Vote Brexit to end London’s housing crisis. George Osborne said it yesterday. He said Brexit “could” cut house prices by 10 to 18 per cent. Since property prices are most inflated in London, the cut must translate into at least 20 per cent in the capital. Indeed the Treasury said yesterday that the average London house price will be £62,000 cheaper in two years under Brexit.
Wait a minute. Twenty per cent below market price is what the Government defines as “affordable”. Since the new mayor, Sadiq Khan, claims he can cure the housing “crisis” by making half of all new houses affordable, Osborne has shown him how to do it. Vote Brexit. The average London home will become statistically affordable. Khan wins.
In other words, welcome to the madhouse. This is all, of course, barmy. But then so is everything said about both Brexit and London housing.
Osborne reached his 18 per cent figure through what he soberly calls his “extreme shock scenario”. The Treasury has, for the duration of the referendum campaign, switched from being a respected economic institution to being a lobbyist for Project Fear. Its notorious apocalypse algorithm looked like a schoolboy spoof, with its subscripts and squiggles “proving” Brexit would cost every household £4,300. (Didn’t the Treasury once prove that EU regulation cost households virtually the same?)
The Treasury thesis appears to be that the shock of Brexit would make Londoners poorer, interest rates higher and deter immigrants and rich foreigners from buying or renting houses in the capital. Prices would therefore fall. That is certainly plausible. Whether this would be a “shock” scenario for most Londoners is surely moot.
We are now entering a world in which economists simply seek predictions to support prejudices. The Treasury assumes that Brexit would lead to a fall in the pound. But surely that would make houses cheaper for foreigners to buy and push at least some prices back up? Why does Osborne not warn of a Brexit “soaring house price shock”?
He argues that rising interest rates would increase mortgage rates and lead to a price fall. Or it could encourage banks to lend more and thus drive prices higher. Brexit might indeed deter immigrants and thus push prices down. But it might lead to a eurozone collapse and see Greeks and Italians flooding into London, pushing prices back up.
These imponderables are clearly too great for any sensible person — but not apparently today’s highly politicised Treasury. The wisest remark perhaps comes from Johnny Morris of the estate agent Countrywide, who says simply: “Brexit would be an unprecedented turn of events, with a wide range of possible outcomes.” That is economist-speak for “no one has a clue”.
All big cities these days have overheated property markets. London’s is no more overheated than Stockholm, Paris, New York, Hong Kong or Sydney. London is also a low-density city which is still, just, an attractive place into which vagrant cosmopolitans can sink their savings, if not their lives. In other words, London housing is a normal market in which prices go up and down, its swings merely exaggerated by politicians trying to control it. But I still find it puzzling, given the hysteria Osborne and his colleagues generated over housing at last year’s election, that a fall in house prices should be such bad news.
It was Osborne who drove the recent London top-end property bubble and is now helping it to burst. He encouraged foreigners to invest in prime housing and now his swingeing stamp duty and assault on buy-to-let are pushing prices back down. For a dozen reasons — recession in China, sanctions in Russia, the oil price collapse or whatever — the bubble is now shrinking, if not bursting.
At the recklessly over-built Battersea Power Station site last week, the developer BPSDC admitted to price discounts. “The market has softened,” said the company’s Rob Tincknell to Property Week. “There are fewer buyers around.” Elsewhere frantic calls are going out from estate agents: “Sell now, don’t wait.” Buying off-plan has become selling off-plan, or “flipping” at a loss. To the fat cats of Singapore, Kuala Lumpur and Hong Kong, London is yesterday.
Anything that calms a frenetic market is a good thing. This may infuriate those encouraged by Osborne’s help-to-buy and starter home subsidies to incur debts they could not sensibly afford. Some may revert to the early Nineties and “negative equity”. But that should teach everyone to beware of politicians trying to buy their votes by showering them with cash.
Where it leaves ordinary Londoners is harder to tell. Housing policy is in the grip of two lobbies, the private housebuilders and the public housebuilders — in other words, the builders. Yet the market for homes in London is at least 90 per cent for already built properties. Khan’s pledge of “50,000 new houses a year, half of them affordable” is not going to happen, however he defines affordable.
London’s future living spaces are buried in existing buildings. They are in old offices and warehouses. In under-occupied houses, basements and extensions. London has the lowest residential density of any big European city. It is locked into wasted rooms by stamp duty, inheritance taxes and 20 per cent VAT on alterations and repairs.
The city is suffering from a massive bureaucratic and fiscal disincentive to bring living space to market. A few more newly built houses or estates will make little difference to supply. If Khan really wants to make a difference, he should turn his back on the lobbyists and squeeze new housing from where Londoners actually live, from the existing bricks and mortar of the city. The future even of social housing lies in cash benefits, in the sharing economy and the lettings market. There is no going back to the council estate.
Either way, Brexit will have nothing to do with the case.