17 February 2022

Cluster bucks – how high housing costs are sapping growth


Harwell is a chocolate-box village, nestled in the Vale of the pre-historic Uffington White Horse and home to an 11th century church. It’s also the UK’s gateway to space.

The Harwell Space Cluster is a research and commercial development campus with over 100 different organisations and the centre of a futuristic industry that contributes £5.7bn to UK GDP. It’s a great example of the benefits of clustering.

The Government has rightly recognised the value of places like Harwell, and announced three new ‘Innovation Accelerator’ areas, backed by £100 million of investment for local businesses and research, in its Levelling Up white paper. This is welcome, but it must not come at the cost of abandoning the clusters we already have.

We have never seen public policy that successfully moves a dense hub of economic activity from one place to another. But we have seen misguided central planners move people out of cities and kill growth, as happened with Birmingham in the post-war era.

Currently the biggest threat to Britain’s most productive places is the prohibitive costs of housing in London and the south-east. As I argue in the latest report for The Entrepreneurs Network, ‘Strong Foundations’, high housing costs affect people’s decisions about where to live and what job to take, meaning that people are less likely to take jobs they are better suited to, have fewer people to collaborate with and learn from, experience higher startup costs for their business ideas, and have less of a stake in the economy. Together, these effects undermine economic growth everywhere.

High housing costs can also perpetuate a self-sustaining cycle of decline, with a disproportionate share of the proceeds of growth going to landlords.. This in turn creates groups of people who lose out from economic growth and are politically motivated to halt it by opposing future development.

Unfortunately, there are people who believe that in order to level up the north we should restrain building and investment in the south-east. The first iteration of the Planning Bill was scrapped after the Government was threatened with backbench revolt. MPs like Bob Seely said that any system where house-building is based on affordability would see us ‘actively depriving’ the north of investment and would ‘concrete over the south’. But, as CapX’s editor-in-chief Robert Colvile noted recently, ‘you cannot fix years of undersupply in the south by building in the north, in the hope that economic activity will follow’.

In knowledge-based economies like ours, smaller towns and cities are less productive, less innovative, and poorer than their larger neighbours. In a developed nation, if one city has twice the population of another, it will have more than twice the economic activity of its smaller neighbour, as residents will be somewhere between 2% and 11% more productive per capita. People then have access to a larger labour market, which means employers and employees are better matched.

Larger cities also have better resources. There is more variety and competition for the services being provided. For individuals this usually means better entertainment venues, restaurants, childcare options, healthcare, shops, and schools. For businesses this will mean better support staff, more office space to choose from, and better suppliers.

People in large cities also have access to better networks. In a smaller city, due to a lack of choice, people will have fewer or lower quality connections. This will limit their ability to learn from each other and collaborate. For example, researchers in larger cities file more, and better quality patents

Larger cities are also likely to produce more original, unconventional ideas. Although smaller towns like Harwell can sometimes sustain a highly specialised cluster, larger cities can sustain multiple industries, which results in inventive people with different backgrounds collaborating. That’s why London is world-leading in fintech – it was already a global centre for both tech and financial services and gave birth to a new industry.

The benefits of clustering are so great that despite the cost of housing and offices entrepreneurs still choose to base their businesses in places like Silicon Valley or London. It follows that if we carry on failing to build enough market-rate housing in the most expensive places, we won’t just divert economic activity, we will kill it.

If we want to level up, then policymakers have to understand and exploit the economics of clusters – not ignore them. Part of the reason the UK’s left behind regions are poorer is that we have ignored these truths. Many of our cities lack adequate infrastructure and are badly connected, which means they function less like a city than a collection of small towns. Leeds, for example, is the largest city in Europe without a metro system, meaning potential benefits of agglomeration are remaining unrealised. One stark statistic illustrates this well: in the UK only 40% of people who live in big cities can reach their city centre within half an hour. In Europe 67% can.

It might not be politically fashionable to say so, but no one benefits if we make the south-east poorer. We all use the same school system, the same roads, and the same NHS. Foregoing growth leaves less money for the Exchequer and less growth for the rest of the country.

Politicians would do well to remember this and stop pitting different parts of the UK against each other for short-term political gain. To be better off we need to make entrepreneurship an attractive option to high-skilled people, and we should want to be the primary destination for aspiring founders. Building more homes in the places they want to live is a critical part of that equation.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Aria Babu is a Senior Researcher at The Entrepreneurs Network.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.