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Office Space Supply Restrictions in Britain: The Political Economy of Market Revenge

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  • Cheshire, Paul
  • Hilber, Christian

Abstract

Office space in Britain is the most expensive in the world. Even in a struggling, medium sized city, like Birmingham, costs are more than 40 percent higher than in Manhattan although construction costs half as much. Taken together with research showing a significant negative net welfare effect of planning constraints in the residential sector, regulatory constraints are the obvious explanation. To investigate this we first explore the meaning of Glaeser et alís (2005) Regulatory Tax (RT) and then estimate values for 14 British office locations. Even on the most conservative assumptions, this shows a very substantial cost of regulation in Britain - orders of magnitude greater than estimates for Manhattan condominiums. Having values going back more than 40 years allows us to investigate the political economy of the regulatory restrictions. Britain has a fiscal disincentive for communities to permit commercial development since business rates are a national tax. In all but two locations, residents control development and their main incentive to allow development is (fear of) unemployment. The useful exceptions are the City of London and Docklands, controlled by business interests, and, in the Cityís case, with a unique fiscal incentive to allow development. The City is also the only office location in Britain where the RT value has fallen over time, seemingly related to an explicit loosening of planning restrictiveness in the 1980s triggered by competition from other locations. Exploiting the cross sectional panel data allows us to test these hypotheses and the results provide strong support.

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Paper provided by European Real Estate Society (ERES) in its series ERES with number eres2007_119.

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Date of creation: 2007
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Handle: RePEc:arz:wpaper:eres2007_119

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  1. Mayer, Christopher J. & Somerville, C. Tsuriel, 2000. "Land use regulation and new construction," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 639-662, December.
  2. Gyourko, Joseph & Tracy, Joseph, 1991. "The Structure of Local Public Finance and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 774-806, August.
  3. Cheshire, Paul & Hilber, Christian A. L., 2007. "Office Space Supply Restrictions in Britain: The Political Economy of Market Revenge," MPRA Paper 5435, University Library of Munich, Germany.
  4. John Muellbauer, 2005. "Property Taxation and the Economy after the Barker Review," Economic Journal, Royal Economic Society, vol. 115(502), pages C99-C117, 03.
  5. J. Phillips & E. Goodstein, 2000. "Growth management and housing prices: the case of Portland, Oregon," Contemporary Economic Policy, Western Economic Association International, vol. 18(3), pages 334-344, 07.
  6. Mayo, Stephen & Sheppard, Stephen, 2001. "Housing Supply and the Effects of Stochastic Development Control," Journal of Housing Economics, Elsevier, vol. 10(2), pages 109-128, June.
  7. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2006. "Superstar Cities," NBER Working Papers 12355, National Bureau of Economic Research, Inc.
  8. Glaeser, Edward L & Gyourko, Joseph & Saks, Raven, 2005. "Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 331-69, October.
  9. Ihlanfeldt, Keith R. & Shaughnessy, Timothy M., 2004. "An empirical investigation of the effects of impact fees on housing and land markets," Regional Science and Urban Economics, Elsevier, vol. 34(6), pages 639-661, November.
  10. P. C. Cheshire & Stephen Charles Sheppard, 2005. "The introduction of price signals into land use planning decision-making : a proposal," LSE Research Online Documents on Economics 568, London School of Economics and Political Science, LSE Library.
  11. Edward L. Glaeser & Joseph Gyourko, 2003. "The impact of building restrictions on housing affordability," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 21-39.
  12. Paul Cheshire & Stephen Sheppard, 2004. "The Introduction of Price Signals into Land Use Planning," Urban/Regional 0410002, EconWPA.
  13. Paul Cheshire & Stephen Sheppard, 1997. "Welfare Economics of Land Use Regulation," Urban/Regional 9702001, EconWPA.
  14. Song, Yan & Knaap, Gerrit-Jan, 2003. "New urbanism and housing values: a disaggregate assessment," Journal of Urban Economics, Elsevier, vol. 54(2), pages 218-238, September.
  15. Bertaud, Alain & Brueckner, Jan K., 2005. "Analyzing building-height restrictions: predicted impacts and welfare costs," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 109-125, March.
  16. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
  17. Paul Cheshire, 2005. "Unpriced Regulatory Risk and the Competition of Rules: Unconsidered Implications of Land Use Planning," Journal of Property Research, Taylor & Francis Journals, vol. 22(2-3), pages 225-244, October.
  18. Wheaton, William C & Torto, Raymond G & Evans, Peter, 1997. "The Cyclic Behavior of the Greater London Office Market," The Journal of Real Estate Finance and Economics, Springer, vol. 15(1), pages 77-92, July.
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