Search for safe haven for funds fleeing euro zone creates London mini-boom

Chris Johns

I cannot remember a time when London house prices were not headline news. Not that different, I suppose, from our own national obsession with Dublin property prices.

And London house prices are now rising so fast that many commentators reckon that yet another bubble has formed, one that will inevitably burst with all of the usual consequences. There are one or two voices, usually belonging to estate agents, which argue this time is different and that current prices are not only sustainable but are likely to rise further.

London has always attracted foreigners, poor and rich. Despite decades of moaning and groaning about immigration, Britain seems to let in just about anyone willing to make the effort. In the most recent census, it was revealed that the proportion of Londoners describing themselves as “White British” fell below 50 per cent of the population. If there was a surprise in this revelation it was just how little interest, outside of the usual tabloids, it attracted.

Immigration has always exerted pressure on London property prices. So has inward investment from wealthy foreigners who never have any intention of permanently settling in the UK.

A more recent phenomenon has seen money flowing into the city fleeing the euro zone. A apartment in Mayfair or a Chelsea mews is seen as something akin to a safe deposit box in a Swiss bank. Perhaps even better.

The logic is clear: if you are rich, you think about financial repression all the time. Somebody, usually a government, is going to try and take your money. It might be new taxes, inflation or other forms of theft, but the result is always the same.

In the case of the euro zone crisis it was a more existential form of theft: redenomination of bank deposits (and other assets) and possibly the seizure of those deposits (the rich will never forget what happened to Cypriot bank account holders).

Faced with these kinds of fears, wealthy individuals have traditionally moved to Switzerland and other safe havens. Note that the primary reason for moving your cash in these circumstances is not tax avoidance but simple security.

London has, it seems, benefitted enormously from these concerns. The numbers do not always paint a consistent picture but up to 75 per cent of property purchases, at least in central London, now come from overseas. And many of these people, apparently, rarely visit their investments or bother to rent them out. Just like a safety deposit box.

The euro zone’s rolling crises are just one source of insecurity for the wealthy. Many British people find it hard to believe, but the UK is seen as a haven of political stability, the rule of law is both strong and fair, as are property rights.

London has always benefitted from being the capital of the UK and a magnet for inward investment. The argument is that it has now morphed into being a truly global city, pretty much unconnected with the rest of the UK.

If there is any truth to this I think it applies only to newly designated (perhaps a city within a city) PCL (Prime Central London). PCL is, perhaps one-third of London. It is worth remembering that significant chunks of the remainder look like any other city or town in these islands.

If construction activity is anything to go by, London’s future is bright. The various sites of the new Crossrail project, for example, are truly jaw dropping. The junction of Tottenham Court Road and Oxford Street is worth a look for anyone visiting there.

The rise of the City State is well documented. It is a global thing. People want to live in big cities. Countries that try to fight, rather than accommodate this trend usually fail. And part of that is a literal failure to accommodate: not enough houses and apartments are allowed to be built where people want them.

Immigration, inward capital investment and old fashioned economic growth have all played their part in the UK house price boom. If this represents the demand side of the equation the supply side is drearily familiar: nowhere near enough houses and apartments are being built.

This is a simple political failure. Everyone wants more building but nowhere near whey live (or where they are an MP).

Can we take anything from this? One small suggestion: how about taking Nama’s new found profits, rush through new planning laws and initiate a mini building boom in Dublin 4, Dublin 6 and south county Dublin?