Disparity in the central London property market
June 19, 2017
Following on from Paul Goodman’s piece on Con Home (which you can find here) the severe shortage of affordable properties in the centre of our great city has again reared its head following the tragic events at Grenfell Tower and the debate surrounding the ‘haves’ and ‘have nots’ in central London. Properties bought up by non-UK residents and then left vacant creates a myriad of issues and I have longed called for action to be taken at local and national level to remedy this stark imbalance. Paul’s article refers to my below piece from 2013 which, sadly, remains as relevant now as it was four years ago.
‘It’s like the Harrods sale!’ exclaimed Rob Tincknell in January. As Chief Executive of the Battersea Power Station Development Company, it was no surprise that he greeted the stampede to secure new Battersea homes with elation. More than £600 million worth of prime London properties – three quarters of the 800 homes on site – had been snapped up in a frantic four days. The final tranche of 200 properties is now on a homes ‘road show’ in Singapore to attract wealthy Far East buyers.
For property-owning Londoners, the Battersea frenzy was no doubt a welcome sign of the continued robust health of the capital’s housing market. But I suspect the average renter found the news utterly demoralising. For them, the financial crisis brought great promise of lower house prices. But that never came to pass. Instead, already-stratospheric rents have crept steadily upwards. Mortgage deposit requirements have increased. House prices are climbing and yet still properties are being snapped up in double quick time. When even a Battersea studios costs £343 000, the hope of owning the smallest of homes seems more remote than ever.
Contrast that to the ease with which wealthy foreigners, many of whom will not be resident in the capital, are hoovering up London real estate. Such is their spending power that it is becoming increasingly common for agents to market new London property developments first to overseas buyers whose appetite for homes in the capital, alongside their ability to pay for them, seems not to abate.
An increasing number of Londoners are feeling locked out of their own city. Whatever one’s politics, this cannot be desirable– an overcrowded capital in which much of our precious housing stock is being bought by part-time or even absent residents. To many there is no starker example than the London property market of the growing global divide between the super rich and everybody else.
To me the greatest attraction of capitalism and globalisation has always been its ability consistently to deliver improved living standards to billions. It held promise that each generation would be better off than the last, with hard work, innovation and talent given just reward. So it had generally been. Yet, in recent years, as wages have stagnated and living costs risen, more and more people have begun to feel that the rules of the game are instead skewed in favour of a growing global elite. This elite seems not only immune from the headwinds battering everyone else but largely uncommitted to and disconnected from the societies that their money influences.
As Chrystia Freeland observed in her recent book about the world’s superrich, Plutocracy, the wealthy of today are different to the rich of yesterday. Members of this elite, she concludes, tend now to feel more affinity with one another than their own countrymen. They are, in many ways, not citizens of any one country but belong to a pan-global village in which they can cherry pick the very best that each society has to offer. While they believe in state institutions that permit social mobility and political stability, when it comes to the taxes required to pay for them, enthusiasm can swiftly wane.
It is in London that this phenomenon has become most visible. In 2011, top estate agent Savills published a report, The World in London, that documented billions of pounds of foreign money flowing into the capital’s prime housing market, ‘boosted by the weakness of sterling and the perception of London as a safe haven amid political and economic uncertainty’. The biggest investors in central London property have been from Eastern Europe (15% of the market with an average purchase price of £6.2m) followed by Middle Eastern and Northern African buyers (14% market share with a £4m average purchase price). Arabian playboys now race supercars along Park Lane, Russian oligarchs buy the capital’s football clubs and frequent its auction houses and glamorous offspring dazzle London boutiques with their family credit cards.
The strength of demand from international cash buyers has only intensified over the past year with prices in the two boroughs of Kensington & Chelsea and my own City of Westminster rising 15-20%. Such is the scale of transactions in these two areas alone that in 2011-12, they accounted for 13% of all stamp duty collected on house sales nationwide.
It is undeniable that as a collective, this international elite’s colossal spending power injects verve into certain sections of the capital’s economy. Luxury retailers, restaurateurs, hoteliers, property developers and high-end service providers (private schools and the like) all benefit from the presence of global high rollers. At a time of zero to low growth, Britain can ill afford to drive away those with money to burn.
But there is a more pernicious economic impact as well. As the international enclave expands, more and more Central London stock is made unavailable to residents, driving up prices in less central areas as those who would have lived in the city centre are forced out. It is arguable that inflated house prices have, and continue to have, a distortive effect on the competitiveness of the UK economy. In truth they lead to ever higher wages, a drain on the benefits budget and diminish available resources for investment and economic innovation. This will become especially acute as the UK tries to thrive in ever more competitive global economic markets. With greater proportions of household budgets consumed by rent and mortgage costs, people have less money to save and to spend. Ironically the high cost of London property also becomes a significant factor in detracting the brightest and the best from abroad from coming here to work or study.
