By Jack Peat, Editor of The London Economic
The great London housing crisis is a potent example of how capitalist structures fail when left to their own devices.
Mayor of London Boris Johnson believes we would be utterly nuts as a society if we “slammed the door” on wealthy foreigners buying property in the capital. Loosely translated, this means that London residents are competing with the top one per cent of wealth in the world in a market that is already strangled by a lack of supply and growing demand. While young families struggle to secure deposits of £50,000 (almost twice the average London wage), oligarchs and tycoons from Hong Kong, China, Malaysia and Russia count the cash from their back pockets as estate agents salivate over the hassle-free exchange of property, trading the capital off chunk by chunk to ‘investors’ rather than ‘residents’.
And therein we have an important distinction. Walk through parts of Knightsbridge and Chelsea and you’ll be welcomed by dark lights in eerily desolate rooms. London property isn’t for living in; it’s a metaphorical currency that only has value as part of a diverse portfolio which is eating up prime spots of the world. Free-market organisation Civitas found that 85 per cent of prime London property purchases in 2012 were made with overseas money, locking millions of UK citizens out of the housing market.
What Johnson fails to see is that by welcoming foreign investment into the London property market he’s actually slamming the door on Londoners. Unfortunately, it’s difficult to get the message across via democratic means. The electoral roll is shrinking in Westminster as non-EU buyers snap up prime housing stock as investment, whipping 11 per cent off the electorate in Knightsbridge and Belgravia and taking more than 2,000 voters from Westminster. As Bayswater, Mayfair and Soho begin to fall prey to the same fate it is evident that, piece by piece, London and its Mayor is shunning the very people that live within it.
The cost of a housing currency
You can get rich quick in developing markets – cheap labour and resource rich nations are a treasure chest for those with a bit of cash who can turn a blind eye to exploitation and dirty tricks – but you can’t stay rich unless you diversify your assets.
In developing nations keeping money in cash is dangerous. Unlike sterling or the US dollar, the Thai baht, Indian rupee or Russian ruble are subject to more external pressures which can alter a person’s wealth uncontrollably.
But London property isn’t subject to the same pressures and relies on the basic economic forces of supply and demand, which will remain tipped on the demand side for the foreseeable future. This has turned the capital into a housing currency that threatens to squeeze supply and exacerbate many of the problems that landed in this mess in the first place.
Fuelling a bubble
Earnst and Young has warned that the London housing market is exhibiting “bubble-like” conditions, with the average price in the capital is expected to reach around £600,000 by 2018, 3.3 times the price in the north-east of England. But as fast as ‘asset’ investors can fuel a market, they can abandon it with the same haste.
A Thousand Trees, featured on an early Stereophonics album, highlights this point quite well: “It only takes one tree to make a thousand matches, it only takes one match to burn a thousand trees.”
As we’ve seen on the global stock markets, investors are in the game to make money and can withdraw from the market at the slightest smell of danger. Take this component away from the London property market and you see that we have a treacherously inflated asset class which could result in substantial negative equity and an instable market if removed.
Capitalism is the worst form of economic system except for all the others. Its main downfall is that it knows no limits. Private rents in London have risen nine per cent since December 2011, so what! UK buyers are out priced by foreign bidders with a diverse portfolio of properties, big deal! In a capitalist structure it’s money first, people second, and as long as we’re a secondary consideration – chiefly in the eyes of politicians – our standard of living will continue to deteriorate.
Ed Miliband has pledged to tackle the problem of overseas investors buying homes in London and leaving them empty, telling the Evening Standard that a Labour government would stop developers advertising properties overseas first and would consult on allowing councils to increase the council tax they can charge on empty properties.
Crucially, he recognised the political mindlessness that is displayed by influential figures such as the capital’s Mayor, Boris Johnson. “The most important ingredient that has been missing is political will. That’s why I have made a firm promise: under the next Labour government, Britain will again be building at least 200,000 decent homes a year by 2020.”
It’s about time politicians represent the electorate, rather than the interests of those with a bit of cash in their back pockets. Confronting the great London housing crisis takes more than a few wistful comments on the flow of overseas funds into the capital, it requires an understanding of what’s actually happening on the ground. Without shutting the door on foreign investment, consider how you might offer the same treatment to the people of London.
Your move Boris.