Nudge" to effect change described in the book of that name by Thaler and Sunstein have apparently been influential in Downing Street.  The idea is one that can work well when there is a behavioural bias to be overcome.  Increasing pensions savings by making pension schemes "opt-out" rather than "opt-in" is a good example.  One could (generously) read David Gauke's statement as an attempt to nudge the population into not accepting "cash in hand" discounts and even reporting tradespeople who suggest it.  If  that is the case, then it would seem to have backfired.  Nudges work best when they overcome a behavioural bias and point us in the direction of our own interest.  A Nudge will have a great deal of difficulty in getting us to take actions which run counter to our own interests.

Lies, Damned Lies, and...

An interesting story on the BBC today.  Apparently the last Labour government "got it wrong" on immigration.  What is as interesting as Miliband's shift is the reporting of immigration and the numbers.  Take the following from the story:

"But its [the Labour government at the time] estimates that only about 13,000 people a year would come to the country were soon proved wrong, with a peak net migration figure, from the EU and elsewhere, of 252,000 in 2010."

The estimate of the number of people who would be coming into the UK from the 8 extra EU accession countries who joined in 2004 is compared to the peak of net migration from everywhere that was taking place six years later.  Unsurprisingly, the net migration to the UK from the entire world six years after accession was considerably higher than the initial estimate of how many Accession Countries' citizens would exert their right to free movement by moving to the UK.  Comparing these two numbers in this way is simply dishonest!

It is worth taking a look at the actual figures.  As with all ONS data sites, it is unnecessarily difficult to find the data you might be looking for.  The spreadsheet titled "Provisional Long Term International Migration (LTIM) estimates September 2011 (Excel sheet 601Kb)" seems to contain some useful time series data, so let's start there.

The Accession Treaty came into force in May 2004, that is when citizens of eight Eastern European countries received the right to work in the UK.  The initial estimate was that around 13,000 people a year would come.  According to the data, 49,000 had come by December 2004.  In the first full year for which there is data, 71,000 arrived.  Did the government underestimate the number of people who would come?  Yes.  Did they underestimate the number as badly as the BBC's figures above would suggest?  By several orders of magnitude, no.  We should remember however that estimating the number of people who will move before they actually move is a very difficult thing to do.  One imagines one would conduct surveys, but it would be very expensive to conduct a proper random sampling exercise.  Any cost-cutting methodologies (eg. telephone / internet surveys) would risk over-sampling people with a better lot in life more likely to stay.

But how important is immigration from the EU Accession countries and how important was it overall.  The answer is, not very.  The graph below shows net immigration by source country.  The blue line shows the total net immigration to the UK of Non-British Nationals.  The red line shows net immigration from the Accession countries, and the green line shows net immigration from Non-EU countries.  While there is a spike in the Accession year, 2004, this seems to have been caused more by immigration from Non-EU countries than from the Accession countries.

What may be of more concern is the reason people are coming to the UK.  In the year to September 2011 (the latest for which I have been able to find figures) 50% of gross immigration to the UK was for the purposes of formal study.  In some ways this should not come as a surprise.  The UK has a strong presence in international academia and some very strong brand names in this area.  Education is actually a good export industry to the UK.  The really good news is that if we restrict attention to immigration from outside the EU, this number goes up to 62%.  That is good because non-EU students can be charged the full economic cost of their education while EU students have the right to study under the same conditions as domestic students.

The bad news is that the government has decided students coming for formal study is the area of immigration where they can get "results" quickly in terms of fulfilling their promise to bring immigration down to tens rather than hundreds of thousands.  It is almost as if they have decided to sacrifice a valuable export industry in order to fulfill a political promise.

I am not completely insensitive to people's concerns about immigration.  I understand that when the amount you charge for the services you provide is forced down because immigrants enter and offer the service more cheaply, that is distressing.  That it is better for the general public who can now afford more of those services is scant comfort, though it be the truth.  The economic arguments here are in fact very similar to those for free trade.  Yet the political argument for free trade has been fought and won in the past, and so I have hope that the political arguments about immigration can also be fought and won.  

One branch of the argument must emphasize the economic benefits of allowing more economic immigration.  Although lowering the price of some labour services is bad for the people who provide those services, it is good for the general public at large who consume those services.  Even if this argument is not accepted, it should be generally accepted that no one's lot in life will be improved by reducing the number of people who come to the UK to study.

While we have to acknowledge that more people put additional strain on the UK's already overstretched infrastructure, this is an argument for building more infrastructure rather than limiting population growth.  As an aside the UK's infrastructure would be overstretched without any immigration.  What population limiting strategies would then be suggested by those who want to solve the infrastructure problem by limiting immigration?

However there is another branch of the argument that has yet to be tried.  Positive net immigration is a sign that people want to live here rather than where they were born.  What better sign could there be of our success as a nation?  Positive net immigration is the best evidence available that the UK, for all its problems, is a good place to live.  As such, it is something we should, as a nation, be quite proud of.  

Executive Pay

So the government is going to introduce binding votes on pay. This is part of what has been referred to as a "Shareholder Spring" of recent years, which has seen shareholders vote against the remuneration packages of various large firms.  However, to date, these votes have been merely advisory.

