Written for First Wealth, a long read on housing. That’s exciting, right?
It is often said that there are only two certainties in life: death and taxes. Well, no, in fact there are three: death, taxes, and the eternal climb of London property prices.
The difficulties first time buyers face are brutally illustrated by the fact that only 14% of Londoners own their own home. The average monthly rent meanwhile stands at £1500 per month, far beyond what most people in the capital can afford.
With London’s housing shortage so chronic that even Harry Potter-style cupboards under the stairs can demand rents of £500 a month, it’s important that we start to seriously consider the ways in which we can ‘cool off’ the UK capital’s property market and make it a more inclusive, affordable and competitive place to both rent and buy.
There are three broad possibilities for curing the cancer: rent controls i.e. government intervention, increasing supply, and reducing demand.
The case against rent controls is strong: Urban decay and homelessness proliferated in the 70s when controls were first introduced in the UK, as landlords refused to maintain properties they weren’t making any money from and housing shortages meant that many found it difficult to find a home. But tempered rent controls that steer clear of introducing an overall price cap – things like raising the minimum tenancy agreement up from six months to three years and introducing legislation that places an upper ceiling on rent increases – could put an end to the current trend of excessive hikes.
Nobody advocates capping house prices. But we can exercise indirect influence on prices via a miscellany of regulatory devices, things like limiting the size of mortgage loans by capping loan-to-value or loan-to-income ratios. The current loan-to-value ratio is back up to 95%, which encourages buyers to take on massive debt to finance homes they will struggle to afford – the vicious knock-on-effect being that they are increasing prices even further.
There are also solutions to limiting demand, though many seem radical. LSE’s Kathleen Scanlon believes that one of the big reasons demand is so strong in London is because of the “massive over-centralisation” of the UK’s economic and public life. While in the USA New York serves as the country’s financial capital, Washington as political capital, Boston as capital of higher education and San Francisco as tech capital, in the UK, London serves all of these roles.
If the UK can reconcile the north/south divide, we might be able to not only reduce pressure on London house prices but also cultivate a healthier country overall. With the Houses of Parliament crumbling and in desperate need of long-term repair, is it not time we seriously considered moving government to another of the UK’s major cities, even temporarily? And what better way to combat the recent loss of 1700 steel jobs in Redcar by investing major funds in transforming it into one of the UK’s tech hubs? The death of an old industry needn’t be a tragedy: it could just as easily be a major opportunity to slingshot the UK into the 21st century.
Still, in London, demand isn’t the biggest problem. That accolade goes to the imbalance of demand in the UK capital. Much of the demand in London is driven by wealthy foreigners, with more Russian oligarchs and Gulf billionaires snaffling up property with every passing day.
Eye-watering house prices are a knock-on effect of so many super-rich individuals seeking properties – not only that, they also act as a huge draw for big-time money launderers. When prices are this high, millions of pounds can be laundered in one fell swoop, while Britain’s notoriously lax rules on the disclosure of property ownership only stoke the flames further.
Should it really come as any surprise that London is now a global magnet for corrupt funds? While minted criminals and corrupt officials prosper, ordinary Londoners are being priced out of the market, with many claiming that developers have been skewed towards developing luxury flats rather than ones that the majority of the market can actually afford. In this regard, encouraging transparency and cracking down on dodgy foreign investment has to be a priority in any strategy to bring sanity and affordability back to London homes.
If we find it ultimately impossible to lower demand, it follows that we must increase supply instead. As City Metric editor Jon Elledge eloquently puts it: Build More Bloody Houses!
While there may be many housing projects planned or currently in construction throughout the capital, they are all being built at a painfully sedate pace nowhere near fast enough to keep up with demand. This is not a case of ‘We’re going as fast as we can’ but more one of ‘This is as fast as we are willing to go’. Developers know that releasing too many houses onto the market at the same time will drive down the price of individual homes – and reduce their profits. Incentivising developers to release housing stock at a quicker pace, whether via subsidies or sanctions, carrot or stick, is one route to affordable rents and homes.
But many are less than convinced of the private sector’s ability to fill the void of state-funded housing, a supposed requirement it has consistently failed to fulfil since the 1980s, when Thatcher drastically cut back on government house building and introduced right to buy.
“Pretty much every policy trick unveiled by ministers – whether planning changes, brownfield land tax breaks or other subsidies – will have limited effect on affordability,” says Andrew Teacher, managing director at Blackstock Consulting. Teacher advocates reclaiming responsibility from an indifferent private market and returning to pre-Thatcher levels of state-funded house building:
“The answer to building more is for the government, as the country’s biggest landowner, to take direct control and use record-low interest rates to lock in debt which can be repaid down the line through rents. Such assets could then easily be wrapped up and sold on, much like other forms of infrastructure, such as railways or power plants.”
Of course, NIMBYism and green belt restrictions are always going to put up significant barriers to a full-scale government-funded house building programme.
But what if we could increase the amount homes coming onto the market without building? Scanlon proposes that we persuade older ‘over occupiers’ – single people or couples living in family homes – to downsize by moving to one or two bedroom properties, which would release a significant level of housing stock for younger families.
“One of the reasons that many older ‘over-occupiers’ remain in their large homes is that the alternatives are so grim,” Scanlon says. “Many would never move into a retirement home, however tidy and well-run, unless forced to do so by ill health or dementia. We need to create positive, attractive living arrangements for later life—homes that active older people would genuinely prefer to live in.”
A new breed of thinking on this issue is already starting to germinate in parts of the UK, with projects like Featherstone Lodge, a co-housing community for over-50s in South London, suggesting the way forward.
While some may scoff that it’s a miracle rent prices in London aren’t any higher, that doesn’t mean that it is an acceptable state of affairs for them to be as exclusively expensive as they are. A city in which only a select few can afford to live will eventually cease to be a city at all.
Image via Dave Catchpole / cc