Opinion

Would Restricting Second Home Ownership in Central London Help Contain Price Growth?

Simon Hughes, a Liberal Democrat MP, has proposed a motion that would allow local councils to introduce controls on second home ownership in London. He believes that this could serve as an effective means of controlling price-growth and will prevent foreigners and investors from continuing to drive up the cost of London home ownership.

At first blush, one would assume that this could work. The intent is to prevent speculators from artificially driving up the demand for London property and consequently allow owner-occupiers the ability to afford a home. 

I empathise with Mr Hughes' intent and the ambition associated with his proposal.  He wants to tackle a serious issue and at least he has proposed something.  Unfortunately, in my opinion, his approach needs some refining. Although this strategy could work in other regions; in London, the lack of supply is the predominant driver of price-growth - not foreign and second home demand. I do believe that something needs to be done but I am concerned that such a policy would not work in the intended manner. It could generate the opposite effect - by further weakening supply.

Research by the Smith Institute suggests that in 2011, foreign purchasers, who spent circa £5bn, purchased 60% of Central London new build property.  This exceeds the English government affordable housing budget for the past four years combined. 

Why does this matter?

The consequences of adopting protectionist housing policy could have the following consequences:

• Loss of Jobs: £5,000,000,000 in new build purchases equates to £5bn in construction, agency, lettings, mortgages, etc.  This is £5,000,000,000 per annum that the United Kingdom currently needs, to stimulate its economy.  £5bn is only the foreign investment figure.  The domestic second home ownership figure is unknown at this moment to me but could most likely add an additional £500m to £1bn in revenues to the bottom line that would further hurt the region and the country economically.

• Reduction in 106 Payments and Benefits: Although each council is different, typically, a development consisting of 15 homes or more requires that the developer either allocate an average of 30% of the project to social housing, make a an equivalent financial contribution to the local council or a combination thereof.  As a result of the Section 106 of the Town and Country Planning Act 1990, £5,000,000,000 in foreign purchases means that at a minimum, £500,000,000 per annum is invested in social housing, solely resulting from foreign ownership.  It is very unlikely that domestic purchases would be able to replace the loss in foreign ownership.

• Increase in Rents: Foreign owners typically purchase London properties for buy-to-let purposes.  One of many reasons foreign investors gravitate to London property is the current lack of rental property available to London renters.  There is currently not enough rental supply.  The only means to reduce rents is to increase supply.  Simon Hughes, the Lib Dem MP of Bermondsey and Old Southwark, is making the claim that foreign and second home ownership is pushing up property prices and forcing locals out but in my opinion, this reasoning does not add up. Either they already own the property and they are benefitting financially from appreciation or they are renters and as a result of increasing rents, they can no longer afford to stay in Central London.  Either way, the solution is not to prevent foreign investment or second home ownership.  The solution is to increase supply in order to decrease rents so that they do not have to move.

Fortunately, for the time being, only Lewisham council responded positively to the idea.

Housing supply is not only a problem for buyers, but for renters as well. London rents have risen significantly in the last few years as supply has continued to constrain.

Put simply: if it were not for foreign investors and second homeowners London's rental market would be much worse. Foreign investment has allowed for London's construction sector to continue generating healthy revenues, creating jobs and investment.

If we listened to the likes of Mr Hughes the result could be soaring rents, extortionate home prices, falling construction and rising unemployment.  In a world that is becoming more and more defined by globalisation, although protectionism may appear enticing on the surface, it rarely produces the result it promises.

However, I do not fault Simon Hughes.  He is making what he perceives is the most effective solution based on the information available to him.  At the very least, he is making some attempt to address London's housing problem whereas many are turning a blind eye.

For issues as serious as this, it is imperative that MPs and other government officials and property experts such as advisors, investors and developers collaborate with one another on a non-biased manner to co-develop solutions that best serves London.

There are solutions but they require time, careful thought and most importantly input from seasoned industry leaders. A little think tank comprised of MPs and industry experts approaching the problem from different angles could go a long way.

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