I have to admit, I was truly gobsmacked when this proposal was first aired a few months ago. I am incredulous that it has ever been the case that shareholders’ votes on remuneration packages for senior management are only advisory. But then, that is what comes of being a theorist.  We know how these things are supposed to work, but are often surprised by what turns out to be "custom and practice".  


There is certainly a problem with executive pay. Over the last few years, executive remuneration has risen by around 50%, with no concomitant increase in corporate performance. It is too easy for executives to be rewarded for failure just as they would be rewarded for success. This may in part explain the poor performance of some firms over the past few years.


Nevertheless, when it comes to corporate pay, as the bard would say: “The fault, dear Brutus, lies not in our stars, but in ourselves...”

Given the shocking state of affairs, we should perhaps recap the relationship between managers and shareholders. What is the relationship supposed to be in theory, and what has happened in practice?

In theory, the manager is the servant of the shareholders. Think of the Earl of Grantham and the Butler, Carson from Downton Abbey. The shareholders do not have time to run the company that they own themselves. Even if they did, there may well be people who can do a better job of it than they can. The shareholders and the manager are both better off if the shareholders hire the manager to manage their firm. The manager gets a salary and the shareholders get the profits.

In practice things seem to have developed quite differently. Managers seem to have gained control of the firms they are running. To continue with the analogy, Carson is now upstairs being dressed by the Earl of Grantham. How has this happened? The answer essentially lies in the strength that comes from being one of a small number.

Think of the profits of the firms (before executive salaries are deducted) as a resource over which management and owners compete. A solution is negotiated between the two parties and the shareowners then have their say (which is not currently binding). Our experience of arguments and debates might lead us to expect that the group with the largest number will win more out of these negotiations. However we would be wrong. Indeed the greater number of shareholders is precisely what gives the managers the decisive advantage.

Among the shareholders, informing themselves about all the issues surrounding the executive pay within their firm and arguing about those issues with the management are costly actions. It takes a lot of time to find and understand all the numbers. There is a reward in higher dividends, and the total reward may well outweigh the cost, but that reward is dispersed across all shareholders. Remember that if a shareholder has sensibly diversified their portfolio, then they would ideally be doing this for a large number of firms. However the benefits of these activities are spread across a large number of shareholders.

Corporate governance activities are what economists would call a public good. The benefits are “non-rival” (one shareholder’s consumption of the benefit does not stop another shareholder from consuming the benefit) and “non-excludable” (it is impossible to exclude one shareholder from the benefit without excluding all). Corporate governance is like the washing up in a shared house. Everyone benefits if it is done, but no one actually wants to do it.

This is a problem unlikely to solve itself and only likely to get worse! In an egalitarian capitalist society, the ownership of capital should be widely dispersed. More people should own fewer shares.  But this will worsen the corporate governance problem and allow managers to get higher and higher remuneration which becomes less and less responsive to performance. As we get more shareholders, the benefits of exerting corporate governance become more dispersed.

The question then becomes what should be done. Giving shareholders a binding vote on remuneration is certainly a start, but the government may need to go further than this. Managers enjoy the privilege of “agenda control”, meaning that they would still get to decide what precise package the shareholders are voting on. A binding shareholder vote might simply become a costly veto where the shareholders face a choice between approving a pay package, or plunging the company (and its stock price) into uncertainty by wielding a veto. Shareholders should be choosing between two alternative remuneration packages, one put forward by management and one put forward by shareholders. The shareholders should also perhaps hold a vote to decide which package they put forward to compete with the management proposals.

The measures to increase transparency also provide a good start. What is needed is a way to ensure that when shareholders vote they are conscious that every penny they pay the chief executive is a penny less in dividends for them.  Simple reporting of total pay should help to raise this awareness.  Although I remain skeptical that managers will find ways of muddying the water here; probably through bonuses or shares issued as bonuses.

These are all measures that will make it easier for shareholders to re-assert control over their companies. However even these measures might still prove insufficient. Shareholders will still be blighted by what economists call a “common action problem”. Common action problems such as this can be resolved by the parties themselves, after all, they are the people with the biggest incentive to solve them. Better information and voting structures will help, but if they do not allow shareholders to solve the problem, other reforms to corporate governance measures may prove necessary.

Housing

The problem in housing

It helps to be clear about the problem in housing.  This is simply that prices are too high.  What do I mean by too high?

• The average age of a first time buyer is now approaching 40!
• In the period 2001 - 2010, nominal average earnings rose by 34%, but nominal house prices rose by 94%!
• National Averages disguise how the situation is worse in major cities, particularly London.

This last point is more important than it sounds.  Among the modern couples trying to get on the housing ladder, both partners will (hopefully) work.  This limits the geographical choice they will have.  It is only in the major cities that they can guarantee that they will both be able to find work in their chosen careers.

Many might be forgiven for feeling that the music has to stop some time and they should wait until a crash before they buy.  Unfortunately this is wishful thinking.  While easier credit has certainly been a factor in the house price boom of the late 20th and early 21st centuries, the way prices (especially in the cities) have held up during the credit crunch, indicates that they are being driven by scarcity.  

