Everyone talks about price bubbles, but few actually define what they mean by them — and for good reason. Former US Federal Reserve chairman Alan Greenspan made a fair point when he said that it was relatively easy to spot a bubble with the benefit of hindsight, after it had burst and prices had collapsed, but it was much harder to spot a bubble when you are still in the middle of it. That is because at the time, although prices are high, there is usually a narrative that can be used to justify them.
Thus it is with London house prices. It is becoming commonplace to assert that London housing is in a bubble because prices continue to rise regardless of financial crashes, geopolitical risks or anything else, and central London is fast becoming affordable only to the internationally rich and a small group of home-grown millionaires.
But to assert that this is a bubble and to go further, as some do, and blame the Government’s Funding For Lending and Help To Buy schemes is surely a stretch too far. I don’t know many Russian oligarchs but those I have met did not need Help To Buy to acquire their houses in Kensington. Nor did their Chinese, Indian, Middle Eastern and Nigerian neighbours.
Surely the reason central London prices are so strong is down to scarcity — too much money chasing a fixed supply. So what we should really do is ask why it is that the world’s richest feel as never before that they have to own a slice of London real estate.
Well, one reason is London boasts some of the world’s most sophisticated estate agents, who for some years have been marketing aggressively in Hong Kong, Moscow, Dubai and elsewhere. You do not find French estate agents pushing Paris or Americans pushing New York to anything like the same extent. So if these overseas wealthy are going to buy anywhere, it is likely that London will be one of the first places they look.
A second reason is profit. Investment returns even for oligarchs are hard to come by. The rise and rise of London property, almost without interruption, makes this an attractive place to park a few million. You may not make a profit but our estate agents can show you lots of charts that suggest you would be very unlucky not to. Third, there is no tax to speak of. In other cities around the world, it is commonplace for the local or national government to impose an annual tax levy of 1% of the market value of the property — sometimes more.
So the foreign owner of a £20 million house in a posh suburb of Boston, for example, would have to pay £200,000 a year in tax whether or not they set foot in the place. There is, of course, nothing like that in the UK, which makes buying a London house attractive compared to the competition even at today’s prices.
Some 10 years ago, when Ken Livingstone was still mayor of London, someone in his office produced a blueprint for the capital, and what was needed for the coming decades.
It said quite bluntly that the population was likely to increase by at least three quarters of a million, and that this influx, plus the existing pent-up demand, meant hundreds of thousands of new homes should be built in the capital. It suggested this should happen in what was dubbed the Thames Gateway — that vast strip of disused industrial land stretching out from Canary Wharf towards Beckton and beyond. Unfortunately the plan was never turned into action.
So here is a policy idea to help ease the London property crisis. First, empower Boris to levy an annual 1% tax on London’s expensive foreign-owned homes. Second, use the tens of millions this would raise to build affordable homes to buy or rent for the ordinary population of London starting in the vast area of Docklands, which is still undeveloped.
The tax would put off some buyers and lead to a lessening of foreign demand, which would ease the pressure on central London property. The new build would increase supply and stabilise prices for those who at present are struggling to buy anywhere.
The scrapping of Help To Buy, which some suggest as an alternative, will do little to take the steam out of London prices. There is only one long-term solution to the housing challenge facing London. We have to build more.
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