House prices in London
For the most part of the twenty-first century, London has experienced a growth in house prices, continuing a trend begun in the late 1980s. The most remarkable feature of the growth is that it continued through a period, 2007-2013, during which time house prices in many parts of Western Europe and Great Britain fell, the fall being prompted by a reluctance of banks to lend the amounts they had been prepared to lend prior to 2007. By the end of 2013 London house prices, whose growth had slowed during the period 2007-13, started to escalate with asking prices in September 2013 5.6% higher than the previous high in July of 2012. This was the start of a boom in house prices which continued though 2014. In April 2014 the Nationwide reported that London house prices had risen 18% in the year to April 2013.
Whilst house prices have risen in London throughout the twenty-first century, housing in the most salubrious and expensive areas of London has witnessed the greatest growth. Until 2013 house prices were rising faster in the center of London, in the Boroughs immediately bordering the center of London, and in the wealthier suburbs situated at some distance from the center. However, in 2013 onwards, there was a surge in the asking price of houses at the bottom end of the market.
The position in 2014
House prices continued to rise throughout 2014. It was also being reported that there was an exceptionally high number of people interested in buying a property in London, compared to previous years. In April 2014, the Guardian reported, “Estate agents and homebuyers have reported frenzied demand for property in the capital, with homes attracting huge numbers of would-be buyers. Peter Rollings, head of London agents Marsh & Parsons, said there had been unprecedented levels of demand and record sales, with 48 potential buyers registered for each available property in south-west London.” “A two-bedroom, ground-floor flat in Balham, initially advertised at £450,000, recently attracted 107 viewings and 53 offers.
So, in conclusion in 2014, two things were clear. There were more people expressing an interest in buying a house than there had been in previous years. And secondly those that ended up buying houses in 2014 were prepared and able to pay more for a house than people who had bought houses in previours years had been willing and able to pay. And thirdly, a lot of people buying properties in London, are not resident in the United Kingdom that they buy the property. In 2014 a recent report by right-wing think tank Civitas, called Finding Shelter, cited statistics showing that 85% of prime London property purchases in 2012 were made with overseas money. The Guardian reported that, “Estate agent Savills found that last year £7bn of international money was spent on “high-end” London homes, with just 20% of that spent by UK citizens.
Why, in 2014, are people paying more for houses than people were paying in 2013?
The million dollar question that all estate agents, economists and investors would like to understand is, why, in 2014, are people paying more for houses than people were paying in 2013? Furthermore why is this happening at a time when people are paying less for houses across western Europe and Great Britain?
Invitation made to rich people from around the world to live in London and invest in London’s financial markets
The very rich
The reason that London’s house prices are going up, is complex, but can largely be attributed to decisions taken by successive British governments to offer its financial services and residency to anyone from abroad with a lot of money, including people who have made their money and intend for their money to be used for purposes who were rejected by the United States financial authorities, following the review of American financial regulation, following the attacks on the World Trade Centre and Pentagon in 2001. Successive British governments have made this possible in several ways. Unlike in many other countries foreigners can invest in London property, without having to pay tax on the income that they generate outside of the United Kingdom. This makes London a less expensive capital city to stay in, than other comparable western European capitals. They have also opened up citizenship and residence to anyone who has a significant amount of money.
The open arms of the British state have welcomed many rich people from around the world, who have come to Britain to invest their money in London’s financial markets, attracted not just by the specialism, effectiveness and efficacy of the financial services on offer, but also by the luxury services and lifestyle offered by London. Many of those people have wanted to follow their investments, and make London a home, or a home from home, a bolt hole in some cases, somewhere where they would come to live for just a few months. Whatever their intention they have been willing to pay a lot of money for one or more properties in Prime Central London. It is widely believed that the impact of rich foreigners investing in PCL has been to cause a ripple effect, so that people who were living in PCL use the money generated by their sale to pay over the odds for properties in the suburbs immediately surrounding central London, and so on and so forth.
