10 Sep 2013

Osborne’s skyscraper a totem of Britain’s new global export: houses

Yesterday George Osborne repeatedly said his economic plan was “just like this building”: One Commercial Street in London’s East End. That is where he chose to give a weighty speech with no policy announcements, but a forceful argument: the 2013 data shows that he and his “Plan A” was right, and the deficit denying “Plan B” brigade were wrong.

The building is a rather intriguing choice of totem for the UK economy. The chancellor’s team chose it, because it stalled in the aftermath of the crisis, and restarted, when confidence returned on 2012, thanks, says the chancellor, to his economic plan. The story is even more interesting than that.

The private flats, covering 10 floors, are flats for sale from £720,000 to £1.4m for the British market. The penthouses are millions. Expensive, yes. But that’s capitalism, particularly in a new district of the “City fringe” with easy access to the financial district and a bespoke tunnel giving access to the Underground. No doubt, for those who are critical of the chancellor it would be seen as a symbol of recovery for the wealthy.

Well, the Chancellor was at pains to point out that the building has provision for four floors of affordable housing, though this is accessed through a separate entrance. Who could complain about the provision of high rate council tax payers in Tower Hamlets? Particularly, as I understand, many of the social housing flats are bigger than the privately sold ones, under regulation of minimum standards for social housing.

But One Commercial Street is rather typical of trends for Britain’s new housing stock for a rather different reason. Fifty of the flats were sold off-plan to wealthy investors in East Asia. Developer Redrow held a special marketing event at a hotel in Hong Kong in February 2012. The flats were then marketed in Britain only months later, and at prices markedly higher.

Is there anything wrong with this? Many would argue that this is a smart strategy where the world’s global upper middle class are buying into the safety, economic and legal stability of British bricks and mortar. Those apartments then effectively subsidise the social housing.

First, the British squeezed middle and even London upper middle are squeezed out of this development. Only a rich nondom, banker or those top of the affordable housing list will be able to live in developments like this (and clearly this is a generic issue stretching well beyond this building).

Second, this makes a mockery of the housebuilding targets and statistics. If some statistics that 75 per cent of London’s new build are bought abroad are true, then net housing stock available to ordinary Britons may well be going down not up. Certainly it will be growing even less than the miniscule amount it is growing now.

Third, house prices are inflated and distorted by this type of business. What would they be doing without this trade?

Fourth, are these flats even lived in? I’m willing to bet that if George Osborne returns to this development in five years’ time, many dozens of these flats will be empty.

Fifth, in other regards the housebuilders are being directly subsidised by the taxpayer with help to buy. Are the housebuilders then choosing to subsidise wealthy foreign purchasers of property, and not even allow the domestic market to function, and domestic buyers to buy? Are we having to subsidise UK domestic mortgages, just so that they can compete with wealthy foreign buyers?

So why are they buying? Because we live in a bail-in world*, where London property is seen as an international currency and store of wealth. Sterling’s devaluation helped. This will continue as Cyprus eases its capital controls, and China liberalises its rules on foreign property purchases. Fine. But there are and will be consequences. It is probably better to acknowledge, count and investigate this. A canny exchequer could probably squeeze much more tax out of these strange purchases. In some of the countries where buyers originate, free market authorities limit property purchases to one per person.

Britain, not just London, has a newish export industry. We are exporting our housing stock. Large swathes of the capital and beyond are turning into a giant hotel, with ghostly empty palaces distorting our already dysfunctional housing market. In some developments, it is not actually possible to buy from Britain. In others, there is a premium paid for buying from Britain. The houses and flats are not functionally part of the British housing stock, almost from the day they are drawn on an architect’s CAD system. Perhaps we should embrace it, and create a new export council, or even new towns full or expensive properties that will never be lived in.

George Osborne’s totem of the UK recovery is rather apt.

* Much of this is drawn from a chapter in my book, The Default Line.

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11 reader comments

  1. Philip says:

    We live in a country which has persuaded itself that “conservative” (Hayekian) economics is the only solution. So or manufacturing industry has shrunk, while services – notably financial services – has boomed (and bust). Economic growth has largely been on the back of inflated house prices. As a result we have an increasingly unequal society with super rich virtually untouched by “boom & bust” and most in increasingly precarious jobs, with their pay & conditions squeezed, and a large number on or close to minimum wage with virtually no job security (zero hours contracts, etc) & highly vulnerable to changes in the economy. Osborne’s so-called turnaround is a farce for many & the figures are too dependent on the things that got us into the mess in the first place – rising house prices fuelling consumption & too great a reliance on financial services. But then he’s a political chancellor wanting to remain in power, not a statesman who’s aiming to do the best for the UK in the long term.

    1. mark says:

      Sadly- absolutely true. None of our politicians even remotely wish to be statesmen. This is of course the most corrupt country on earth. It can be no surprise to anyone. We did give lessons to the arabs.

