Friday, 10 August 2018

Economic Myths: Supply and demand - planning permission vs Premiership football players

The usual suspects keep insisting that if we abandoned all planning restrictions, then the value of land would fall. "It's simple supply and demand, innit?", they sneer.

Clearly not true, but I can't be bothered explaining how land prices arise in real-life for the umpteenth time, so let's use an analogy:

1. 'Demand' for footballers (as measured in £££) is mainly all the people who subscribe to Sky Sports, so Sky Sports is prepared to bid a lot of money for Premiership TV rights; it needs that content to get the subscriptions.

2. Premiership clubs can hold out for huge sums of money (or else they sell to the BBC or ITV or whoever).

3. Premiership clubs in turn need the best 200-300 football players they can afford (to stay in the Premiership). There can be - by definition - only 200-300 of such players, so the best 200-300 players can in turn hold out for huge sums of money i.e. all the club's receipts minus the actual costs of maintaining the stadium, selling tickets and so on.

4. It would be fatuous to say that Premiership player wages are so high because there is a lack of supply of footballers. Tens of thousand of people play football regularly with a reasonable degree of skill and proficiency. Premiership players aren't actually much better than the average, they just have to be in the top 200-300.

5. It is not the skills of the players (in absolute terms) which dictates their salaries (they are not ten or a hundred times better than First Division players in the 1970s or 1980s), is is the fact that Sky Sports can monetise what you used to be able to watch for 'free' on the BBC/ITV.

6. Thought experiment: all Premiership players are in the same aeroplane crash and die. So Premiership clubs quickly go out and recruit the best 200-300 players who are left. By definition, these players aren't quite as good as the recently deceased but they can still hold out for the same salaries.

In case people don't get the analogy:

* Contracts with a Premiership team = the best locations
* Contracts with a Championship team = the next best locations
* All the way down playing for your local pub team = zero location value (in £££)
* Premiership players = people who 'own' the best locations = rent collectors/landlords (If a landlord dies or sells, the next owner collects the same amount of rent.)
* Increasing supply of footballers/number of teams in lower divisions has no impact on wages further up the chain = liberalising planning laws increases value of the land now unburdened, but has no impact on value of more favourable locations (which were developed first).


Ben Jamin' said...

The thing with the usual suspects is that they assume the market as it currently stands has efficiently allocated existing housing. It hasn't because total expenditure on housing is lower than it otherwise would be if we all had to pay rent. So attempts to increase supply in order to reduce prices does so by adding further costs and inefficiencies.

They also fail to acknowledge that if the aim is to reduce selling prices, presumably by as low as possible, then a LVT would reduce them as low as they could go. This would also allow for optimal market allocation.

The only valid point regarding supply as far as I can see if that regarding growth. But that would only serve to increase land values, thus prices without a LVT. The LVT sorts that out too, because it incentivises the Government to add development to where the economy demands it because that increases aggregated land rents, thus revenues.

So whether your aim is to lower prices, improve affordability, allocate existing property efficiently, or make sure we have the right kind of development in the right places in the future, LVT is by far the best solution. Whereas blaming planning in order to increase supply isn't.

Mark Wadsworth said...

BJ, the usual suspects make so many false assumptions we can't list them all, I just wanted to deal with a main one.

James Higham said...

There's a distinct lack of information in this post on the footballer's homes' valuations.

Mark Wadsworth said...

JH, I'm not the Daily Mail :-)

Lola said...

Same is true of F1 drivers and top engineers
As a comnercial tenant i have a full insuring and reparing lease. My service charges are roughly the same as the rent. I also pay Business Rates. BR is my service charge for location benefits.

Mark Wadsworth said...

L, yes F1 drivers is the same. Or Wimbledon prize money. The winner doesn't get less winnings if there are more tennis players.

George Carty said...

Isn't one of the most important points about the economics of football the fact that football fans are mostly extremely loyal to their clubs? This means of course that a supporter of a Premiership club is unlikely to defect to a lower-division alternative to save money or in protest against "obscene" Premiership player salaries.

AIUI the thinking of of the "usual suspects" who advocate abolishing planning restrictions is that these restrictions (especially Green Belts) are forcing people to live at an undesirably high density, and that if more building was permitted on cheap marginal land people would move there en masse to escape from high rents/land prices.

I'm not sure this would work in England due to an overall shortage of land (the red-state American cities which are usually cited by these advocates typically have a population density of 2,000 per square mile – only twice the population density of the entire country of England) but might it work to bring down house prices in countries like Australia or New Zealand?

George Carty said...

Another factor to be considered is that in higher-density cities the land-price gradient from centre to periphery is steeper than in low-density cities, because it is determined primarily by the time cost of commuting, and commuting is slower in higher-density cities due to traffic congestion.

Mark Wadsworth said...

GC, yes, fan loyalty = captive audience = rent.

Not sure about your density stats.

Good point on value gradients.

Bayard said...

"these restrictions (especially Green Belts) are forcing people to live at an undesirably high density,

Well that was the intention of the Green Belts in the first place, to prevent "urban sprawl", i.e. low density housing.

Mark Wadsworth said...

B, if the resulting density is "undersirably" high, wouldn't that push prices down?

Bayard said...

Well yes, prices inside the Green Belt are lower than they would be if the density there was lower than it is and people naturally want to live in less dense housing at a given price and location, so the "undesirability" of the current densities is already built into the price.

Mark Wadsworth said...

B, ta. Which goes against the conventional wisdom that planning restrictions push up prices.