This process has been going on for some time and started in the 1970s when members of the ruling families in various Middle Eastern states, made rich from the sale of oil, started to chose west London as a summer holiday destination. Their traditional destination up to that point had been the hills surrounding Beirut, but that option was quickly ruled out with the Lebanese civil war, which started in the 1970s. Since the 1970s Arabs have been investing a lot in London’s financial institutions and in London building and infrastructure. In 1991, with the prospect of Sadam Hussein’s Iraqi army invading Saudi Arabia, the Saudi Royal Family were said to have bought a string of properties on Bishop’s Avenue in Hampstead. At the turn of the twenty-first century it was said that following the attacks on the Twin Towers and Pentagon in the United States, the US government’s regulations had become much tougher on rooting out money invested in American markets via terrorism and corruption. Consequently, it was said that a lot of Arabs switched their investments to London. They were joined by businessmen and corrupt politicians grown fat on the mineral and oil wealth of ex-Soviet Union, who have also invested in London property, Roman Abramovich and Boris Borozevsky, noticeable examples.
An international army of mercenary financiers
It has also sucked in an international army of mercenary financiers and bankers, together with a panoply of international investors, who use London’s financiers and bankers to manage their money.
The growing economy, together with a liberal social climate, and a perception that performance is more important than social class, has attracted chancers
Arguably the economic success of London, and its relative success compared in the western world, has attracted chancers, people from around the world, who may not have a specific interest in getting a job in the financial services, but who have a general belief that London is a place where work can be found, and where businesses and lives can be built. Some of these chancers are very poor, people who are looking to start at the bottom rung of the ladder, hoping to make their way to the top. They include economic migrants, and arguably, refugees, who are keen to flee their own home, and are particularly keen to make their refuge London. But they also include businessmen, not necessarily billionaires, but businessmen who want to move lock, stock and barrel from whatever country they are operating in, to London. Following the aftermath of the events, which saw western banks rob savers of their investments, and then saw governments rob taxpayers and recipients of state services, to pay back the savers, rich people across the European Union, fearing higher rates of taxation and the possibility of their saving being expropriated by states eager to make up the deficit, moved to London. The trend, therefore, has been for Great Britain and London to attract rich people from around the world, who want to get their money out of the regime that they made it, and channel it into the international financial market, co-ordinated in London.
The laissez-faire, apathetic, liberal attitude of Londons institutions and Londoners to each other and cultural variance, has also increased the attractiveness of London to people who want to take a chance on a new place. Thousands of French people have come to London over the last two decades, having been eschewed by Parisian employers for being from the wrong neighborhood, wrong ethnic group or even the college. Economic migrants also include Euoprean middle classes, who although they have reasonable material lives in the country they come from, believe London offers better career opportunities and a more liberal social climate. Far Eastern Asians from places like South Korea and Japan also venture out as far as London, finding the cultural freedoms and tolerance of London a breath of fresh air contrasted with the regimental expectations of their home country and family.
The perception that London is a growing economy, where employers value performance over social class, and where governments to promote entrepreneurialism and profit over social class, attract people who want to take a chance on setting up their own business or furthering their career. Many French people come to London to forgeo the better material conditions they experience in France, for the opportunity to change or progress their career or ambitions to set up a business, London having rules and regulations, and a spirit and culture, which fosters risk taking, change, innovation and ambition in the economy and employment sector.
Chancers find it easier to get into London than they used to
Membership of the European Union has made London accessible to 400 million Europeans
Not everyone has been welcomed to London in the 21st Century, even if their intent is to materially better themselves. In the early 21st Century one had to have a visa to get work in the Great Britain and United Kingdom if one did not have British citizenship. That changed however in 2003 when a decision was made by the countries involved in the European Union, that people throughout the European Union would be free to travel and live where they wanted within the Union. This meant that London which had previously been an option open only to 60 million Brits, was now open to 400 million Europeans. Furthermore, throughout the 21st Century more countries were added to the European Union, meaning that more people could come and live in London. The effect was that many people from Eastern Europe, who had previously been prevented from traveling to and living in London, came freely, to find employment. This increase in immigration is likely to be one of the reasons for why London’s house prices rose, the new arrivals were effectively competing with those who were already living in London for accommodation.
