Regulatory Capture, London (UK) Homeowner's Edition

Something to keep in mind the next time you're in a metropolitan city and someone complains about housing prices and calls for regulation. Maybe the reason for the high prices *is* regulation (Economist):

This is the subject of ongoing debate in Britain; witness the furore over whether to allow construction on London's "greenbelt". Construction is a constant point of contention in built-up areas as well. The magnitude of the impact of these supply restrictions on real estate costs is astounding. In a 2008 paper, Paul Cheshire and Christian Hilber estimated the "shadow tax" imposed by such regulations on office prices in London and other major cities. They found a shadow tax rate of planning restrictions (above construction costs) of about 800% in London's West End, and of nearly 500% in the City of London. The comparable rate is about 300% in Paris, 68% in Brussels, and 50% in Manhattan. (The Manhattan estimate is for the year 2000; other city estimates are for the early 2000s.) [...]

London property owners, as a class, are effectively an incredibly successful rent-seeking operation greedily sucking up the economic surplus generated by the city's economy. When a London firm brings someone to London, they do so, presumably, because the move generates a productivity increase which generates gains that can be shared between firm and worker. But the lion's share of that increase flows not to the firm or the worker but to the owner of the firm's office space and the worker's flat. As a result, London winds up with many, many fewer firms and workers than it could otherwise expect to have. As does Britain, because firms and workers deflected from London are more likely to wind up in New York or Hong Kong than in Newcastle.

Keep that in mind when you read stories about Britain's struggling economy; its lagging growth and productivity performance, and its difficulties raising exports. It's largely down to those great vampiric beasts that bestride London's economy. You know, the homeowners.