  2. Rogue Trader says:

    It’s wrong to say that these flats are only affordable to the super rich. Imagine a couple each earning a moderate (for central London) salary of £65k each. With a deposit of £250k from the sale of their existing property, or a bit of inheritance, they should be able to secure a mortgage for the remaining 65% of a £700k flat without any trouble. At current undiscounted rates, mortgage repayments would be about £2k per month (approx. 28% of salary). This should be considered in the context of a season ticket cost of up to £1k for the couple if they decided to live out in the shires.

    Of course, not everyone is in this position, but on the other hand there are only a handful of these flats to sell.

  3. Hua TS says:

    Developer needs to clear the construction loan bank covenant of 25% development units sold before official UK local launch so Asia esp hkg /spore is first pre-launch spot because appetite is there inspite of premium pricing as compared to benchmarks around the vicinity. The expected value of this decision is positive because projects get completed due to secured construction funding and overseas buyer subsidize social housings; jobs get created during construction & post-completion due to management team needed to maintain. Here overseas owners subsidize maintenance cost as well so there is a community ecosystem where everyone should/can be happy.

  4. Andrew Dundas says:

    It was NEVER TRUE that Britain needed the austerity brought into our lives in June 2010 by Lord Snooty and his gang-man Frogs’ spawn.

    We have always been a v. strong economy and well able to borrow to cover all short-term crises arising from the Wall Street Crash on 2008-09.
    As Chancellor Lawson explained in the late ’80s, the UK has vast assets and does not need panic measures whenever we have an adverse financial year. UK owns vast assets and government borrowing is from UK citizens – not from abroad. So it’s just a transfer of funds amongst ourselves.
    The Tory austerity policy was always a lie. It is intended to ensure the poor get poorer, and the rich get richer. And to create room for a “recovery” as we approach the next General Election.
    As for Housing. Those restrictive policies are the Cartels that ration development permits through local Planning Policies. Those local cartels force up property prices by restricting supply to half the rate of new household formations each year. The OFT should condemn our local planning as cartels acting against the public interest – which would be an undeniable charge if they were in the commercial sectors of our nation.
    So there we are: an unjustified austerity that’s made millions of families suffer a steep fall in living standards. Outrageous Cartels that force up housing costs to the benefits of Millionaires. That’s Lord Snooty’s Britain!

  5. Robert Taggart says:

    Would happily sell our ‘pad’ (a northern suburban bungalow) to any Oil Sheikh, Oligarch or other such – for a considerable sum mind !

  6. Adam Daniels says:

    Lawson may have been right in the 80s but the proportion of public debt held abroad has ballooned since the 90s. The chinese used to help us buy their goods by lending us the money. Now they are beginning to invest it in private sector assets like property.

  7. William Mitchell says:

    The problem is surely that housing prices are TOO HIGH, relative to the ability of most people in the UK to pay. The prices got that way because we all became convinced that the entire “housing ladder” was moving up, and getting on that ladder only made sense. With easy credit, often more than income would justify, everyone who could jumped on board.

    When the bubble burst, many of us were left holding assets that cost us more than they were worth. More than we could afford.

    Eventually, housing costs will probably return to an appropriate relationship to buying power. But, without government intervention, that will take time, during which many people will not be able to afford to buy.

    As for the foreign buyers, I see no downside. If they want to invest their money in the UK, all the better.

  8. adil says:

    It is a little frustrating that very few people see the housing market as a false economy. The government are looking for a quick win and encouraging buy-to-let and (dare I say it property speculation) is a quick and unsustainable win. Please, please, please look at Ireland and Spain. They saw property as an important component of their economy. Are they doing so well now?

    For any potential property tycoons out there or buy-to-let-ers try to find answers for these:
    – is there really a shortage of housing in the UK or a shortage of AFFORDABLE housing?
    – apart from the housing (I mispelt, but think it apt hosing) market which other sectors are booming that ensure there is a steady stream of people that need to rent your property?

    This government is behaving very irresponsibly and should be looking to turn on the cold water on this already overheated market.

  9. andy says:

    I feel so sorry for all those Londoners being priced out of the market, must be terrible to be on the receiving end for a change. Where I live we have the same problem – there’s a village down the road which is 75% second homes – homes are even put on the market there with a clause stating that they can only be used as second homes and not as permanent dwellings, to keep the prices high. Who owns these houses – mainly Londoners, the village Mousehole in Cornwall. This has been going on for years and no-one at channel 4 seemed to notice this “break” in the house ladder.

  10. DCB says:

    adil – we have the opposite crises to Spain and Ireland. In Ireland the planning system was ineffective e.g. you could build almost anything, anywhere. In the UK you couldn’t build anything. The difficulty is getting the balance right.

    With loser planning we would have a lot more homes – but with too lose planning our banks would have been a lot more bust (e.g. UK taxpayer will probably eventually break even on bank bail outs where as the Irish taxpayer has about £200k debt per person, in terms of share of national debt incurred to bail out banks/german creditors, that will never be recovered)

    I do not see how wrecking the prime London end of the market is going to help the rest of the market. There is absolutely no shortage of land – even just brownfield land – in London.

    The higher the re-sale prices of prime the greater s106 contributions that can be sought for affordable housing and community infrastructure.

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