How the global elite’s penchant for luxury real estate has contributed to London’s housing crisis and how considering the issue on a macro level may help find a solution
Today, London grapples with a devastating housing crisis. 2021 saw average house prices in the city surpass £500,000 for the first time ever, a punchy illustration of a decades-long trend which has seen increases in homelessness, a shortage of affordable housing, and left young professionals in the city facing a reality of likely never being able to get on the property ladder there. When people seek to diagnose the causes of these struggles, a lot of attention tends to be paid to failures on the part of the government — serial underfunding of housing programs and wilful ignorance of rising prices out of a misguided belief that it signifies a strong economy. In approaching this issue, I sought to peel back even further and look at the oft forgotten global factors at play. At its root, houses were becoming more expensive because people were buying up properties at increasingly ludicrous prices in all areas of the city, rapidly turning the land beneath even the most dilapidated neighbourhoods into gold. This was perpetuating a never-ending cycle of supply and demand that was lining the pockets of developers and pricing Londoners out of the neighbourhoods they had spent their lives living in. Drawing on both my experiences living in London and researching this topic, it was clear that rabid foreign investment was the chief culprit, as the mega-wealthy flocked from all over the globe to get a piece of the pie. What I sought to discover, and what this paper will discuss, is what drives the global elite’s obsession with luxury real estate. I found that their primary motivators were economic, investment in the property market was an almost unfathomably lucrative proposition. Stirred into this was the prospect of legitimacy and stability offered to those individuals with a shady financial past or originating from countries with a volatile economic or political predisposition. Assessing the matter on a local, legislative level therefore neglects the foundational cultural and economic forces that drive these absurd price hikes. Seeing as these trends replicate in a plethora of western-world cities other than The Big Smoke, looking at the matter from a broader perspective permits the study of the common trends that create such blown up property markets, and equally offers the opportunity to find solutions to combat such rampant growth and its negative side effects.
This issue has cause for alarm due to the ravaging consequences it has upon the city, and the broader implications it carries. London is an internationally revered city for the richness of its culture, its quirks and peculiarities, and its inhabitants — from the cockney “-ello”s of its ‘cabbies’ to the ever-endearing utterance of “what can I get ya?” from every pub proprietor on the corners of the city’s charming lanes. Today however, the diversity and exoticness that makes it special is leeching out at an alarming rate. 250,000 of the most vulnerable residents sit on waitlists for affordable housing and even those working posh jobs in the city face the unnerving reality of never buying property in the capital. Skyrocketing prices are driving locals away, and in their stead come neighbourhoods of luxury new builds with the lights off in the windows and a smattering of gaudy monuments to income inequality. The trends seen here are indicative of a growing disparity in wealth globally and offer a grim look into the future state of affairs of many cities around the world as nations develop. Tackling this issue in London therefore has wider ramifications, as it is simultaneously equivalent to tackling it on a global scale — potentially providing a roadmap to avoiding further exploitation and gatekeeping of opportunities by the global elite.
So what is it that drives these high net worth individuals to London’s streets. Yes, the time zone is friendly to conducting business, the streets are lined with pleasant shops and cafes, and you wouldn’t be hard pressed to find enriching cultural experiences, with a wealth of museums and theatres packing the city centre. However, what really helps them look past the devastatingly congested roads and abhorrent weather when opting to buy luxury property is the fact that it is a preposterously good investment. In the period between 2008–2018, the value of real estate in London as a whole grew by 68% (Anton, Emil. Alux.com). When it came to prime real estate, referring to the city’s exclusive central neighbourhoods (which is where the mega-rich tend to invest), value more than doubled (Anton, Emil.). To put this into context, an investment into to the stock market could expect returns of 7 or 8 percent annually. In other words, buying a house in one of London’s most prestigious boroughs is an incredibly valuable asset to have, and one that offers immense returns on investment. In the period following the financial crash of 2008, when faith in economic institutions was at an all time low and the thought of moving money into conventional economic instruments paralyzed people with fear, the property market in London rebounded quickly and has grown at a steady and consistent rate ever since.