To correct the housing market, we must understand the housing market

The problem in the housing market is the severely constrained growth in the supply of new housing.  Population growth has outstripped housing growth by a rate of two to one.  Furthermore, while the population is growing, the number of households is growing even faster than the population.  This is a result of young people waiting longer before they marry and put down roots.  Although it is an open question which trend begets which.  It is entirely possible that young people wait longer because of the high cost of housing.  They are reluctant to start families when they can only afford small quantities of housing.

In economic terms, the supply of housing is not adjusting with the price.  We can represent this with a vertical supply line.  The demand for housing however responds to the price of housing.  We can represent this with downwards sloping line.  That line will shift upwards as the population increases; as people get richer; and as credit becomes easier to access.  In the last thirty years or so, the population has increased; people got richer (for most of it); and credit became easier to access.

In that time the housing stock has remained virtually static.  So the entire change in the housing market comes through in a price increase.

With this simple model in mind, we can see how some measures designed to help those who have not yet brought houses, might actually exacerbate the problem.  Policies to help home buyers have included reduced stamp duty for first time buyers and government guaranteed mortgages for some buyers.  However such policies will only shift the demand curve further up.  They will not alter the number of houses, neither will they alter who gets the houses.  Indeed a policy such as this is merely a transfer of wealth from tax payers to home owners disguised as a measure to help those who don't  yet own homes.

The real question then is why has the supply remained fixed?  There are only a few possible answers.  Basically one of the things required to build houses must be in fixed supply.  In order to build houses, one needs: labour; land; and materials.  Over the period in which house prices rose so dramatically, labour has not been in short supply.  The period encompasses the accession year when the former Eastern Bloc countries joined the EU and their citizens gained the right to come and work in the UK.  Neither has there been a particular shortage of materials.  Land has been in short supply.  This may come as a surprise to anyone who has ever flown over the UK in daylight hours.  There seems to be a lot of land available.  The problem is that one is not able to build on it.  Planning law essentially makes it very difficult or expensive to build more houses.  Indeed the more desirable a place is to live, the more difficult it is to build there.  Our major cities are protected by a so-called "Green-Belt" that was put in place around 50-60 years ago.

While the government is (at the time of writing) trying to reform planning law, cutting more than 1,000 pages from the rule book, it is doubtful whether:

1. the reforms will actually go ahead; and
2. they will actually go far enough.

What kind of change is needed?

Let's go back to basics.  Why might someone think that planning law is needed?  Essentially there is what economists call an externality here.  If I own the plot of land next to your house, then what I do with land will affect you.  Your enjoyment of your house will be affected if I build a tower block of flats on the patch next door.  The price of your house will also be affected. The result is that if I want to make any change to my land, I must seek the permission of the local government and this process gives you the right to object.

With this in mind, from a political economy perspective (this is the branch of economics that considers the incentives of policy makers), it is not difficult to see why house building has been so sluggish.  Bear in mind that there is no one single housing market in the UK.  There are a collection of more or less linked but separate markets.  Building new houses in any town will increase the supply of housing in that town and so lower the price of houses in that town.  The people who's permission must be sought in order to increase the local hosing stock are answerable to the people who already own houses in the area.  The economic losers out of development effectively have a veto.  No one speaks for the economic winners from proposed development (who are typically poorer than the losers).

However there is another way to take the externality into account.  Let ownership mean ownership, but create a vehicle for  owners to commit not to develop.  Such vehicles already exist in property law in the form of restrictive covenants.  This is best illustrated through an example.  Suppose I am a loss making farmer with a field near a village.  I could sell the field.  The only person who would be interested in buying is a developer.  The village is a short commute from London where there are lots of well paid jobs but housing is expensive.  Because of this proximity to London, housing is expensive in the village too, just not as expensive as London.  If the developer buys the field they will build more houses and the price of housing in the village will fall.  The current system effectively gives the villagers a veto on the development of the field.  Instead we should give the farmer the ability to sell the right to develop the field to the highest bidder, whether that be the developer or the villagers.

The development will go ahead if the villagers value a lack of development less than the developer will get from developing the land.  The developers profits from developing the land represent the benefits to those currently without housing from getting housing.  The development will not go ahead if the benefits to the villagers from keeping the land vacant exceed the benefits to those without housing from being able to move to the village.  These are precisely the situations in which we want development to go ahead or not go ahead.  Such a system could be achieved by allowing owners to enter five year restrictive covenants with their neighbours.  The covenants would be tied to the land rather than the person.

There is one difficulty with this system which I must admit. There will be a common action problem among the villagers in terms of buying a restrictive covenant from the farmer.  Indeed in order to reduce opportunities for corruption, I believe the local council must be prevented from buying restrictive covenants from owners.  Otherwise there will be too many opportunities for local politicians to enrich their chums by preventing "ghost" developments that the voters actually would not mind.  This actually makes the common action problem worse as people will not have access to the organising technology afforded by local government.  However preventing the system from being used corruptly must surely take precedence.  Furthermore, after such a long period of too little development, it would take a long while before any reforms led to too much development.