Offices scarce but housing scarcer: estimating the premium for London office conversions

The British system of land use planning is one of the most restrictive in the world. It substantially increases the costs of office space (Cheshire & Hilber, 2008; Cheshire & Dericks, 2020) and, especially in London, increases house prices (Hilber & Vermeulen, 2016; Carozzi et al. 2019). Partly in response to the crisis in housing supply, with effect from 30 May 2013, government introduced an automatic right to change the use of offices to residential except in some areas in central London and Manchester deemed to be important office locations. This paper exploits the resulting boundary discontinuities these exceptions produced to estimate the impact on office prices of the new right to convert to residential use. Using a panel data set of some 2,000 office transactions between 2009 and 2016, we find a significant increase in the price of offices eligible for this automatic conversion: a premium of some 50 percent (depending on specification). This demonstrates that while from other sources there was a known shortage of office space from supply restrictions, the restrictions on the supply of housing were substantially more severe.