London Mayor Boris Johnson puts it bluntly, “For the last 30 years we have probably built about half of the homes London needs. The problem is now a crisis.”
Soaring home prices in the British capital are raising fears that the boom cannot be sustained, with significant risks for the nation’s financial stability just years after a housing bubble in the United States triggered a global crisis. But potential dangers are more than just financial: Pushing middle-class earners farther from central London than ever and turning certain quarters into a playground for the super-wealthy would exacerbate social inequity, insecurity and tensions between locals and foreigners. For many, that quintessential British dream of home ownership is already becoming a distant fantasy.
The figures that underpin such fears are, indeed, staggering. Property prices in London have jumped by about 10% in the last 12 months. The UK’s largest property website, Rightmove, reported last month that the average asking price of a home in the capital had surged by more than £50,000 in a single month, from £493,748 in September to £544,232 in October. This increase of more than 10% is not reflected in the rest of the country, with England and Wales registering a more modest hike of 2.8% in the same period.
Central London has been driving the spike. More neighborhoods are reporting £1 million or more as the average price of a home, while areas that were once working class have been gentrified to the point of pricing out some locals.
Part of this is due to the fact that wealthy foreign buyers are purchasing property – sometimes before it is even built – as a form of currency. This isn’t new, but it has been exacerbated by the global crisis and market uncertainty. Russian oligarchs and Indian tycoons have soaked up luxury properties in West London, while the eurozone crisis has brought in fresh money from Greek, Italians and other continental Europeans in search of a safe investment. Estate agent Savills estimates that some 70% of newly built properties in central London are bought by foreign investors; according to another estimate by property broker Knight Frank, 30% of luxury London homes worth £1 million or more were bought by non-UK residents in the year between June 2012 and June 2013.
But foreign buyers, while very much the focus of newspaper reports and local anger, are only part of the problem – or, according to the London Mayor, no problem at all, since their investment funds development projects that would otherwise be unaffordable.
Another factor that is ratcheting up prices is population growth. Between 2001 and 2011 the population grew by 12%, according to The Economist, compared to 3% in New York. Currently, 8.3 million people live in the British capital; that number is expected to hit 10 million by 2031.
Johnson says the capital needs to build 42,000 new homes every year for the next two decades to keep up with the growth in the population. The Mayor, a Thatcherite and firm believer in the ability of the market to regulate itself, has rejected calls for restrictions on foreign buyers. In any case, to him, there is one answer to what he calls the “biggest challenge” facing the capital: build.
He has recently unveiled government funding of £1billion a year from 2015-2018 for a plan that includes building 45,000 low-cost homes. He has called for the creation of 10 housing zones to re-qualify run-down areas and spur development. Johnson’s opponents in the Labour Party argue that many new developments mostly add high-cost units to the market, and do little to help the neediest or even the less-than-wealthy.
The national government is stepping in, too. After its controversial “Help to Buy” scheme, which is designed to help first-time buyers, it is now taking steps to revoke a tax advantage offered to foreign purchasers. Starting in April 2015, the Tory-led coalition of Prime Minister David Cameron plans to introduce a capital gains tax on future profits made by non-residents who sell a residential property in the UK. “Britain is an open country that welcomes investment from all over the world, including investment in our residential property,” Chancellor George Osborne said recently. “But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not. That is unfair.”
The measure has already been dubbed the Oligarch Tax, but its impact could be negligible, given that the change is neither immediate nor applicable to profits prior to the change. Moreover, foreign investors were not necessarily looking to flip properties for short-term gain, but often seek long-term safety for their investment. Indeed, many such foreign-owned properties are notoriously left empty for years.
Meanwhile, British newspapers are filled with stories of middle-class families with decent incomes who can no longer afford to live in their own neighborhoods, let alone take advantage of the city’s offerings, as the prices of movie tickets, restaurants, theaters – not cheap to begin with – have gone up along with housing.
A local politician touted as a possible contender for the next mayoral election, Sadiq Khan, has said London is at risk of becoming “a tale of two cities,” borrowing from the successful campaign of newly-elected New York Mayor Bill de Blasio. A society with greater inequality is a potentially more violent one – and its residents tend to be far less happy, according to numerous quality-of-life studies.
“A Tale of Two Cities”, the novel by Charles Dickens, begins with an unforgettable line: “It was the best of times, it was the worst of times.” In modern London, it may be the best of times for the super-rich, but the rest are struggling with impossible property dreams. The challenge for Johnson, and for national politicians, is to write a happier ending to this problem – not to allow a widening of the gap between “best” and “worst,” but to provide fairer times for a frustrated majority.