Urban Land Economics and Public Policy

Urban Land Economics and Public Policy

Macmillan Building and Surveying Series Series Editor: Ivor H. Seeley Emeritus Professor, Trent Polytechnic Advanced Building Measurement, second edition Ivor H. Seeley An Introduction to Building Services Christopher A. Howard Applied Valuation Diane Butler Asset Valuation Michael Rayner Building Economics, third edition Ivor H. Seeley Building Maintenance, second edition Ivor H. Seeley Building Quantities Explained, fourth edition Ivor H. Seeley Building Surveys, Reports and Dilapidations Ivor H. Seeley Building Technology, third edition Ivor H. Seeley Civil Engineering Contract Administration and Control Ivor H. Seeley Civil Engineering Quantities, fourth edition Ivor H. Seeley Civil Engineering Specification, second edition Ivor H. Seeley Contract Planning and Contractual Procedures B. Cooke Contract Planning Case Studies B. Cooke Environmental Science in Building R. McMullan Introduction to Valuation D. Richmond Principles of Property Investment and Pricing W. D. Fraser Quantity Surveying Practice Ivor H. Seeley Structural Detailing P. Newton Structural Surveying S. L. J. Mika and S.C. Desch Urban Land Economics and Public Policy, fourth edition P. N. Balch in, J. L. Kieve and G. H. Bull 7980 JCT Standard Form of Building Contract, second edition R. F. Fellows Other titles by the same authors Housing Improvement and Social Inequality P. N. Balchin (Gower) Housing Policy: An Introduction P. N. Balch in (Croom Helm) Housing Policy and Housing Needs P. N. Balchin (Macmillan) Regional and Urban Economics P. N. Balchin and G. H. Bull (Harper and Row) The Electric Telegraph: An Economic and Social History J. L. Kieve (David and Charles)

URBAN LAND ECONOMICS AND PUBLIC POLICY Fourth Edition PAUL N. BALCHIN Ph.D., B.Sc.(Econ.) Principal Lecturer in Economics Thames Polytechnic JEFFREY L. KIEVE M.Phil., B.Sc.(Econ.), A.I.A.S. Property Investment Consultant and Visiting Lecturer Thames Polytechnic GREGORY H. BULL B.A., M.A., Doctorate Senior Lecturer in Economics Thames Polytechnic M MACMILLAN EDUCATION

Paul N. Balchin and Jeffrey L. Kieve, 1977,1982,1985 Paul N. Balchin, Jeffrey L. Kieve and Gregorly H. Bull 1988 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended), or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WC1E 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First edition 1977 Reprinted 1979 Second edition 1982 Reprinted 1983 Third edition 1985 Reprinted 1986 Fourth edition 1988 Published by MACMILLAN EDUCATION LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world Typeset by TecSet Ltd, Wallington, Surrey

To Daniel Elizabeth Karen Mark Paul and Richard British Library Cataloguing in Publication Data Balchin, Paul N. Urban land economics and public policy.- (Macmillan building and surveying series). 1. Great Britain. Urban regions. Real property. Economic aspects I. Title II. Kieve, Jeffrey L. III. Bull, Gregory H. 333.33'7'0941 ISBN 978-0-333-46378-9 DOI 10.1007/978-1-349-19444-5 ISBN 978-1-349-19444-5 (ebook)

Series Standina Order If you would like to receive future titles in this series as they are published, you can make use of our standing order facility. To place a standing order please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address and the name of the series. Please state with which title you wish to begin your standing order. (If you live outside the UK we may not have the rights for your area, in which case we will forward your order to the publisher concerned.) Standing Order Service, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire, RG21 2XS, England.

