Our neighbours Lauren and Matt and their kids moved out of
London
to Cambridge the other week. Bibi, Andy and their two left for Bristol
in June. Another of my eight-year-old's classmates and her family are
heading out after Christmas. In my book this is a trend.
The moves
are not examples of the lifecycle of the striving middle classes. Nor
are they examples of middle-class folks being thrown on hard times by
the sluggish British economy.
The families moving out had good incomes.
Matt, who had been looking for a house for more than three years, summed
up the reason for leaving best: "I don't want to be a slave to a
mortgage for the next 25 years." Given the astronomical rise in
house prices here, he wasn't speaking metaphorically.
This is what happens when
property in your city becomes a global reserve currency. For that is
what property in London has become,
first and foremost. The property market is no longer about people
making a long-term investment in owning their shelter, but a place for
the world's richest people to park their money at an annualised rate of
return of around 10%. It has made my adopted hometown a no-go area for
increasing numbers of the middle class.
According to Britain's
Office for National Statistics, London house prices rose by 9.7% between
July 2012 and July 2013. In the surrounding suburbs they rose by a mere
2.6%. The farther away from London you go, the lower the numbers get.
When you finally cross the border into Scotland, house prices actually
decline by 2%.
The gap between London prices and those of the rest
of the country is now at a historic high and there is only one way to
explain it.
London houses and apartments are a form of money.
The
reasons are simple to understand. In 2011, at the height of the
eurozone crisis, citizens of the two countries at the epicentre of the
cataclysm – Greece and Italy – bought £400m of London bricks and mortar.
The Italian and Greek rich, fearing the single currency would collapse,
got their money out of euros and parked it some place where government
was relatively stable and the tax regime was gentle – very, very gentle.
Considering that tax evasion in Italy and Greece was a significant
contributory factor to their debt problems, it just seems grotesquely
cynical to encourage this kind of behaviour.
But that's what
Britain in general, and London in particular, does. The city is
essentially a tax haven with great theatre, free museums and formidable
dining. If you can demonstrate that you have a residence in another
country, you are taxed only on your British earnings.
And the
savings on property taxes are phenomenal. The property taxes on New York
mayor Michael R. Bloomberg's $20m London home come to £2,143.30 a year.
That's $3,430.
Clearly, the mayor bought in at the right time. The
Google executive chairman, Eric Schmidt, is reported to be house-hunting
here – he's looking in the £30m (about $48m) price range. Yet he will
pay a similar amount in property tax as Bloomberg does.
There are
other facets of London real estate as a medium of exchange. British
gross domestic product has yet to return to pre-crash levels, but the
financial services industry has roared back. Banks are paying out big
bonuses again, and anyone looking for a safe investment is getting into
London property.
From the top of Parliament Hill, on Hampstead
Heath, look eastward. Out around the Olympic Park and beyond you see
clumps of highrise apartment buildings sprouting like toadstools in a
meadow after heavy rain. These aren't being built to meet the calamitous
shortage of affordable family housing in the city; they are studio and
one- or two-bedroom apartments.
The
developments are financed by "off plan" buying. Bonus babies look at the
blueprints and put their money down with no intention of living in what
they've bought – just collecting decades of rent. And it's not just
those who work in London's financial district, the City, who buy in. Hot
money from China, Singapore, India and other countries with
fast-growing economies and short traditions of good governance is
pouring into London.
When I say property is money I mean it. An
astonishing £83bn of properties were purchased in 2012 with no financing
– all cash purchases. That's around $133bn.
I suppose the
development that houses equals medium of exchange isn't all bad. I have
friends who were very successful "creatives" (architects,
cinematographers, commercial and television directors, etc) in their 30s
and 40s. They bought houses when houses were places to live in. Once
they turned 50, they passed through a mirror that turned them invisible.
Work dried up. They have survived in London via the magic of
remortgaging. They accept that their children will never be able to
afford to stay on in the city.
The ripple effect of this
frankly demented situation is felt all over town. The foreign rich and
the City rich (there is some overlap) have made most of the centre of
London unaffordable to any but their own kind. Those who were once
considered rich – in the top 10% of earners – now can barely afford to
move to my neighbourhood, where a typical row (terraced) house, with
three bedrooms (the third bedroom wouldn't qualify as a closet in
Manhattan) and a total living space of around 950 square feet tops a
million dollars, three times what it cost in 2000.
The overall
economy of Britain certainly doesn't justify these prices. Bank lending
for businesses is flat, but mortgage lending? Hoo-ha,
it's soaring up and up and the bulk of it is concentrated in London. It's as if the whole British economy is based on housing speculation in the capital.
David
Cameron's government seems to think that is the case. Cameron may be
pursuing austerity policies elsewhere in the economy, doing virtually
nothing to help subsidise employment or industry, but his government has
just started a "help to buy" scheme. The government will guarantee up
to 15% of the purchase price of a house up to £600,000 ($960,000), if
you have a 5% down payment.
The ordinary uses of the city have
been changed beyond recognition. London was never a cheap place to live,
but now more expensive property means more expensive everything else:
restaurants, cinemas, bars and theatre tickets.As for services, the
minimal tax paid by those who have made property into money means that a
city whose population has increased by 14% in the last decade can't
afford to build new schools. There will be a capacity shortfall of an
estimated 90,000 places by 2015. Children won't be turned away from
school, but class sizes will grow to untenable proportions.
So
younger people, like my former neighbours, feel compelled to leave –
even though they were making a very decent living. The delicate social
ecology that made London's transformation into a great world city over
the last two decades is past the tipping point, I fear.
For the quarter of a century I have lived here, a sense of community has defined my life.
A very organic sense of London pride
has allowed this city to withstand substantial shocks – some welcome,
like its transformation into a true cosmopolis; some unwelcome, like
jihadist terrorism.
Now it is beginning to feel that the next
phase of London's history will be one of transience, with no allegiance
to the city. I wonder whether those just parking their money here by
buying real estate will ever be able to provide the communal sensibility
to help the city survive the inevitable shocks it will experience in
years to come.
How this story will end doesn't bear thinking
about. It seems a very reasonable bet, though, that those who use London
property as just another form of money aren't thinking about it at all.
Michael
Goldfarb is a writer whose most recent book is Emancipation: How
Liberating Europe's Jews From the Ghetto Led to Revolution and
Renaissance
© 2013 The New York Times Syndicate
When I wrote this piece in September, shortly after the ONS
published its report showing a 9.7% increase in London house prices, I
never thought to send it to a British paper. Everybody here knows the
score – no one will publish it, I thought. Wrong. It went viral.
Clearly, it spoke to people's fears.
They fear that property
prices make no sense. It feels like 2005-07 all over again. People shake
their heads and say it can't go on like this. Since nothing has changed
in oversight of the City and the rest of the global financial system,
people fear what the next property- driven crash will do to their lives.
People
fear for their jobs. The time frame of productive economic life for
the middle classes is growing shorter. People don't get into good
full-time work now until their late 20s. By the time they are 50, they
are living on borrowed time (it's more like 40 if they work at Silicon
Roundabout). And anyway wages are not rising in line with house prices,
so they have to take out massive mortgages.
Finally, they fear
what I write about at the end of the essay. The balance in London's
complex social ecology has been lost. The balance point in any society
should be between stability and stasis. Stability is good; stasis is
bad. What's happening in London has shifted the ground so dramatically
that stability isn't something most people can contemplate. How do you
raise your children knowing that the place they were born and raised is –
on current trends – not a place they will be able to afford to live
when they grow up?
