Blaming overseas investors for the London housing crisis is hitting the wrong target

Any attempt to deter overseas investment would most likely harm the capital's chances of building the necessary number of homes it needs.

Investing in London property has become an increasingly attractive proposition in recent years, with some of the most expensive property in the city often outperforming other asset classes across the world. Indeed some have even dubbed property in the capital as “the new global reserve currency”. But is this investment from overseas actually harming the London housing market?

With London suffering from a severe shortage of housing, there has been increased interest in what the impact of this investment has been. A 2014 YouGov survey found that almost half of Londoners think wealthy people from overseas buying top-end property as an investment has been the main cause of the London house price boom, which has seen average house prices rise to over 15 times more than average incomes. Such views may be reinforced by the media coverage of such investments, with headlines often decrying ‘Chinese buyers fuelling UK housing shortage’ and ‘Londoners miss out as homes built as ‘safe deposit boxes’ for foreign buyers’.

The perceived wisdom runs as follows. Firstly, rich people from overseas are buying up expensive property which pushes up prices across the city. Secondly, they are buying new properties as investments and leaving them empty – the so called ‘buy-to-leave’ phenomenon. These issues are held to represent a threat to the capital’s future growth as London becomes less attractive and accessible as a place to live, in turn constraining the ability of businesses to recruit talent.

Such concerns have not gone unnoticed by London politicians. In March 2014 Mayor Boris Johnson launched a Mayoral Concordat on housing, a voluntary commitment for developers to commit to marketing new homes in London to Londoners first. Meanwhile, likely Labour Mayoral Candidate Tessa Jowell has vowed to introduce punitive taxes on the owners of empty properties, and the national Labour party have proposed higher stamp duty rates for foreign buyers.

To what extent do overseas buyers influence the market? Let’s first consider the prime central London area. A 2013 study by estate agents Knight Frank found that in the twelve months to June 2013, 28 per cent of £1 million plus homes in prime central London (areas such as Chelsea, Islington and Notting Hill) were sold to overseas buyers. Given that approximately 7,000 homes in London during that period were sold for over £1 million, and assuming that most of these were located in prime central London, then overseas investors accounted for just 1,960 of these £1 million plus transactions – equivalent to roughly 1 per cent of all house sales in London that year.

Yet overseas investors do not solely buy in prime central London. The same Knight Frank study found that while only 7 per cent of new-build properties in Outer London are purchased by overseas buyers, this rises to 20 per cent of new-builds in Inner London and 49 per cent in prime Central London. This may well have an impact on prices in these specific markets, given the limited supply of new homes in the capital.

However, assessing the economic impact of such trends really depends on what these buyers are doing with their property. If the buy-to-leave phenomenon is true, a significant number of empty homes would be a concern. However, much of the evidence for buy-to-leave is anecdotal and there is little concrete evidence of the scale at which it is happening. Indeed in most cases it seems that these properties are being rented out. In a separate study by Knight Frank, a survey of overseas buyers of London new-build property found that only 2 per cent purchased their property to use as a second home, with 65 per cent instead intending to rent them out, and 33 per cent purchasing them as homes for children attending university in London.

Renting property in London can be very expensive, but these statistics cast significant doubt on the idea that overseas investment is the primary driver. Instead, the main cause is a simple imbalance of supply and demand. Landlords want as large a return on their investment as possible and as long as demand for homes massively exceeds supply they rationally charge relatively high rents. The cost of renting a property in Inner London is unlikely to be any different if the landlord was from Southwark rather than Singapore.

In fact, overseas investment can actually have a positive effect. The finance raised from off-plan sales overseas often helps bring forward development on otherwise unviable sites, and through Section 106 agreements and the Community Infrastructure Levy add to the supply of affordable housing. The key for policymakers is to direct foreign investment toward a wider range of housing types and affordable properties. Any attempt to deter overseas investment would most likely harm the city’s chances of building the necessary number of homes it needs. Blaming people from overseas for the ills of the capital’s housing market is hitting the wrong target. Rather than point the finger at others, politicians and policymakers need to take action to boost the supply of new homes in the cities that need them most.

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Ralph Kent
23 April 2016 14:53

You incorrectly say: "much of the evidence for buy-to-leave is anecdotal and there is little concrete evidence of the scale at which it is happening". I know first hand from dealing with large volume housebulders that the primary marketing location (where they aim to sell up to 90% of new developments off-plan) is East Asia. £50K for a marketing weekend in Beijing, HK, KL or Singapore, champagne flowing with the dregs left for the UK market, some of whom may actually want to live in these flats. There have been articles in the mainstream press regarding how Galliard Homes has been selling in this way, and obviously they are not alone in this sort of tactic - it is the industry norm. But you might still think that is 'anecdote'. So I refer you to Islington's SPD - "Preventing Wasted Housing Stock" - (July 2015, pdf link below) which provides very clear concrete evidence of what is happening - 50% of new-build market flats vacant with no one ever registered on the electoral register three years after completion. If that's not clear evidence of the wasteful effect that BuyToLeave is having on the property market, I don't know what is. I sincerely hope that Centre For Cities try to retain some credibility by retracting or correcting this blog article and publishing a new blog post in light of this data. You have published something that flew in the face of what everyone could see was going on - now there is hard data which demonstrates that you were entirely wrong on how deep & widespread this problem has become thanks to a global financial market awash with quasi-free money. Should you not publish an updated blog to correct your mistake, I think that can only suggest some sort of vested interest (property developer donors, for example) that mean that your analysis is not impartial.


Darren Carr
28 January 2016 22:49

Having read that ridiculous article I think it actually reinforces the argument that oversees buyers are a major factor: 20% of new builds in inner London; 49% in Central London. When we're building just a fraction of those needed and giving incentives to first time buyers on new builds only then such a large proportion becoming unattainable tips the supply-demand dynamic even further against our 20 and 30 somethings. As they are priced out of Central and Inner London they increase competition in Outer London and the ripple effect continues. And Boris was out in China promoting the sale of developments in East Greenwich by claiming they are exempt from requirements to have social housing included. Add to this that oversees buyers don't pay capital gains here so value property differently to domestic buyers, and builders in the comfort of ever growing demand can drive up the prices month after month without scrutiny.


9 January 2016 10:49

very useful blog, thank you for sharing


Cllr Jon Burke
17 June 2015 23:11

I'll go through this in detail when I have the time but, in the meantime, the belief that "rich people from overseas are buying up expensive property which pushes up prices across the city"isn't "perceived wisdom", as you claim. Between 2012 and 2014, 70% of new build properties in the capital were bought by foreign investors, with strong anecdotal evidence - including the largest new block in my ward, in which 50% of (the same) flats are in constant darkness - indicating many are kept empty. I suggest you read the Smith Institute's London For Sale? report. Further, while there are numerous arguments against the facile, supply-side focused measures advocated by this blog piece, the primary one is that increased supply hasn't, and doesn't (given the specificity of London's housing market), place downwards pressure on house prices...


Ben Kochan
30 April 2015 10:29

If they were getting the s106 agreements and the affordable housing, the development might be acceptable - but the amounts being secured are pitiful and those they are getting are not truly affordable!

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