Blocking much needed investment is not the key to unblocking London’s housing woes
My article for ConservativeHome, published 06/02/14
On Tuesday, the think tank Civitas became the latest organisation to fall into the trap of thinking the solution to rising house prices in London is to block foreign investment. Throwing out of the window the generally agreed economic principle of free markets and free trade, Civitias call for the establishment of a new Government Quango, the Foreign Investment Review Board (FIRB), with the specific intent of blocking foreign investment in the UK, at the very time we need to attract greater foreign investment to boost economic growth and exports.
While it is true that house prices in London have been rising fast, and that in itself is unsustainable and damaging for the market in the long term, we have seen many reports that also point out traditional markets for foreign investment, such as Chelsea, Belgravia and Knightsbridge have seen growth below 6%, compared to 11.4% across London as a whole. House prices, in London and elsewhere, are not being driven skywards solely by foreign investment, but rather a greater market failure to ensure supply meets demand for housing of all tenures.
As I argued in October on this very website, blocking out foreign investment in fact risks greater pressures on London housing supply, and even higher prices.
Foreign investment is vital to promote development of new homes in the capital that will serve future generations, as well as investors and renters in the shorter term. If we shun that investment today, we leave ourselves vulnerable to even greater housing shortages in the future.
Of course, the market has not worked perfectly and the Chancellor has quite rightly recognised that foreign investment in housing must be on a level playing field. In his Autumn Statement introduced capital gains tax on non residents who sell residential property here in the UK, saying “Britain is an open country that welcomes investment from all over the world… 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.” This goes further to the changes to Stamp Duty made in previous budgets which introduced a premium for purchasers (mainly foreign buyers) shielding investment in companies.
As a Westminster councillor, an area with more foreign owners of property than anywhere else in the country, I am deeply concerned about the affordability of homes in the City, especially for young people who have grown up here and work in the area.
Unfortunately, contrary to what Civitas would have us believe, there are no easy answers.
The impression is often given that all of the new homes built through foreign investment are multi-million pound luxury homes at the very top end of the market. In reality however the new homes we are talking about extend to affordable homes and everything in between. Forward sales, of the type Civitas are concerned about in their report, provide not just the financial capital to ensure more housing units are completed in London, but perhaps more importantly it also affords the developer with the confidence to invest time and resources on a scheme.
Developers report that foreign investment is driving development in the Capital and estimates suggest that delivery of new homes in central London would be 40 per cent lower without such investment.
At a time when we are still delivering fewer new homes than are needed, 40 per cent shrinkage could be devastating to housing supply and there push prices up even further. Of even greater concern is the affordable elements of the developments now being built would not have been built at all if the developments themselves had not been started using foreign investment. These homes are 30 per cent or more of the overall developments and occupied from completion by local families in desperate housing need. Those most in need would have suffered even more if these developments had not been built at all, a point ignored by Civitas and Labour.
For the vast majority of developers who rely on bank finance to deliver schemes, in order to advance the initial capital, banks will often require pre-determined levels of sales to be achieved at various milestones. Without these forward sales – some of which are from abroad – schemes will simply not proceed. Estimates suggest that approximately two-thirds of the large scale projects in London are financed on a similar basis.
Another myth about many of the homes in foreign ownership is that they are mostly left unoccupied creating ghost communities in the heart of London. True, Knight Frank report that 75 per cent of new homes in Inner London are being bought off plan by foreign investors; but as Colin Wiles points out in the Guardian only 28 per cent of buyers did not live in the UK. One developer I spoke to, pointing to electricity usage on their developments which shows that 95 per cent of its foreign-owned homes are in permanent occupation.
Tackling the housing affordability crisis will only be achieved with a focussed once-in-a-generation house building drive. Wherever the money comes from to build we should remember that the homes are here and will be lived in by Londoners for decades to come.
The ultimate question is not to determine which investors are good or bad, but as an international city, how best can London keep up the supply of new homes of all tenures.