Contents Preface to the Fourth Edition Acknowledgements List of Figures List of Tables 1 Introduction Urbanisation. The resource of land. Urban land economics. 2 The Market and the Location of Urban Land Uses The inefficiency of the market. Accessibility and demand. The urban land use pattern. The central business district. The zone of transition. The suburban area. The rural-urban fringe. Urban location theory. Costs. Revenue. Costs, revenue and decentralisation. Profitability. Retail location and development. Office location and development. Industrial location and development. Residential location. ix xi xii xiv 1 13 3 Spatial Structure and Urban Growth 55 Urban rent - land values - density. Theories of urban structure. Concentric zone theory. Sector theory. Concentric zone-sector theory. Multiple-nuclei theory. The development of individual urban sites. Theories of urban growth. Central place theory. Urban base theory. Keynesian theory. Input-output analysis. Location theory. Size, urban growth and optimality. 4 The Property and Investment Markets 87 Property interests. The property market and price determination. Institutes and the property market. Government and the property market. Property as an investment. Differences between property and non-property investment. Cycles: the property market boom and collapse 1972-75, and the property boom 1986-87. 5 Economics of Development and Investment Appraisal 106 The nature and types of development. Site selection. Financial calculations for private development and the price of land. Optimal development. Sources of finance for development. Property development and investment overseas. The development cycle. Investment appraisal. Conventional methods of investment appraisal. Discounting and the time value of money. Net present value. Internal rate of return analysis. Uncertainty and probability theory. Sensitivity analysis.

viii Contents 6 Welfare Economics, Land and the Environment 136 The concept of economic welfare. Welfare, externalities and public goods. Cost-benefit analysis. Pollution. 7 Urban Congestion, Decay and Renewal 171 Economics and the traffic congestion problem. Road use and development. Direct costs. Indirect costs. Disequilibrium of demand and supply. Road pricing theory. Methods of road pricing. Some economic consequences of direct road pricing. Investment. Car parking. Public transport. The inner urban areas. Renewal strategies. Local authority sources of finance. Local authority current financing. Monetarism and rate control. The reform of local government finance. 8 Housing 222 Housing market. Tenure and prices. Population trends. Finance for house purchase. Building society funds. Incomes and income elasticity. Tax concessions. Second homes. House prices and the macro-economy. Private rented accommodation. Local authority housing. Housing associations. Slum clearance, rehabilitation and renewal. Rehabilitation. The supply of houses. The housebuilding industry in Great Britain. House prices and land costs. Material, labour and finance costs. Conclusions. 9 Land Values, Proprietary Interests and Town Planning 272 Town Planning and property values. Market-determined values and social needs. The price mechanism and the inequalities of wealth. The polemics of government intervention in the property market. Planning and the loss and recovery of private property rights. Government policy since 1973. 10 The Construction Industry in the United Kingdom 297 The nature and characteristics of the industry. Repairs and maintenance. Site work. The nature and determination of demand. Tendering. Negotiated contracts. The construction industry and the economy. Effects of government policy. The structure of the industry and its economic organisation. Number and size of firms. Small firms. Large firms. Subcontracting. Material manufacturers. Builders' merchants. Labour. Labour-only subcontracting. Technical developments in the construction industry. System building. Local authority housing and industrial building costs. Metrication and dimensional coordination; computer applications. Construction overseas. Conclusions. Index 332 Postscript 344

Preface to the Fourth Edition While this book, like the first three editions, is a basic text for students registered on degree courses in Estate Management/Land Economics, Building Surveying and Quantity Surveying, it is hoped that it will increasingly serve as an essential reader where there are degree or diploma courses (or specialisms) in urban economics, urban geography or town planning. In addition, the book should remain an important reader for students preparing for the examinations of the many professional bodies concerned with land- for example, the Royal Institution of Chartered Surveyors and the Royal Town Planning Institute. Between us we have lectured on courses in land economics and town planning for nearly two decades and have been involved in the preparation of both degree and honours degree syllabuses. We have found that while there is an ever-increasing flow of new literature on urban land economics, often the product of intensive research, the student's problem of a restrictive range of suitable books still remains partly unresolved. By combining theory with the applied aspects of the subject, however, this book is intended to eliminate this deficiency. In recent years there has been a dramatic change in the economic strategy of government in the United Kingdom - most notably with the adoption and relegation of monetarism and the implementation of programmes of privatisation, not least within the field of property. This edition therefore considers public policy in greater length than in former editions- a facet now reflected in its subtitle and inevitably in the coursework and examination questions of the relevant academic and professional institutions. This alone (apart from more detailed theoretical considerations) distinguishes this book from others of similar title and should make it a more comprehensive and therefore useful text. A further new feature of this edition is the inclusion of a chapter on welfare economics. By placing welfare considerations near the middle of the book, it is hoped that a bridge will be formed between the initial chapters which concentrate mainly on the private market and subsequent chapters which deal with public intervention. The subject matter of the book progresses from the general to the specific. Chapter 1 is an attempt to provide a background account of population change, the process of urbanisation, the basic features of land as a factor of production and it considers the role of urban land economics. Chapters 2 and 3 seek to explain the rationale of the locational determinants of economic activity. Chapters 4 and 5 deal with property investment, the economics of development and investment appraisal in the private sector. Chapter 6 considers the relationship between welfare economics and land, and examines the question of pollution. Chapter 7 sets out to explore urban decay and renewal - including the conix

