The recent housing green paper committed Britain to building 3m homes by 2020. Where should we build them? We could scatter them across the country in line with current population patterns, but both spatial economics and history tell us that we can do better. National income will be higher if we build them in the right places.
The 19th century saw coal-producing areas and the North West become prosperous. Liverpool and Manchester, for example, proved to be perfect locations for the then highly skilled, high-wage cotton industry and grew by more than half a million people apiece. Other big towns appeared from nowhere: Crewe was a village of 46 houses and 289 residents in 1800, but a big town a century later. People were attracted by the jobs and wages on offer and Britain would have been a lot poorer without people migrating internally.
Since 1945 Britain’s prosperity has moved south-east. Today Heathrow, not Liverpool, offers the best connections to the US. We trade more with Europe, so the South East, not the North West, is the best location for many businesses. As the home of finance rather than textiles, London has simply been luckier than Manchester.
City size matters even more than in the past. Service sector companies, especially those employing highly skilled workers, gain most from locating close to each other, as knowledge spill-overs between workers and companies make them more effective. In addition the rise of dual-career, dual-industry couples wanting to work in the same city as each other gives companies in different industries the incentive to locate in the same place.
For these reasons we would expect to have seen large-scale migration to the South East since 1945, with some small towns in that area growing dramatically, as in the 19th century. But we have not. Two obvious places where we could imagine knowledge spill-overs being important – Oxford and Cambridge – have seen population grow at just 0.5 per cent per year.
The postwar planning system was based on the belief that people should stay where they were and that jobs should move to them. But the belief that we can shuffle jobs around Britain proved false. You cannot move Canary Wharf to Liverpool: it is successful (in part) because of where it is.
This mistake has real consequences, above all for those trapped in declining towns to which our planners failed to persuade companies to move. Those without qualifications in Blackburn have a one in three chance of being unemployed; the equivalent figure for Windsor is only one in five. Those in work are less well paid outside the South East. Big house price differentials caused by misguided planning policies make it hard for people to migrate towards the South East.
It is correspondingly plausible to imagine that Britain would be richer were Whitehall planners simply to divide the 3m new homes equally between Oxford, Cambridge and London. It is highly unlikely that this would generate a worse outcome than spreading them fairly evenly across Britain. But the history of planning tells us that Whitehall does not know best. Rather than trying to pick winners, we should use market signals to decide where to locate these homes.
Britain’s highest land values are currently found in London and nearby commuter towns such as Reigate; in Oxford; and in Cambridge. A hectare of land in each is worth at least £8m, or around £200,000 per property. Nowhere else comes close to matching these levels. Additional houses in these areas are worth more because these places are capable of generating additional well-paid jobs. It is clear, therefore, that these are the most sensible places to build the first of the 3m new homes.
As we do so, the increase in supply may lead prices to fall to more typical levels, in which case the price signal will automatically lead us to build in other areas. But if the new homes attract new companies, then wages in these newly enlarged cities will stay high, leading housing and land prices to remain high. If that is the case, and it seems a plausible scenario, then the sensible strategy would be to keep increasing the size of these cities, generating more and more high-quality, high-wage jobs in the process.
Oxford and Cambridge would then become the Liverpool and Manchester of the 21st century: cities whose economic success leads to dramatic expansion, to the benefit of those who move to them, and, via buoyant tax revenues, to all of us.
The writer is lecturer in economic history at the London School of Economics
