What price a top state school?

26th January, 2013

The best things in life may be free, but buying a house in the vicinity of the best things in life is expensive

How much do parents value a safe environment, green spaces and a good education for their children? Such things are priceless – except that, of course, they are not. The best things in life may be free, but buying a house in the vicinity of the best things in life is expensive.

Economic researchers use house prices like a movie jewel-thief uses an aerosol spray. The aerosol isn’t important by itself, but it reveals the otherwise invisible laser beams that will trigger the alarm. The house prices aren’t necessarily of much direct interest, but indirectly they reveal our willingness to pay for anything from a neighbourhood free of known sex offenders to the more familiar example of a popular school.

In principle this is easy. Compare the market price of two otherwise identical houses, one of which enjoys the amenity in question (a nice view, a quiet street, access to an excellent school) while the other does not. In practice, houses are rarely identical, and all sorts of valuable amenities from good schools to good neighbours to low crime are likely to be jumbled up together.

Researchers have relied on a variety of statistical techniques to get round this problem. At first they used what are called “control variables”, a mathematical attempt to adjust for the fact that a proper like-for-like comparison is impossible. More recently they have focused on administrative boundaries, where one side of a street is in a school’s catchment area while the other side is not.

“A link between better schools and higher house prices is one of the most stable empirical regularities worldwide,” writes the economist Steve Gibbons in Centrepiece, a magazine published by the LSE’s Centre for Economic Performance. His colleague Stephen Machin has published a more academic review of the literature, reaching much the same conclusion: the ability to send your children to one of the best schools rather than one of the worst will add 15 to 20 per cent to the value of your home. (Internationally, estimates range from about 5 per cent to 40 per cent.)

Relative to private school this is pretty good value: it corresponds to around £20,000 or so. [EDIT: Apologies, this should have been £28,000, with UK average house price of £160,000. Not sure what I was thinking. Then again, interest rates of 5 per cent are on the high side so the £1000 a year figure remains in the right ballpark. Thanks to all who pointed out the error.] Since one would presumably get this money back eventually, when selling the house, the real cost is just the extra interest on a larger mortgage (or the foregone opportunity to earn interest on savings). At interest rates of 5 per cent, that is £1,000 a year for the right to send every child in your family to a nice school, an order of magnitude less than the cost of privately schooling a single child.

One obvious question is what parents actually think they’re paying for here – the quality of the schooling, or the chance to choose their child’s peer group? The answer seems to be both, in roughly equal measure. School regulators focus on “valued added” measures – the underlying quality of what the school provides – but parents are probably right to care about who is in their child’s peer group, too.

What conclusions should we draw? The first is that while the chattering classes talk endlessly about schools and school admissions, willingness to pay to live near a good school is smaller than I would have expected. No doubt there is a lot of variation here: some people don’t care at all and others care desperately. Still, it is surprising that willingness to pay is so low.

The second conclusion is that while £1,000 a year isn’t an enormous amount, it’s a large sum relative to how much we spend on state schooling – about £6,000 per child in England. More to the point, of that £1,000-a -year willingness to pay for good schools, the school system receives not a penny. There must be a better way.

Also published at ft.com.

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