this summer, in an attempt to tackle its housing crisis, New Zealand passed landmark legislation banning foreign ownership of domestic property. It was about time: a recent report from the Economist found that New Zealand has one of the least affordable housing markets in the world — prices in some areas have risen by 75 percent over the last four years.
At a time of enormous concentration of wealth, and low yields elsewhere in the economy, speculative investments have been flowing into housing at a record pace. As anyone who has lived in London will know, the United Kingdom faces similar problems. The influx of foreign money into the UK housing market has boosted prices by up to 30 percent since 1999. Average house prices would have been almost £40,000 lower in its absence.
But even averages disguise a more acute problem in some areas: overseas buyers purchased almost 4,000 of London’s 28,000 new homes between 2014 and 2016, and 70 percent of these were buy-to-let purchases. Whole tower blocks have been bought up by foreign investors and lie vacant, a trend you can observe by noting how few lights are turned on at night in many of central London’s larger apartment buildings. Two-thirds of the 210 flats in the Tower in Vauxhall, for instance, are owned by foreign investors.
Meanwhile, home ownership is increasingly out of reach for most people. UK house prices increased by a factor of 10 between 1980 and 2017, doubling consumer price growth during the same period. With wages no higher than they were in 2007, homelessness has soared. Rough sleeping has risen by around 170 percent since 2010, while child homelessness has increased by 80 percent since 2011.
The debate about how to tackle this housing crisis has focused on supply and demand. Strict planning laws, continuous falls in public house-building, and land banking by developers are often cited as preventing supply from keeping pace with demand. Some even argue that there simply isn’t enough space — that Britain is a small island and that it is now ‘overpopulated’ — even though only around 5 percent of land is built on.
But this focus misses the point. According to recent research from Oxford Economics, if the UK had built 300,000 houses per year since 1996 this would have reduced house prices by just 7 percent. Rapidly expanding the amount of social housing construction is a demand we should all get behind — but by itself, this won’t be enough. Ask any international investor and they will tell you the same thing: property in Britain, and especially London, is part of the plumbing of the international financial system. Without tackling this financialisation of housing, no amount of construction will end the crisis.
This process can be traced back to 1980s financial deregulation, which sparked a dramatic increase in lending: household debt rose from 80 percent of household incomes in 1980 to 150 percent in 2008. Much of this was mortgage lending, which increased twentyfold between 1997 and 2008. During this period, the UK gained the dubious honour of having the highest proportional level of mortgage lending of any major economy. As a result of deregulation, banks did not have to cover these loans with existing deposits, so the loans that they created effectively increased the money supply. With all this new cash chasing the same amount of assets, house prices were bound to increase.
The lending boom of the pre-crisis period turned housing from a basic consumer good into a speculative asset. Capital from around the world flooded into the UK property market, allowing banks to extend even more credit. The process through which mortgages were securitised — turned into commodities that could be traded on financial markets — allowed banks to make yet more loans.
Usually, when we tell this story, we focus on the moment the music stopped in 2007, when house prices collapsed. But UK house prices have more than recovered — in fact, they hit a record high in July. Why? Because the financial architecture of the economy remains fundamentally the same.
There are measures that can be mobilised to counter this. In a recent report for the Institute for Public Policy Research, I argued that the Bank of England should have a house price inflation target that would limit the amount banks were able to lend for housing purchases, and especially for those seeking to buy second homes. The taxation of housing also needs to be reformed: a land value tax would be a start, but inheritance tax also needs to be increased and the loopholes closed to ensure the system captures the huge capital gains of the past forty years.
But foreign, speculative investment in housing remains a serious problem that can’t be solved by building more housing or limiting lending alone. To tackle it, we must limit capital flows into the UK. A currency transactions tax would make a serious contribution to this, acting as a form of qualitative capital control to help to limit flows of hot money into our housing market. A New Zealand–style law placing restrictions on foreign ownership wouldn’t be a bad idea either.
The next Labour government must restore housing to its proper place: as a human right rather than a speculative asset. It’s time to take on the international financial elites who have made London their playground.