Weak border controls
Great Britain’s border controls, which are generally designed to stop people who are any combination of poor, not white, not European and who lack work visas from entering the country, are weak and not up to the job. Many econmic migrants from impoverished rural parts of Turkey, Iraq and Afghanistan, who would be detained if identified, if determined, intelligent and lucky enough, can make it into London to work. Cheap air travel, international trafficking and smuggling networks, are also making it easier.
Membership of the European Union together with low corporate tax rates
It has been argued that London’s position within the European Union, together with low corporate tax rates, has made London as an attractive site for international businessmen and women, looking to establish a European base. This of course has contributed towards an influx of well-paid workers coming into the city, looking for places to live.
Government subsidies for people wanting to get a mortgage to buy a house
The number of people wanting to buy a house has also been influenced by government subsidies for borrowers including commitment to guaranteeing bank mortgages and providing equity loans to would-be borrowers.
In 2013 house prices in London experienced a further boost when the Conservative Liberal Democrat coalition government provided financial support to young bankers and speculators, as part of two schemes designed to increase the relative wealth of people who already owned their own homes.
The first Help to Buy equity loan scheme, offered a loan to borrowers looking to buy new homes. The loan had to be used in conjunction with a loan provided by a bank. The loan offered by the bank offered a lower interest rate than that offered by the government, which meant the government was subsidizing the interest paid by borrowers. The other Help to Buy mortgage guarantee scheme involved the government guaranteeing mortgages provided by banks given to people with a deposit between 5% and 20%.
The effects of the government subsidies
The Help to Buy equity loan and mortgage guarantee scheme were not designed to help prospective borrowers who lack the income to meet the repayments that would be needed on a London property. Instead it is designed to benefit those who have a good strong income, but little savings, as in the case of young people working in banking and the financial sector. It has also been suggested that those who might benefit most from the mortgages are people who could afford to pay a bigger deposit, but who in taking advantage of the new 95% mortgages, can pay less of a deposit and use their remaining cash as a mortgage to invest in another property. Speculators, then, looking to cash in on short-term increases in house prices, can use this scheme to get more mortgages and buy more houses, with the same amount of money.
In October 2013 it was reported that the asking prices for houses in the lower end of the market was beginning to skyrocket. It has been suggested that one of the reasons for this is that speculators, expecting the government’s schemes to increase the number of people able to borrow to buy, are buying now to cash in on later increases in house prices, and that this in itself, is causing house prices to rise. So for example in the last six months of 2013, houses for sale in Tottenham, of around the three hundred thousand pound mark, have increased in value by fifty thousand pounds. Speculators are, apparently buying the properties off private landlords, who had, until recently, until changes to housing benefits laws, been receiving high rents, subsidized by housing benefit. The size of speculation is thus creating a self-fulfilling prophecy. The government’s scheme, designed to increase the relative wealth of homeowners, through promoting speculation, increased the theoretical wealth of homeowners, before the scheme has even kicked into action.
Low interest rates
Since 2007, the Bank of England set interest rates at a historically low rate of 0.5%, which encouraged people to borrow money, for they could borrow it at low rates from the banks, which meant that more people were able to get mortgages to buy houses. However this rate was available throughout Great Britain and in itself does not explain why house prices in London rose whilst they went down elsewhere in Great Britain.
