The Housing Market and Regional Commuting and Migration Choices

Summary:

In this view, a very high rate of owner-occupation as in Britain may impede labour mobility because of higher transactions costs than in private renting. Bover et al (1989) suggested other ways in which the owner-occupied housing market can exacerbate regional labour mismatch. A body of econometric evidence has now built up to suggest that high relative earnings and employment opportunities encourage migration to a region while high relative house prices discourage it. The most obvious mechanism for this negative effect of house prices on migration arises through cost of living differentials between regions. If earnings are not deflated by a regional cost of living index which appropriately incorporates housing costs, relative house prices will, in part, measure this omitted cost of living effect. However, there are likely to be further effects connected with constraints on credit availability and the risks associated with a high level of indebtedness both relative to income and to housing equity.

The evidence in Muellbauer and Murphy (1997) is that housing markets in Britain are far from efficient and are given to 'bubble' type overshooting. This arises for at least three reasons: extrapolative expectations, the release of liquidity constraints when house prices rise which feed backs into the housing market, and because of feedbacks to the housing market from the extra spending on other goods which more valuable housing assets make possible. Highly competitive credit markets, low transactions costs and a history of high returns in housing tend to increase house price volatility in Britain. Moreover, given the importance of the portfolio motive for house purchase in Britain, the demand for living space by employees can be crowded out by higher portfolio demand. This helps explain the peak of net-outmigration from the South East in 1987-89 when South East labour demand was so buoyant. This is an important example of regional labour mismatch resulting both in efficiency losses and inflationary pressure.

The possibility of commuting is often cited as a way of overcoming housing market impediments. This paper models regional commuting and migration choices in a common framework. Data for the 1980s and 1990s on net commuting are derived from the ratios of numbers of employees resident in a region to the number employed in that region using Labour Force Survey and Census of Employment data. Information on migration comes from the National Health Service Central Register.

As argued by previous researchers, the commuting/migration trade-off implies stronger responses of migration to relative housing market costs in adjoining regions compared with more distant regions. The reverse should hold for relative labour market effects. Our findings support these arguments. We find extremely strong housing market effects on migration rates in models which incorporate proxies for house price expectations as well as downside risk in house prices, in addition to the conventional relative house price effects.

The paper argues that, in some respects, history is repeating itself with the end of millenium re-emergence of regional mismatch, popularly known as the 'North-South divide', and the associated pressures on pay. Given its costs, long distance commuting is unlikely to prove a large enough safety valve. Potential tax reforms, including of the Council Tax (a type of property tax) are proposed which should ameliorate these difficulties.

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