By +Eric Jafari
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
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
- 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
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
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
09 October 2012
Simon Hughes MP,Housing Policy,Buy to Let,London Rental Property Market,Housing Supply