What’s more, the government has looked at this flood of foreign capital in almost exclusively a positive light, and has therefore engaged in something of a policy of appeasement when it comes to foreign investors, reducing barriers to the inflow of their money and creating incentives for it to keep coming in. The prevailing thinking in the field has remained that the world’s elite should be encouraged by any means necessary to continue flooding the city’s streets with cash — that such investment is integral to tax revenue, and the rising house prices have been somewhat erroneously perceived as an illustration of a strong and prosperous economy. Comments by Jonathan Hewlett in 2012, who at the time headed up the London division of property giant Savills, are representative of such thinking. In discussing the influx of Russians seeking property “in the 30m plus market” (Hammond, Ed. FT.com) following electoral turmoil, he remarked that, “unless we tax these kind of buyers beyond all comprehension, London will remain strong” (Hammond, Ed.). In other words, the implication is that legislative steps should be taken to continue incentivising foreign investment in the city, or else you run the risk of losing this flow of capital and crippling the market. The result of such thinking has been to continue enticing foreign investment by creating a tax haven. The logic at play here is flawed for reasons this paper will go on to discuss.
This is where an interesting dichotomy arises. On the one hand, the government wants, and frankly needs, to be taxing foreign investment as an avenue for raising revenue. It is an integral part of their budget; foreign investment into London amounted to £660.8bln in 2019, accounting for 42% of all foreign investment into the UK (Barnett, 2021) — of which real estate made up a significant chunk. On the other hand, however, they need to be keeping taxes low enough to keep up the appeal of investing into London. What this has resulted in practically, is a persistent willingness on the government’s part to turn a blind eye to tax dodging. As the Pandora Papers (Miller, Greg.) and Panama Papers (Prasad) leaks of 2016 and 2021 respectively demonstrated, leaders were often assisting and even involved in major tax avoidance schemes. A tax loophole that allowed wealthy foreign individuals to dodge taxes by listing themselves as non-residents has been known for decades with little effort to seal it. “In most countries, a foreign resident’s ‘domicile’ (home country) status is determined by objective criteria. In Britain, it’s largely up to the foreigner.” (The Economist, 2003) wrote an article almost two decades ago, highlighting a system that left itself open to abuse. A few years later, one count of those exposing this loophole was set at 150,000 people, up from 65,000 just 5 years prior (The Economist, 2007), and this gap in the legislation remains open for exploitation today. The long and short of it is therefore, that the only people who could reasonably regulate the rampant growth of the property market are the very people who believe that they stand to gain by allowing its abuse to continue.
The government’s view that this sort of investment is beneficial is not irrational, it undoubtedly has had positive effects, including but not limited to the stimulation of jobs and economic growth. The concept that a strong economy is good for everybody is not entirely erroneous, however it is predicated on a Reagan-Thatcher era belief in the idea of trickle-down economics, a long-debunked notion which is effectively propaganda used by the wealthy to keep exploiting the vulnerable (Persky, Joseph). No one has ever accused politicians of being morally or ethically righteous, so it would not be unreasonable to posit that the issue boils down to an even simpler level: they are motivated by self-interest. The constant growth of London’s property market therefore presents a somewhat distorted image — yes it boosts confidence in the economy which can lead to greater spending at the individual level, but it also rocks its very foundations. The issue lies in the fact that average pay in the city sits at around £39,000 (Clark, D., Statista), therefore the ratio of house price to income is colossal, and with the growth of the former far outstripping the latter, the divide only widens as time progresses. This forces people into taking out increasingly heftier mortgages as they look to get onto the property ladder, essentially creating a ticking time bomb as the economy rests at the mercy of volatile interest rates, and barrels towards a crash similar to that of 2008 (Pettinger et al.). What would in fact be wise is to regear the approach to focus on younger and less wealthy people. As has been seen in countries such as Finland, prioritising the vulnerable is a stronger approach in the long term. The logic seems intuitive, by giving the people the opportunity to gain a solid foothold in their living situation, you open the door for them to have more disposable income to invest in the economy on a grassroots level, constructing a bottom-up system which is far more secure and less volatile. The tax revenue losses and need to invest in such an approach would generate significant upfront costs but prove cheaper in the long run than allowing swathes of people to slip into poverty and hence rely on governmental support in the future.
Suppose, therefore, that you are a member of the global elite. “What do I do with my massive stacks of cash?” you think to yourself as you relax on the deck of your yacht in the French Riviera. You consider getting another car, buying some shares of Amazon, or frequenting some nightclubs. “Meh, I’m not sure…” you mutter, “half the value is gone by the time I drive it off the lot; it’s too volatile I don’t want to risk it; that’s just throwing money away” you conclude. “Aha!”, you exclaim, as a light bulb flickers to life above your head — buy a house in London. It really is a no brainer — you’ll double your money in 10 years, and the government is tending hand over foot to your every whim and desire so that they can collect their percentage on the £40m mansion you just bought.
