The immutable laws of supply and demand.

Photographer: Simon Dawson/Bloomberg

London Real Estate, Beyond Insane

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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With the U.K. election over and the Conservative Party installed in Parliament with a surprise majority, the U.K. housing market can go back to business as usual: A nationwide shortage of new homes driving already-crazy prices higher. The lack of supply, which everyone acknowledges is the problem, seems to defy a solution. And nowhere is the insanity more evident than in London.

A house went on sale on my street in north London right after the election outcome ended the prospect that a Labour government might cap the rents landlords can charge, impose a so-called mansion tax and send foreign investors scuttling. Its price, probably not coincidentally, is 2 million pounds ($3.1 million) -- exactly where the mansion tax would have kicked in.

Judging from the estate agent's brochure, it's very similar to a smaller property I bought less than three years ago, for a heckuva lot less than 2 million quid. And believe me when I say that I don't regard this as a good thing, no matter what my mortgage lender probably thinks. Who wants to live through another boom-to-bust cycle in housing prices? 

Brixton, an area of south London, has been "up and coming" since I moved to London a quarter-century ago. Infamous for its 1980s riots, Brixton last month was the scene of an anti-gentrification demonstration that ended with the police using tear gas against protesters. It seems Brixton has finally arrived: Photographs from the rally show police officers guarding a branch of Foxtons, a London-based realtor.

Over the weekend, a friend of a friend explained that, while she supported the protest, she would have felt awkward taking to the streets herself, since that would have meant leaving her gated community (complete with swimming pool) in Brixton to wave a placard. Talk about middle-class dilemmas.

Across London, asking prices dropped 2.3 percent in the month ending May 15 as the election deterred potential buyers, according to Rightmove, which runs a real-estate website. That's the biggest drop in nine months, almost erasing the 2.5 percent gain for the month ending April 15. But on an annualized basis, London prices have climbed almost 9 percent a year in the past half-decade, more than double the rate for the nation as a whole:

That 53 percent climb is creating a London of haves and have nots, even with prices cooling off since August. If you're already on the property ladder, happy days. If not, you can forget about leaving the rental sector unless you have an alternative source of wealth outside of what you make at your daily job. And the picture is similar across the country, where lower home prices are negated by lower wages.

It has been a year since Bank of England Governor Mark Carney called surging home prices "the biggest risk to financial stability." With the election out of the way, there's nothing on the horizon to put the brakes back on London property prices, which is still very much an investment of choice for the world's wealthy. With wage growth still lackluster, further gains in real-estate prices throughout the U.K. will make home ownership unfeasible everywhere.

The solution isn't difficult: Build more houses. In 2004, the U.K. Treasury commissioned something called the Barker Review of Housing Supply. It recommended that the 125,000 houses built in England in the previous year would need to climb to more than 300,000 to restrain annual house-price growth to 1.1 percent. That is the equivalent of 75,000 new dwellings a quarter. That has never been achieved since the beginning of the millennium; the quarterly average since 2000 is just 33,730:

Nor is there much disagreement about why supply is failing to match demand: The planning laws in this small, crowded island are byzantine, uncoordinated and, in many cases, unnecessarily restrictive. A report today by the Centre for Policy Studies research group is unequivocal:

The U.K. planning system is chiefly to blame, restricting housing supply and inflating house prices to unaffordable levels. The mass of planning legislation is poorly understood; even local authority planning experts complain they have difficulty coping with the workload that it generates.

The CPS suggests that the Conservative government can make good on its election promise to "support locally-led garden cities and prioritize brownfield development" by introducing special areas where the zoning rules are relaxed. Developers would have to engage with local communities and offer additional infrastructure -- transport links, leisure facilities, green spaces, future employment opportunities -- to qualify for a less onerous permitting process.

It's a good suggestion. The U.K. planning system has few fans. The last new town to be planned here was Milton Keynes 40 years ago. If the home-owning aspirations of the current generation are to be satisfied, the supply-side of the U.K. housing equation has to change. The arrival of a new government should be the catalyst for easing regulations to spark a housing boom -- but in construction, rather than prices. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net