The extraordinary rise in house prices experienced in London, during the aftermath of the financial crisis, arguably set the context for a second wave of investment in London property, this time from people who don’t live and don’t want to live in London, speculators. The rate of increase in house prices, which has attracted speculators from around the world, looking to make a profit from what is perceived to be a relatively stable trend in rapidly increasing house prices in the capital. London’s financiers and bankers are speculating in London housing. On the 4th March 2014, it was reported by Patrick Collinson of the Guardian that an investment company called London Central Portfolio aimed to purchase £100 million’s worth of 1 and 2 bed room flats in Mayfair and other areas of west London, based on the belief that by 2050 such flats will be sold for £36 million a piece. Hugh Best, LCP investment director, said: “The average price in prime central London is now £1.5m, and has been growing at 9% a year, which we think is firmly sustainable. They have been growing at that level for 40 years and we see no reason for that to change.” However London’s financiers are not the only ones speculating on the London housing market. Following the aftermath of the events, which saw western banks rob savers of their investments, and then saw governments rob taxpayers and recipients of state services, to pay back the savers, rich people across the European Union, fearing fearing collapse of the Euro, but most realistically higher rates of taxation and the possibility of their saving being expropriated by states eager to make up the deficit, decided to invest in London property seeing it as a stable investment. Large numbers of Greeks, Italians and French have all said to have resorted to buying into the London property market as a response to such fears. Reuters news agency suggests that the so-called Arab Spring, which turned out to be nothing more than Arabs Sprung, similarly led to rich Arabs investing in London property. Enquiries from crisis-hit countries such as Argentina, Ukraine and Turkey were also reported to have increased during 2014. The scale of speculative investment in 2012 was hinted at by a recent article in the Guardian, which reported that, “Estate agent Savills found that last year £7bn of international money was spent on “high-end” London homes, with just 20% of that spent by UK citizens. Two-thirds of homes bought by people from overseas were not purchased for owner-occupation but as investments. Overseas buyers are also acquiring less expensive newbuild homes. It says that over the past two years only 27% of new homes in central London went to UK buyers, while more than half were sold to residents of Singapore, Hong Kong, China, Malaysia and Russia. The point then is that people who want to live in London are not longer just competing against each other, they are also competing against people who don’t want to live in London, who have more money than them, and who want to make a profit by buying a house now, based on the expectation that someone will come along in a few years time and pay even more for the same property.
Furthermore, the appetite of foreigners for speculation in the London housing market is by itself prompting developments costing billions of pounds, many of which are being funded by foreign developers. At the beginning of 2013 the majority of buyers of 866 luxury apartments planned for Battersea Power Station by a Malaysian developer were foreign, with Singaporeans taking more than any other foreigner type. In 2013 estate agents selling flats in Elephant and Castle targeted investors in South-East Asia. Far eastern businessmen own most of the property around Canary Wharf and Limehouse. Vantage Properties, an estate agent in Canary Wharf, have offices in Hong Kong and Shanghai and employ many Chinese staff.It has been suggested that in the not too distant future the plan of the Chinese government to liberalise hedge funds, is likely to result in a wave of investment from China into London’s property market.
Rich people wanting to be ‘where its at’
Arguably, there is a third class of rich people, who are also entering the London property market. They are not serious about using London’s financial investment services to boost their income, neither are they speculators looking to take advantage of a bullish market. Instead they are a group of rich people who are aware that London is, on a global scale, at least one of the places to be. It has been argued that Russians, Kazakhs, Chinese and Arabs have all bought London property, at least if not wholly for the prestige that comes with being able to tell someone that you have a place in London.
House building is slow
Whilst the rate of new building in London cannot in itself explain why prices are going up, it has been argued, quite reasonably that if more houses were built, then the price of housing would come down. I think this is less an explanation for what is going on, rather a policy option, to those who see that rising house prices is a problem. Some argue that the rate of housing should match the influx of new people into the city, and that measures should be taken to ensure that it does. However successive governments have resisted building social housing on a large scale, to provide decent homes for London’s poorest, instead preferring to pump state money into banks, so the banks can provide mortgages, helping increase the relative wealth of home owners.
There is a question about the rate at which people leave London?
I haven’t said anything about leaving London. Who leaves London? For what reason? How many? I know some people leave London to go and live in the countryside. Some people leave it because there is nothing in London that they can afford, or there are more attractive living arrangements outside of the city.
The resulting influx of very rich people, and very poor people has increased competition for accommodation in London, and has led to subsequent rises in house prices. The net flow into the city has increased competition for living spaces, which means that everyone, rich and poor, are forced to borrow and spend more of their savings, to beat others to secure accommodation. Furthermore the strong economy in London has meant that few people have wanted to sell up and leave.
The mother of all Ponzai schemes
The elevation in house prices bought about by foreign investment and foreign and London based speculation comprises a huge ponzai scheme. As prices rise, so speculation in the London housing market looks a more attractive proposition, causing more investment. This will inevitably result in more private housing developments, as local authorities and developers seek to benefit form this inward speculative investment. However like all speculative activity, it will at some point crash. Interestingly, if and when it does, it wont just be Londoner homeowners who will be stung, it will have far reaching consequences around the world, for much of the new investment is coming from international investors.