There is an additional problem in London having become a ‘safe haven’ for international capital flows, a proportion of which has its origins in corruption and rent-seeking activities that would be illegal in the UK. As detailed in Misha Glenny’s McMafia, laundering the proceeds of such activity in London property is just about the easiest and most secure way of banking a large amount of money. The UK is one of the few countries which combines a unique mix of deep and liquid real estate supported by supply shortages, an open capital account, a foreign banking presence, stable judicial institutions, and the rule of law. In running an open capital account without there being a level playing field whereby the UK’s benign investment conditions are mimicked elsewhere, there is a net transfer of British assets to a class from developing regions who have obtained money from acts that would be criminal on these shores. It is one thing to have an open border to welcome foreign business people who create employment and contribute to growth and government revenue. It is quite another for the London housing stock to have become an international currency that is traded between foreigners with little connection either to the city or the nation.
This state of affairs has been tolerated as the price for high foreign investment in Britain in the absence of economic growth. But as the living standards of the majority diminish, we are fast reaching a tipping point at which this inequality is so exaggerated as to become intolerable. I am not advocating a return to the class warfare of the 1970s – it was my distaste for the politics of envy during that era that first motivated my aspiration to public life. However I fear that the capitalist system’s safety mechanisms are being undermined by exaggerated wealth.
People work harder if they are incentivised to do so. Witnessing those who have made their money from cartels and monopolies or from risking other people’s money in a game of ‘heads I win, tails you lose,’ mocks the ambition of the ordinary man. It creates a sense of impotence – that no matter how hard one works or how talented, the simple desire to own a home and afford a family is becoming out of reach. It means that the restoration of growth alone is insufficient to rectify the structural flaws that stand between the ‘squeezed middle’ and their aspirations. It also explains why there is such anger being directed towards those who apparently dip into our society, enjoy all its benefits and yet pay little tax.
Naturally this disconnect between the superrich and everyone else is not an exclusively British problem, as we know from the ‘We are the 99%’ Occupy protests which first took root in New York. Occupy protestors have been criticised for having no coherent alternative plan. Yet it is not up to them to deliver solutions, politicians should recognise them simply as a manifestation of society’s outrage. It is our job as political representatives to address that outrage rather than simply to mimic it. The effect in politicians sharing public anger is for governments to look either utterly impotent or disingenuous in that outrage. This must be addressed before the last vestige of faith in our economic and political institutions is undermined.
I believe policymakers must now undertake an objective cost-benefit analysis of the presence of an international superrich. If the cost is found to be too high, how do governments seek to minimise it? How do politicians design a system that inculcates a sense of societal responsibility within this elite without driving money, talent, investment to other shores? How can we distinguish between genuine foreign business people who become resident in Britain, create employment and contribute to the UK economy, and those who effectively free load on the nation’s infrastructure?
Passionate domestic debate about the imposition of a ‘mansion tax’ is now all the rage. In part it is seen as an answer to some of these very questions. My primary concern over such a levy has always been for those who happen to reside in homes whose value has inflated to a level that bears no relation to a household’s ability to stump up large cash sums. In other words, the asset rich and cash poor. I suspect a mansion tax would most likely drive greater numbers of Londoners from their homes, vacating even more prime, central property for the delectation of foreign buyers. In short, a mansion tax would exacerbate rather than fix the problem.
In light of this, in recent months I have canvassed interested constituents for alternative solutions. A first suggestion has been to publish data. Only then can the problem fully enter the public consciousness and inform national debate. We need to understand just how much London residential property is owned by non-resident, non-tax paying foreigners.
Next it has been suggested that we look at the levying of taxes on non-resident, non-British owners of property through the abolition of the distinction between domicility and residence. Residents would be taxed on their worldwide income and assets while non-residents would be levied with special holding taxes on passive property assets they hold. In New York, apartments can incur a tax of up to $20 000 if they are left empty – might we look at sure a plan here?
Some of my constituents believe these plans could discourage non-resident foreigners from buying real estate assets in the UK while making the fiscal regime attractive to foreign business people who wish to be resident in the UK. Even just a 5% capital tax would generate sufficient revenues to make a big difference. Furthermore, a reduction in net capital inflows would reduce the value of sterling and add to our competitiveness.
The government has made a start with stamp duty – a 15% levy on purchases of property over £2 million by non-natural persons and an annual charge on UK residential properties valued over £2 million owned by non-naturals. Undeniably, however, the Conservative Party is nevertheless being left behind in public debate on these issues. If we are to oppose vigorously a mansion tax, we must rapidly come up with an alternative solution before we cede these contentious and important matters to Labour and the Liberal Democrats. It is not difficult to frame this debate in a distinctly ‘Conservative’ way. The principles that make capitalism work are being warped and it is for our Party to declare that it wishes to address that in order to nourish hard work, aspiration and responsibility. This is not about envious wealth confiscation, rather a government addressing the structural problems that are snuffing out ambition.
Over the past few decades, we have witnessed an unprecedented shift in the ownership structure of central London residential housing stock. The ripple effect has been profound and the inequality of wealth in our capital is now reaching a tipping point. Enough with public hand wringing and moralising. Ultimately these are issues which politicians are elected to address – we must now change the rules of the game.