Is Foreign Investment in London to Blame for Property Prices?

By James Moynan
Theory Section Editor, Economics Undergraduate Student 

Siddons Court is a largely unimpressive feat of architecture, a housing block constructed of a mixture of red and brown brick. Its design barely warrants a glance by the common Londoner, especially when compared to the nearby majestic royal opera house. You would assume Flat 1a, then, to have no meaningful significance.

However, the flat has just been sold for £1.2 million, for which you get three bedrooms, a kitchen, a breakfast room and a two-tiered living room, which together comprise a total of 1,118 sq.ft. Such a price is not an anomaly when it comes to the capital, given the flat is only minutes away from the Tube and nestled in the heart of one of the world’s fastest growing cities, and to the right investor it might seem like a smart purchase.

Siddons Court
Siddons Court in London. 

What is meaningful about 1a is that it holds the accolade for being Britain’s most expensive ex-council flat.  Brought for £130,000 in 1990 through the Right-to-Buy scheme, 1a has given the unnamed sellers a return of 800 percent, and an overall profit of over million pounds. The flat represents how London’s property market has exploded throughout the years, despite the owners having to weather two financial crashes.

In recent times stories about million pound London flats have reached such a level to be almost unremarkable, as investment in London has rapidly accelerated. In 2014 £13.8billion was invested in the City of London and Docklands, of which, according to Cushman & Wakefield, 78 percent was attributed to overseas investment through a variety of financial mediums.

These figures are the latest in a global trend to invest in the capital, which since 2009 has seen average house price rise 12 percent a year. Such levels of investment and house price rises, in an economy that has mainly flatlined since 2008, have sent ripples through the market and lead to accusations of a distorted market, with a YouGov poll showing 49 percent of Londoners blame wealthy overseas investors for recent house price rises.

So to what extent are Londoners fears correct? Is foreign investment in London property an economic force for good or not?

With the average house in London now being worth just shy of £500,000, and with Deloitte estimating that mortgage costs represent a remarkable 61.6 percent of first-time buyer income, the anger at foreign investors comes predominantly from young first-time buyers shut out from the housing ladder. Their anger at a lack of affordable housing has resulted in a range of small protests, such as one involving Russell Brand on the New Era estate in Hackney against US investors Westbrook partners.

But protests, however immediately successful, cannot stop longer term market forces from reflecting the demand from overseas. The wealth effects of these market forces, and the consequent rapid growth in prices are highly polarised. While homeowners feel their improved wealth and are likely to feel able to spend more in the economy, renters’ economic confidence is weakened as they try to build up a savings account to contribute to a deposit for a house.

But protests, however immediately successful, cannot stop longer term market forces from reflecting the demand from overseas.

This polarisation represents one of the unseen and immeasurable knock on effects from the rise in prices;  the rise in inequality between homeowners and renters, the haves and the have nots. Due to the rise in prices the less prosperous boroughs of London have increasingly been targeted by developers, as demand continues to grow. Tower Hamlets in particular makes a fascinating case study; home to Canary Wharf (one of the UK’s two financial centres) the borough also the highest rate of poverty after housing costs in the UK, at 44 percent of households.

The borough is  home to a recently developed penthouse on the market for £5 million, despite 20 percent of households live on less than £15,000 a year. This is a truly remarkable divide in wealth, and while inner-city poverty and inequality isn’t a recent phenomenon, there is a clear sense of an increase in its extremity.

This polarisation represents one of the unseen and immeasurable knock on effects from the rise in prices;  the rise in inequality between homeowners and renters, the haves and the have nots.

Despite all this, there is a clear sense that foreign investors have become an easy scapegoat for a more complex underlying issue. It is easy to attack a group of people who ordinary Londoners don’t see and don’t interact with, who buy property as a “safe deposit box.” But the property these investors buy into are vastly different to those trying to get onto the property ladder: the prime located London skyscraper is not the same property as a smaller flat in the outer boroughs. Too many ignore the flip-side of the argument; these foreign investors provide essential stimulus for multi-million new builds.

For instance, the newly built Shard, the tallest skyscraper in Europe, built by a consortium of Qatari banks, would not exist were it not for foreign money. In the words of London’s Mayor Boris Johnson, the building is “an exclamation mark that London and Britain are open for business.”

It is easy to attack a group of people who ordinary Londoners don’t see and don’t interact with, who buy property as a “safe deposit box.”

This highlights the fact that foreign investment is a very good economic indicator of how strongly an economy is viewed around the world. Investors from abroad only invest in search of a return; by doing so in London they give the thumbs up to its future, believing it to be a safe investment in stable growth and political security.

Overall London prices should only be seen as a reflection of demand and supply; however unlike other goods it should not be overlooked that housing isn’t a luxury item but a necessity of life.

shard.JPG
The Shard building in London.

According to the CBRE over the past decade London’s population has increased by around 800,000, yet only 200,000 new homes have been built, and only 7 boroughs currently have enough stock in the development pipeline to satisfy projected growth in households over the next 10 years. It is hardly surprising, then, that investors can see where their returns are going to materialise from, and it seems there is no end in sight to the investment explosion. While this may be a statement of faith in the UK’s economy, it shouldn’t be overlooked that these figures may just represent, as Lord Kerslake put it “the biggest public policy failure of the last 50 years.”

For Londoners, and the wider economy, these are interesting times.

—–

Feature image courtesy of Marcus news, WikiMedia Commons. Siddons Court image courtesy of Chestertons Estate Agents, Covent Garden and West End Lettings. Shard Building image courtesy of Diego Delso, WikiMedia Commons.

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