More backlash from London's empty towers
By Unconventional Economist in Global Housing
at 12:30 pm on May 27, 2016 | 50 comments
I wrote yesterday how the new mayor of London, Sadiq Khan, had spoken-out about foreign investors using homes in London as "gold bricks for investment" following an investigation which found that the UK's tallest residential skyscraper is now more than 60% foreign-owned and is under-occupied.
Now The Guardian's Simon Jenkins has followed-up with a piece claiming that London's empty high-rise is a mark of corruption:
Now we know. The glitzy 50-storey tower that looms over London's Vauxhall and Pimlico is, as the Guardian revealed yesterday, just a stack of bank deposits. Once dubbed Prescott Tower, after the minister who approved it against all advice, it is virtually empty.
At night, vulgar lighting more suited to a casino cannot conceal the fact that its interior is dark, owned by absent Russians, Nigerians and Chinese. It makes no more contribution to London than a gold bar in a bank vault, but is far more prominent, a great smudge of tainted wealth on the city's horizon…
In London, property is the most potent lobby…
There was no published plan for the drastic surgery being inflicted on London's appearance. No limit was set to the towers' location or height. No one took care of their appearance or bulk, their civic significance or their role in the life of the capital. Some 80% of the approvals were for luxury flats, chiefly marketed as speculations in east Asia…
This bubble simply has to burst. The waste of building resources, energy and space, the sheer market-wrecking bad planning, beggars belief…
In London, as the Guardian shows, these buildings have nothing to do with housing supply, let alone low-cost supply… They are the product of speculative flows of often "dodgy" cash, seeking an unregulated property market that asks no questions and seeks a quick profit. That is all…
Replace "London" with "Melbourne", and "80% of the approvals were for luxury flats" with "80% of the approvals were for shoe-box apartments" and the article would make nearly as much sense.
Again, if you have not done so already, make sure that you check-out the below video from Four Corner's recent Home Truth's special report, featuring Prosper Australia president, Catherine Cashmore, taking reporter Ben Knight for a tour through largely vacant apartment blocks in Melbourne's CBD where, at 8pm on a Tuesday night, the lights are off and nobody's home:
Former Victorian Premier Jeff Kennett also makes an appearance in the video, slamming the high-rise dog boxes proliferating through Melbourne:
"We are still building units that, to be quite honest, you wouldn't put your dog in. I mean, some of these one bedroom vertical fridges are appalling. And I couldn't imagine anything worse"…
"I think we are in for a crunch, there's no doubt about it"…
Singapore whacks foreign investors with massive stamp duty hike
Free-market Singapore has levied massive stamp
US house prices soar from coast-to-coast
Goldman Sachs has released a bunch of interesting
US shelter inflation hits "dizzyingly high rates"
Goldman Sachs with the note: In the spring, we
RBNZ: Property market cruising for a bruising
The Reserve Bank of New Zealand (RBNZ) believes
Jason MEMBER May 27, 2016 at 12:42 pm
Property/Land Tax now.
Janet May 27, 2016 at 12:52 pm
Way, way too late. The damage has already been done, and will continue to be done. There is no safe way back. We've burned our economic bridges. It's only a question of "Who gets hurt next ,and how much will it damage the country as a result?"
Kurt May 27, 2016 at 1:46 pm
We don't need another tax, we just need to fix the ones we have.
PPR should always be exempt. Foreign investment rules need to be changed and taxed appropriately, as well as neg gearing and addressing corruption in developers and cosy councils…..
skippy MEMBER May 27, 2016 at 2:03 pm
Concur… Kurt and Janet…
For those not informed…. the very people that profited the most in the ramp up do even better in a crash…
Gavin MEMBER May 27, 2016 at 2:57 pm
Sadly Skip this is what boils my blood too!
CDS Skippy?
Strange Economics May 27, 2016 at 9:21 pm
All this apartment news should be filed under investment, not in the property section.
It is completely separate to the rest of the Melbourne market, which consists of overpriced houses that are prohibited by Plan Melbourne and the council nimbys from ever turning into affordable 3 bedroom low rise units. It is irrelevant to FHBs and is as you say just a gold brick speculation. Someone will have to pay to demolish them once they crash in price, and no one wants to pay the 10K per year strata fees.
Cornflakes May 27, 2016 at 1:05 pm
Good graph of Building Approvals by council in Victoria this report on Page 17. The inner is where all the action is and where it will all end.
http://www.mpa.vic.gov.au/wp-content/uploads/2016/05/State-of-the-State-Report-Volume-2-May-2016-2.pdf
Revert2Mean May 27, 2016 at 1:11 pm
If James Hansen et al are right, London will be largely under water by 2100, so who cares?
http://www.independent.co.uk/environment/climate-change/london-new-york-shanhai-map-climate-change-sea-level-global-warming-a6726886.html
Original John May 27, 2016 at 1:21 pm
England, always behind the times – just need to implement this:
http://www.businessinsider.com.au/netherlands-floating-houses-2015-12
Quite neat actually – had a look when I was over there in 2014.
meltfund June 4, 2016 at 7:43 am
Indeed. They are improving the 'land' too just like when you build on dry land
Smacko MEMBER May 27, 2016 at 1:21 pm
Real estate as an asset class has morphed from a place of shelter to a way to get ahead and build wealth. The assumptions that people have about property have changed. It is now about wealth creation, rather than shelter. Until those assumptions are reversed the bubble will keep bubbling on……
People are leveraging their entire life savings into property. They are putting at risk their own future and the children's future, and none of them have any comprehension of the doubled edge sword that is leverage. If you told someone that you put their life savings of $250K leveraged it up 10:1 and stuck in the the stock market, they would literally puke their guts up, because they know that the stock market goes up and down and the risk of them losing that $250K is a very real possibility to them. But in property most of the population has never experienced the market going down. The reason why they are not puking is they see it as a trade with no risk.
