(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
By Edward Hadas and Chris Hughes
LONDON, Sept 27 (Reuters Breakingviews) - Some day, London will be like it was only a few years ago, when its homes were not unaffordable for all but the most wealthy. While waiting, policymakers should try to mitigate the damage that global easy money has done to this privileged corner of the world.
Unusual global financial conditions are the curse of London property, or the blessing, for those on the inside. Central London was not so appealing when monetary policy was normal. Although finance flourished between 2000 and 2005, and interest rates were low, property prices in its prime areas underperformed the UK average. The credit boom, which both relaxed mortgage availability and vastly increased financial-sector bonuses, sent the market into overdrive in 2006 and 2007. There was a small correction after Lehman. The sharp rise since 2009 has coincided with global money printing.
The multi-year financial windfall has done wonders for owners. At the extreme end, prices of houses in central London’s plushest areas are up over 83 percent in the last 4.5 years, according to data from the London School of Economics and real-estate agent John D Wood. That means a house worth 500,000 pounds when the market seemingly normalised in 2009 has generated a capital gain of the same value as a 155,000 pound-a-year job over the same period, adjusting for taxes. And the market trough then was still about one-third above its level of January 2006.
These are of course mainly paper gains. But they represent an astonishing post-crisis windfall for those in UK society, at a time when real incomes across the country more broadly have fallen and when employment in the regions has stagnated.
What’s more, the gains could soon become an economic drag. Up to now, most talented newcomers to London have been content to rent and, since landlords are willing to accept 2.5 percent gross yields, rents are merely exorbitant, not prohibitive. Rents in London’s top postcodes actually fell 2.5 percent annually in August, says real-estate agency Knight Frank, and in London more broadly have lagged inflation in the last 12 months, says the national statistics office. However, as the young professionals start to crave the security and freedom of property ownership, they find that all affordable options are unattractive: small, dismal, distant from work or in ill repair.
Many people endure that. But if prices continue to rise, other cities could lure away the best and brightest. London would not be hurt if the buyers who are outbidding normal people compensated by helping to keep British culture diverse, cool and lively. In fact, there is much more degradation than support. Too many of the most attractive properties are going to absentee owners, both from the UK and the gilded global elite. The super-rich push the very rich, mainly lawyers and bankers, out to less attractive properties, and the ripples of unaffordability and capital gains push artists, teachers, academics, healthcare professionals, software developers and other interesting people out of the region. This will slowly dull London’s buzz.
What can be done? One common suggestion is to make non-residence much less attractive. But even high annual “non-occupancy” taxes might not bother ultra-rich owners who can swallow the cost. Capital gains taxes which captured most of the real gains that accrued for merely owning something in the right place could be more effective. Such taxes could be tailored – limited, say, to post-2009 gains, applied only to ultra-rich houses, adjusted for inflation – to make them fair and politically acceptable. If property has become a financial asset, it should be treated as such.
Another remedy is to invest in making non-central parts of the London metropolitan area more appealing places to live. Various parts of local and national government are working on the problem, but much more could be done – at a relatively modest cost – to encourage commerce, culture and leisure activities.
Finally, while London’s problem is more an excess of buying power than a shortage of buildings, new and attractive housing with excellent transport links would make economic exile to the outer boroughs and more distant suburbs less galling for those who need to work in the centre of town. The UK is certainly rich enough to afford more and better buildings where people want to live, but unambitious governments and obstructionist planning rules have slowed progress to a crawl. A controlled construction boom would be welcome.
The agenda – non-residence taxes, windfall capital gains taxes, urban renovation and quality construction – could work, but not without a strong government to back it. Nothing like that is in sight. The lack of political will is an even bigger threat to London’s future than too-generous monetary policy.
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(Editing by George Hay and Sarah Bailey)
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