(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
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)
Keywords: BREAKINGVIEWS LONDON/HOUSING/
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