The proposition gets even more appealing if you happen to have come by your riches through less than legitimate means. Snapping up some prime property in the heart of London makes lawmakers surprisingly amenable to looking past grave legal and ethical violations. The National Crime Agency has stated that between £36 billion and £90 billion are laundered through Britain but concedes that even these figures are “a significant underestimate” (Reuters Staff, 2018). Or perhaps you are from certain Asian or Middle Eastern countries where the economic and political volatility dissuades you from wanting to keep your assets there. This was certainly true of royalty fleeing revolutions in the likes of Iran in the late 20th century, who snapped up mansions on North London’s Bishop Avenue, affectionately known as ‘Billionaire’s Row’. Many of these families never even stepped foot into these houses, and they stand there today in a decrepit state, yet these people have almost universally profited nonetheless, as the earth that the concrete was poured onto has skyrocketed in value (Anton, Emil.). The moral of the story is, whatever your reasons for wanting to may be, the government is so seduced by the perceived benefits (and actual corruption) offered by your buying of property, that they will embrace your investment with open arms in whatever shape and size it may come.
One of the most disturbing consequences of the balancing act that the government engages in, is the frequency with which these mega-homes are left unoccupied for long stretches — the ‘ghost’ house phenomenon. An October 2016 estimate found almost 600,000 homes lay empty nationally, many of which were in London, and this figure has only grown since (Barton, Cassie.). In a society that claims to value fairness and equality — permitting such neglect of valuable square footage amounts to a failure in satisfying these values. As much as the government may incentivise a foreign presence in the capital through legitimate and less-than-legitimate tax breaks, the reality remains that London is an exceedingly expensive city to live and operate in. Therefore, the rich choose to buy up property in the city but live in places such as Monaco (Anton, Emil.) where their income remains untaxed, hence getting the best of both worlds whereby they profit from the appreciation in value of their homes, while avoiding the inflated expenses of earning money and purchasing goods in the UK. The One Hyde Park development is most explicitly illustrative of this trend — apartments there start at $25m and penthouses have sold for over £200m (Moore, Matthew.) — almost all of the luxury pads have been bought — and yet 75% of residents list their ‘humble’ abodes as second homes. When hundreds of thousands of people are struggling for even a cramped 1 bedroom flat while a family of four spends 2 months in a home with 10 bedrooms and a private swimming pool — it is clear that something has gone devastatingly wrong. Of course, this prompts the usual rebuttals that in a meritocratic, capitalist world — those that work hard deserve to enjoy the fruits of their labour in whatever way they deem fit. I believe this position to be flawed for a whole host of reasons, however their discussion goes beyond the scope of this essay. Put succinctly, this position erroneously operates on the assumption that everyone exists on a level playing field, which we know they decidedly do not. It is the government’s role, therefore, to bridge this gap — yet as has been demonstrated they are not up to the task.
So really when it comes to understanding how London’s housing crisis has been shaped, you have to consider both the macro and micro contributing factors. Both interplay and are closely related, but neither can be properly understood without the other. This is what assessing the global angle has brought to the table with this topic. In my initial outlook on the issue, I was very quick to pin the blame squarely on simple government mismanagement. This mismanagement was not a mirage and does in fact exist, but it was only by looking at how and why the global elite so rabidly rush to invest in London’s property, that I was able to understand that it was more accurately perceived as fairly rational (though misguided and self-serving) decision making on their part in the face of overwhelming cross-cultural and cross-continental forces. Altering perspectives also serves to aid in the pursuit of a solution to some extent.