X Preface straints of urban transport and public finance. Chapter 8 analyses the problems of housing. Chapter 9 examines land values and public intervention, and chapter 10 looks at the performance and organisation of the construction industry. In compiling all editions of this book, every effort has been made to ensure that legislative and statistical detail is accurate or at best undisputed at the time of writing. In this edition, to take account of policy development, it has been necessary to add a Postscript on page 344. We must acknowledge the debt we owe our colleagues past and present who have advised us particularly with regard to amendments to later editions. We would particularly like to thank Professor lvor Seeley who painstakingly read and edited the initial manuscript and without whose help the publication of this text would not have been possible. We would also like to extend thanks to Christine Marcouyre who helped to type and collate material for this edition, and finally we would like to thank our respective families and particularly Maria and Mildred for the patience which they have shown throughout the preparation of this book. Paul N. Balchin jeffrey L. Kieve Gregory H. Bull

Acknowledgements The authors and publishers wish to thank the following who have kindly given permission for the use of copyright material. P. Cheshire and D. Hay for table 3.5 'Suburbanisation and deurbanisation in Western Europe, 1970-80' [quoted in P. Hall, 'Flight to the Green', New Society, 9 January, 1987]. Financial Times for figure 4.3 'Share price movements 1973-87' [Financial Times, 24 October, 1987]. Morgan Grenfell Laurie for table 4.2 'Investment media: comparison of real rates of return, 1978-86' [MLG-CIG Property Index, 1987]. Every effort has been made to trace all the copyright holders but if any have been inadvertently overlooked the publishers will be pleased to make the necessary arrangement at the first opportunity. xi

List of Figures 1.1 Relationship between labour and capital inputs and rent 8 1.2 Economic rent and transfer earnings 9 2.1 Von Thunen's model of agricultural land use 20 2.2 Alonso's bid-rent-distance relationship 21 2.3 Urban, speculative and agricultural values 22 2.4 Hypothetical turnover or rent gradient within a major shopping centre 27 3.1 The concentric zone theory 58 3.2 Rent gradients and the concentric pattern of urban land use 59 3.3 The effect of rising rents on the concentric pattern of urban land use 60 3.4 The axial development theory 61 3.5 The sector theory 62 3.6 The structure of a hypothetical British city 63 3.7 The multipie nuclei theory 64 3.8 The maximum economic life of a building 65 3.9 Net annual returns (NARs) and capital value of a building in current use over time (price stability assumed) 66 3.1 0 Capital value of a cleared site in new use upon redevelopment 67 3.11 Factors influencing timing of development 68 3.12 Site values of competing uses 70 3.13 Chris taller's theory of the arrangement of central places 72 3.14 The rank-size rule: the hypothetical population of cities in relation to their ranking 74 3.15 Money flows circulating around, injected into and withdrawn from an urban area 79 4.1 Demand and supply of owner-occupied houses and changes in tax relief 96 4.2 Demand and supply in the uncontrolled sector of the housing market 97 4.3 Share price movements, 1973-87 103 5.1 Optimal site development and site bid 112 5.2 Multi-storey development 114 5.3 Maximisation of site value for given capital investment 115 5.4 Present value of income and expenditure 132 6.1 Pareto gains and losses 138 6.2 Potential Pareto improvements 139 6.3 Welfare maximisation: a simple model 140 6.4 'Production on production' externalities 142 xii

List of Figures xiii 6.5 6.6 6.7 6.8 6.9 6.10 7.1 7.2 7.3 8.1 8.2 8.3 9.1 9.2 9.3 9.4 9.5 9.6 9.7 10.1 10.2 Production frontiers and the internalisation of external costs Environmental quality and the production frontier Demand curve for tunnel crossings Housing subsidies and the consumption of housing services Savings and investment decisions over time Private benefits and social costs in production: the optimum level of pollution control Road tax and costs Public transport demand, costs and subsidy Changes in the maximum economic life of a building (assuming general price stability) Demand and supply in the controlled sector of the private rented housing market The relationship between housebuilding and land costs under conditions of complete elasticity of supply The relationship between housebuilding and land costs under conditions of complete inelasticity of supply The effects upon values of an increase in demand Taxation and the supply of land Surplus value, profit and rent The impact of planning control upon land use and values The impact of a green belt upon land use and values Planning control and the social value of land The effect of a reduced supply of development land upon capital values Brick stocks and housing starts Unemployment in construction as compared with national rates, 1969-86 143 144 147 151 158 165 179 188 194 240 263 264 277 279 280 282 283 284 291 313 315

