Everyone knows that London is an expensive place to live, but how big’s the cost difference with other parts of the UK?
The price of a London home is at least $600 a square foot. A house less than three miles from Piccadilly Circus costs a minimum of $1,500. In prestigious parts of Mayfair and Belgravia, homes go for up to $35,000 a square foot.
In contrast, a great house in a good part of Glasgow is about $400 a square foot.
Bargain hunters can go to Derry City in Northern Ireland. There, a family home costs no more than $200 a square foot.
Which of these cities has the fastest-growing populations?
Conventional economics suggests the growth of a city will be largely determined by the income levels and cost of living in each place.
From a cost perspective, it’s a no-brainer. A home that costs $1m in London will go for $200,000 in Derry. And since rents reflect capital costs, these too should be proportionately lower.
Pay’s another story. Average annual earnings in London are now above $60,000, though this figure is distorted by a small number with very high salaries. For the UK, the average is $50,000. In Glasgow, it’s about $38,000. In Derry, it’s less than $30,000.
So the average person in Derry pays one-fifth of the amount he or she does in London for housing while earning half the average in Britain’s capital.
Of course, job opportunities are critical. London’s creating more jobs than other British cities. But about 20 per cent of the British labour force is in public services like education and healthcare and these are in national demand.
So there are fewer new jobs outside London than in London. But there are jobs. Vacancies emerge as people retire.
The answer conventional economics might suggest is that London benefits from creating more jobs but loses because of the cost of living. The overall outcome might be uncertain.
What do the figures show? In the past ten years, the population growth of London has consistently outstripped that in both Glasgow (population: 700,000) and Derry (population: 110,000). In the 10 years ending 2011, Derry’s population rose by under 3 per cent. London’s grew by 12 per cent in the same period.
The projections are equally startling. The Office of National Statistics published a report in 2012 that forecast London’s population would grow by more than 10 per cent in 10 years to more than 10m. The increase in the city’s population over that period would be equivalent to the present population of Birmingham, the UK’s second biggest city. Around February next year, it is forecast that London’s population will rise above 8.4m, its highest-ever level.
It can be argued that conventional economics still helps us understand these trends and that the growth in population in Britain’s most expensive city can be largely explained by rising income levels and job opportunities.
But it’s clear there’s more to London’s expansion than that. Teachers and nurses who would earn not much less outside the city pay eye-watering rent for a small living space in London. And they are doing that voluntarily, even willingly.
Why didn’t they go to Oxford, Bristol or Manchester instead and enjoy a much higher living standard?
The answer Economics2030 provides is that people creating value in services will make choices that have nothing to do with price. Students learn better when they are taught by teachers they like and respect. Restaurants won’t serve customers who treat staff badly (or will charge more for those that do). It’s the relationship that matters most for people creating and consuming services, not price.
A high proportion of young university graduates go to London for their first job. This choice is driven by a combination of factors, of which pay and jobs are only two. Others are the desire to be in what is perceived to be a dynamic and multinational community where there are excellent leisure facilities. It could be a snob effect: people who live in London feel they are superior or more successful simply by being there.
All these factors have this in common: they are intangible and have nothing to do with price.
The implications for economics are profound. More than 7bn people live on the planet and just over half live in cities and towns. The UN forecasts the global population will grow to about 9bn in 2050. By that time, the population of cities and towns will be more than 7bn.
For a growing majority of humanity, what happens in cities will determine the quality of their lives. Infrastructure, housing and services in cities will be the biggest challenge facing the world in the next half century. It will be as important as global warming due to human action.
But as the growth of London shows, the demand for these services is only partly due to price.
Economists justify themselves by arguing their theories help people allocate resources in an efficient way.
But if economics is going to be relevant to the growing number living in the world’s cities, economists will have to think with increasing seriousness about the role of non-price factors that are driving urban growth everywhere.