Zooming out also allowed me to consider what factors other than regulatory unscrupulousness played a role. What I came to consider was that there were broad cultural forces that also contributed. Looking at the advent of social media in the past decade or so helped encapsulate these ideas, as it illustrated the growth and proliferation of the drive to display wealth. The rise of ‘influencers’ on these platforms, essentially professional flaunters of wealth, is a damning confirmation of this trend. A consequence of social media in the broader tapestry of globalisation through more traditional economic avenues, is an acceleration of cultural homogenisation. There quickly becomes a fairly fixed set of brands that people want to be seen wearing, nightclubs frequenting, and restaurants dining at (Currid-Halkett, Elizabeth). In London, these forces are slowly but surely driving the rich cultural diversity for which the city is so well known out of its streets. The inhabitants who move into the areas that former or prospective tenants get priced out of are increasingly homogenous — they may well be of different nationalities and backgrounds — but the forces of globalisation (including social media’s role within that) mean they are all functionally painted over with the same brush; they drive the same cars and vacation in the same spots. Take Notting Hill for example, the notorious London neighbourhood was once home to a myriad of different creatives: artists, writers, musicians; the houses were brightly painted, markets were vibrant, and the area teemed with life. Today, most houses are covered in a familiar coat of white paint, and the few that retain the quirky colour schemes of the past do so in a seemingly disingenuous nod to what this part of the city once was; the luxury SUVs parked outside are coated in a layer of dust and few windows have the lights on.
As much as I view the role of such cultural shifts to be significant, it would be naïve to suggest that attempting to alter such global, fast-moving tidal changes presents a viable path to solving the issues at hand. As such, that is not what I am advocating. However, with that being said, the mere recognition of the fact that our warping cultural priorities feed into and allow our own exploitation is worthwhile and may serve to aid in implementing change. What considering the more tangible aspects of the global angle — the driving forces behind the elite’s affinity for real estate — does facilitate however, is a more targeted approach to enacting solutions. Without it, one might be quick to simply call on the government to raise taxes or supplement spending on state-assisted housing — both broadly correct measures — however by understanding how and why the elite act you can more concretely pin down where and how to tax and regulate them in order to curb their influence on the housing market.
Ultimately therefore, solving these problems does still come down to a more local level, legislative approach. There is a plethora of changes that could be enacted to combat the devastating negative impacts from the elite. One of the more straightforward ones would be to impose and enforce higher and more stringent taxes on luxury property purchases, with a particular emphasis on those listed as ‘second homes’. This could be implemented in conjunction with a mandate requiring a minimum period of occupancy for newly purchased properties — such as necessitating that the home is occupied at least 50% of the time in the first 3 years of new ownership. Of course, these kinds of measures are limited in their efficacy by the fairly simple aforementioned principle that they call for lawmakers to act against their own best interests. In the eyes of the government, clamping down on foreign investment will drive them away and present a crucial loss in revenue at their disposal and in the ability for them to line their pockets. The other end of the spectrum would be to consider targeting the problem from the bottom-up. Finland has enjoyed immense success in imposing quotas requiring the construction of affordable housing with any new development, with 25% of such projects needing to be made up of social housing that is accessible to the most vulnerable (Tunstrom, Moa.). In Berlin meanwhile, a five-year rent freeze was implemented to great effect in order to allow young professionals to get a foothold in the market (Melissa, Eddy). At the end of the day however, these efforts amount to a mitigation of the consequences of the problem rather than a solution to it at its roots. The only truly effective resolution would come about by tackling the issue from the top down and the bottom up in tandem.
The unfortunate reality is that I cannot imagine this problem being solved in the foreseeable future. Perhaps this view is pessimistic, but I view it to be rather realistic — the rapid development of countries such as China, with other long impoverished nations such as those of central Africa and South America due to follow suit, means that the population of ultra-high net worth individuals, defined as those with a net worth exceeding $30m, is only expanding — it grew by 1.7% during pandemic-ravaged 2020 alone (Hood, Bryan.). If the number of UHNWIs continues growing, then so too will the demand that fuels skyrocketing property prices. As long as that demand exists, there will be someone to supply it. Simply put, too many scattered things have to converge to affect change. Societal cultural priorities have to fundamentally alter, governments have to clamp down on the rich and lift up the poor, and the world’s wealthy and influential have to effectively act against their own best interests. At its root, the housing crisis in London is just another offshoot from the runaway train that is the growth in wealth inequality globally (Gornick, Janet C.) — and at present resolving this inequality requires the rich and powerful to directly undermine their own wealth and power, as the only players with the authority to make a meaningful impact. I do still retain a shred of youthful optimism, however. There is a palpable shift, generation after generation, that is calling for more attention to these issues. Particularly in developed countries, young people are frustrated by the plummeting affordability of living — student loan debts, high prices, and stagnating wages — as well as a broader global concern for the future that these trends will create. My hope is that, with time, this concern will translate into effective political action that forces a change in the status quo. Perhaps then will the necessary factors align to resolve these issues that we see replicating across borders.
Works cited
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