BUYING INTO THE BEST NEIGHBOURHOODS: HOUSE PRICES AND SOCIAL INEQUALITY

Houses take up about a fifth of our spending, but when we buy a house, we buy access to a particular neighbourhood, to a quality of life for ourselves and to life chances for our children. A series of research reports, edited by Professors Paul Cheshire and Stephen Sheppard, explores the important relationship between the housing market and fundamental inequalities of incomes, lifestyles and life chances in our society.

The studies, published in the November 2004 Economic Journal, show that:

• Many of the most important things that contribute to a good life – security, good schools and local amenities – are only available if you live close to them. When people buy houses, what they seem to be trying to buy is at least as much a relative quality – ‘the best neighbourhood’ – as it is a given quality.

• This implies that if the richer households become richer, they will be even more successful in buying into the nicest neighbourhoods and, as a result, these nice neighbourhoods will become even more attractive. At the same time, the now relatively poorer households will be condemned even more exclusively to the less attractive neighbourhoods with higher levels of vandalism, served by the worst schools, etc.

• So the richer households living in the most attractive neighbourhoods actually receive a windfall gain if incomes become more unequal and they become richer still. Growing income inequality means not only that they have higher incomes but that their property values rise relative to people who have become relatively poorer.

• Similarly, people seem voluntarily to select neighbourhoods in which their own ethnic groups are concentrated – irrespectively of house prices.

• Taken together, these findings suggest that trying to reduce social segregation and exclusion by planning for ‘mixed’ neighbourhoods is as likely to be effective as applying leeches is to cure a fever. It treats the symptom not the cause, which is inequality in society itself. So some things we may think of as problems – such as ethnically exclusive neighbourhoods – may promote welfare rather than reduce it.

• Many local public goods, overtly funded from taxation, which we think of as naturally being provided on an equal basis to all households, should really be thought of as being allocated through the housing market. Consumption of them is conditioned on household income in just the same way as consumption of foreign holidays, private education or broadband internet access is conditioned on income.

• There are lots of features of a neighbourhood that make it an attractive place to live: low crime levels, good schools, local public goods and amenities, nice neighbours, etc. And of course, the features that make it attractive must also seem likely to be permanent. If you make the big decision to pay extra to buy a house in your dream neighbourhood, you don’t want to wake up to find it is suddenly full of rubbish and the schools that serve it are tumbling down the league tables.

• Not only is there only one best school and one best neighbourhood in any city but the price paid to live in the best neighbourhood rises disproportionately with its quality. Taking a ‘standard’ house and estimating the way its price varies with aspects of neighbourhood quality, it is the last 10% of the variation that makes most difference to its price. If there are ten primary schools in a city, going from the worst to the next to best increases the standard house price by 10%. But buying the same house in the catchment area of the very best school will cost you another 20%.

• The same is true of a range other aspects of neighbourhoods: garden size, secondary school quality or the socio-economic characteristics of your neighbours.

Notes for editors: ‘The Price of Access to Better Neighbourhoods’ edited by Paul Cheshire and Stephen Sheppard is published in the November 2004 issue of the Economic Journal.

Cheshire is at the London School of Economics; Sheppard is at Williams College, Massachusetts.

For further information:
Paul Cheshire on 020-7955-7586 (email: P.Cheshire@lse.ac.uk);
Steven Sheppard via email: Stephen.C.Sheppard@williams.edu; or
RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).