List of Tables 1.1 1.2 1.3 1.4 1.5 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 5.1 5.2 5.3 Percentage of active population employed in agriculture in selected advanced capitalist countries, 1955, 1966, 1973 and 1981 Percentage of active population employed in industry in selected advanced capitalist countries in 1955, 1966, 1973 and 1981 Percentage of active population employed in services in selected advanced capitalist countries in 1955,1966,1973 and 1981 Population growth in urban and non-urban areas, 1960-70 and 1970-75 Diminishing returns to land United Kingdom population 1951-85 Proposed major out-of-town shopping developments in Great Britain, 1986 (December) Out-of-town and town centre shopping development in Great Britain, 1986 Indicators of economic performance in selected advanced capitalist countries, 1979-87 The decline of industrial and manufacturing employment in the United Kingdom, 1955-84 Changes in manufacturing employment in selected advanced capitalist countries, 1955-83 Changes in manufacturing employment and floorspace in England and Wales, 1967-85 Location of industrial floorspace in England and Wales Available industrial land in Great Britain, 1982 Industrial rents and rental growth in Great Britain Prime and high tech industrial land values in Britain, 1980-86 The urban hierarchy in South Germany The changing hierarchy of shopping centres in Britain, 1961-84 Basic-non-basic equilibrium Population change in urban cores- Western Europe, 1965-75 Suburbanisation and desuburbanisation in Western Europe, 1970-80 Institutional investment in property, 1973-86 Investment media: comparisons of real rates of return, 1978-86 Commercial rental growth adjusted for inflation, 1965-87 Developer's budget The cost, revenue and site value of a hypothetical office development The calculation of net present value xiv 2 3 3 4 6 14 30 35 42 43 43 44 45 46 46 47 73 75 77 83 83 92 93 104 111 115 131

List of Tables XV 5.4 The internal rate of return 131 5.5 Optimal investment criteria 132 7.1 Some international comparisons of traffic density, taxation and expenditure 173 7.2 Urban areas designated under the Inner Urban Areas Act 1978 196 7.3 Urban Programme expenditure, 1974-75 to 1985-86 197 7.4 Enterprise zones: designations 1981-84 201 7.5 Local taxation in selected areas before and after the imposition of community charges 218 8.1 Trends in housing tenure and stock, 1970-85 223 8.2 Average house prices and retail prices, 1970-86 224 8.3 Indices of new and existing house prices, house building costs, general index of retail prices, 1973-86 225 8.4 Regional variations in house prices, income and unemployment, Great Britain, 1987 227 8.5 Mortgages: main institutional sources, United Kingdom, 1970-86 228 8.6 Nominal and real rates of interest on loans, 1973-86 233 8.7 Distribution of mortgage interest relief, 1981-84 233 8.8 Mortgage interest relief and exchequer subsidy, 1978-79 to 1985-86 234 8.9 Legislation controlling rents, 1915-74 237 8.10 Houses demolished or closed, Great Britain, 1975-85 251 8.11 Renovations with the aid of grant or subsidy, Great Britain, 1971-86 255 8.12 Theconditionofhousingin England, 1971-81 256 8.13 Houses started, Great Britain, 1950-86 259 8.14 Private sector housing land prices (at constant average density) and house prices, 1971-86 262 8.15 Building society loans on new houses, starts and completions in the private sector, 1970-86 267 8.16 The number of dwellings and households, England and Wales, 1966-81 268 8.17 Public expenditure on housing and transfers, United Kingdom, 1979-80 to 1986-87 268 10.1 10.2 10.3 10.4 10.5 Value of construction industry output, Great Britain, 1970-85 299 Employment in the construction industry, Great Britain, 1970-86 303 Structure of the construction industry: number and size of firms, 1973-81 307 Employment of operatives by contractors by size of firm, 1973-81 309 Dwellings built by non-traditional methods, local authorities and New Towns, England and Wales, 1965-79 325