Property in the capital has become a global reserve currency for the super elite, altering its delicate cultural ecology, says Michael Goldfarb. Then he explains why his story had such an impact
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
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