Dr. Gintas Vilkelis PhD
London’s housing crisis is a symptom of a much bigger systemic problem
One of the most important things to realise about the London housing situation, is that it is not a London-confined problem, but rather a symptom of a much bigger (country-wide, maybe even EU-wide) systemic problem, therefore it will be impossible to solve if all of the “solving actions” were to be confined to within the London borders. It’s like being made responsible for keeping the boat afloat by pumping the flooding waters out of only your section of the ship, when you are not permitted to patch up a gaping hole in another part of the ship – the one that’s causing all the flooding in the first place.
The problem is caused mostly by the fact that London, due to its reputation and relatively thriving economy, is a major magnet for the economic migration (from other parts of the UK and beyond). For as long as the British economy remains strongly unbalanced (whereby London is the “economic engine of the country”, while most of the rest of the country is economically depressed and under-achieving), London will inevitably remain the natural “magnet”. Currently, a lot of that potential in-flow is stemmed by the common knowledge that the cost of housing in London is unaffordable to many, due to the severe shortage of it.
This means: if the ambitious plan of building many more new homes were to be achieved in the next few years (which by itself is a big “IF”!), the resulting housing situation improvement would just increase the in-flow until the new unaffordability balance is reached, and we’ll just end up with London having even more houses and more inhabitants, but with the housing cost situation remaining more or less as bad as it is now, and transport and many of the social services (schools, health, etc.) even more overloaded than they already are already. And whoever is in charge of London (as well as whichever party is in charge of the country), will get blamed for it.
Another significant factor that’s further exacerbating the property price situation in London, is the wealthy foreigners bidding up the property market by parking their money in the safety of London real estate. But here is one of the “hidden” culprits amplifying this process that you might not have heard about: the 2008 and 2012 Non-Dom tax reforms:
Since the introduction of the £30,000 annual charge in 2008, about a quarter of Non-Doms left the country, and those, who still live here, have reorganised their life so as to avoid being struck by the levy after seven years. Their investment focus has shifted from businesses to property (because property investments are much easier and quicker to liquidate when your 7 years are up and you want to make sure you have the ability to quickly leave the country).
So this is a double-whammy: not only did this legislation reduce the number of new jobs created (via the reduced direct business investment), but it also further exacerbated the already inflated property prices, which is one of the 3 root causes of the current cost of living crisis; and it’s making London-based businesses even less competitive due to the ever increasing cost of renting business premises.
More details about the Non-Dom situation in the UK can be found in this 2013 article:
The solution
Generally speaking, there are 3 principal approaches towards solving the housing crisis:
- Increase the supply.
- Reduce the demand.
- Give people more money to enable them to buy at the current prices.
#3 is by far the worst of the 3 approaches (albeit the quickest and easiest to implement), as it does nothing to fix the root causes, and instead only gives the appearance of helping to manage the symptoms while in reality making the problem even worse long-term by increasing the upwards pressure on the prices, thus making the housing situation worse for those who “didn’t get in” this time around.
And if we were to accept the presupposition that London will remain a strong magnet for a huge number of economically desperate people, then increasing the supply by a large amount would appear to be the only credible solution. The main problem with this approach: the size of the pool of potential (+ current) London’s residents vastly outnumbers even the most optimistic new build projections.
The only truly sustainable solution to this problem involves properly addressing the underlying root causes, which means employing a combination of approaches #1 and #2: (1) build more homes, and (2) make London relatively less of a magnet by increasing the desirability of other parts of the UK.
The latter means enabling and empowering other parts of the UK to revive themselves economically, so that (1) fewer people would feel compelled to flee their area for economic reasons, and (2) some of the people, who already live in London, would start moving out to other up-and-coming parts of the UK, where job prospects now are much better than they used to be before, and where they can now have a more luxurious and less expensive lifestyle; a greener, less crowded, better place to raise their family or to retire. London, of course, will always remain a very popular city, but it should be popular for reasons better than just being the “economic lifeboat of last resort”. The whole situation would then become much more manageable. And the more and the faster other parts of the UK get revived, the fewer new homes will need to be built around London to resolve London’s housing shortage, thus making the new construction targets even more achievable.
And furthermore, if the wealthy Non-Doms were to be incentivised to start investing into British businesses instead of property, that would make the whole situation better still!
Given how vital are the investments (including foreign direct investment) to any country’s economy, this would shift the whole UK economic system into a new mode of more prosperous and mutually beneficial cooperation, where the investors from all over the world would be incentivised to invest their money into more society-benefiting sectors than just property, get rewarded with attractive rates of return (being produced by the thriving and growing economy), and low tax rates without having to forego more lucrative investments just for the reasons of avoiding punitive taxation.
This way also more money would remain circulating in the productive sector of the free market economy rather than being forcibly diverted to be wasted by the bloated, inefficient and ever more tax-desperate welfare state that has been increasingly focusing on trying to extract the maximum money possible from those “with the broadest shoulders” instead of looking for effective ways to get their runaway spending back under control.
There is a saying that democracy will be dead when people lose ability to vote with their feet (whether fiscally or literally). With the recent major successes in cracking down on the tax heavens, but without a matching reduction in governments’ spending, we are rapidly approaching that point. This drift has to be stopped.
In www.localism2now.com/c (“How Localism 2.0 Can Help Conservatives Win Elections”) I explain in greater detail how Localism 2.0 would make it possible to revitalise the economically depressed areas in other parts of the UK – something that under the current highly centralised system is impossible, and which then forces the central government to resort to the never ending vicious cycle of overtaxing the productive portion of the population (esp. London and the South East) in order to fuel a vast, expensive and inefficient welfare state in all corners of the country. Under such a system, nobody wins and everybody loses; and it makes the UK less competitive in the world’s arena.