I saw what it did in London in the early 90's and it did more than make people chuck. On the other hand, the sale of plastic hose pipe and duct tape did go up……
Shawn May 27, 2016 at 3:47 pm
Showing your age Janet…You are clearly ignorant of the new FIRB paradigm, the new virtuous perpetual motion machine that is the Australian (and NZ) property sector.
Let me educate you…Shove free fiat money in one end and millionaires shoot out the developer and speculator doors, bankster windows and govt taxation exhaust pipe. The wealth effect generated in the well oiled machine's wake as it hurtles smoothly down the economic freeway creates a tide that lifts all boats it passes.
The physics and financials are damnably complicated and no one actually understands exactly how it all works, but lets just say its a thing of never ending prosperity, hence is a perpetual prosperity machine.
The machine is further feed on the free fuel of immigration, those migrant workers required to attend to the needs of the newly minted indolent RE millionaires produced as the machine glides on. These migrants buy the previous machine occupant's old suburban shacks and leverage the annual 20ish % equity growth to buy their own investment RE. hence the cycle is neatly and seamlessly self generating and gathers yet more momentum as it goes, ever upwards.
Like most advances of the modern times, old fuckers just can't let go of their established experiential belief systems, hackneyed dogmas like gravity, nothings free or lasts forever, never trust a crocodile, and don't let the rabbits guard the lettuce.
We younger more enlightened folk are livin the dream!!
Switters May 27, 2016 at 3:49 pm
Some dark imagery there, Janet.
Original T May 27, 2016 at 3:58 pm
@Switters Is this a hamster thing?
Kevin May 27, 2016 at 2:27 pm
I believe it's the opposite. The assumption will only be reversed when the bubble pops, not the other way round. Because why would anyone change their assumption when it's still tracking reality?
Quite right. And if you do not over leverage, there is no risk either. Location value ALWAYS rises without exception. 3 times is about the safest multiple. Not too much so that you cannot hold out and keep paying your rent to the bank, then you are good. The great thing is that once you have a couple of properties free from debt, everything else becomes that much easier. The rent from these will pay the banklord already. And so it goes. Whats staggering is there are 15 million mortgagees in the UK out fo 26 million households all gambling away and everyone blames the banks. Funny.
Yeah while I am all for a major property shake out, the social implications will be massive. That is the sad part. Peoples hopes and dreams will evaporate….
Peter May 27, 2016 at 2:07 pm
Peoples hopes and dreams shouldn't have been built on property speculation.
coolnik May 27, 2016 at 2:37 pm
A classic status-quo response.
Young peoples hopes and dreams are being evaporated right now, how about that? Unless young ones don't matter anymore…
AlbyMangles May 27, 2016 at 2:40 pm
lol they never have, you know, baby boomers ffs
doctorX May 27, 2016 at 1:46 pm
how is building a luxury 50 storey building in London and selling it to foreign citizens different from building 50 McLaren P1s and selling them to the same foreign people?
can you imagine someone complaining about sales of P1s to Chinese?
lol that's funny right
BeansMeans May 27, 2016 at 1:58 pm
I'd like to complain about selling 50 McLaren P1's to the Chinese thanks.
yeah what a waste, a P1 used to drive 20kph under the speed limit while checking the phone all the time
FiftiesFibroShack May 27, 2016 at 2:04 pm
I'm guessing most people don't dream of living in their own car.
I cannot see how that (building a luxury 50 storey skyscraper or glitzy P1 and selling it to Russians or Chinese) makes anyone in UK less able to buy his/her own used unit in Peckham or used Ford?
The problem there is not in building luxury units and selling them to foreigners but in banks giving everyone million pounds to outbid each other in a quest to collectively become debt slaves
haroldus MEMBER May 27, 2016 at 2:09 pm
hey guys i've got a plan to get us out of this mess.
why don't we sell 50 toyota camrys to the chinese?
that would actually save us but it's too late we gave up on the idea of actually making something
Mediocritas May 27, 2016 at 2:40 pm
Because the Chinese will sell us 100 Toyota Camry knock-offs for a cheaper price.
Because the P1 doesn't occupy the space where you might want to live and compete to push up the price of the place where you actually do have to live.
Does the P1 market end up bidding up the price of Corollas?
drsmithy MEMBER May 27, 2016 at 2:54 pm
Building a P1 doesn't make corollas more expensive ?
Different market segments, it's not the buildings that influence the value of a place so much as the land and area underneath it. The old buy the worst house in the best street rings true. Because often you can't lose if you do.
I dunno, I reckon the price of a house is influenced by the price of the house next door.
Additionally, a building full of luxury apartments is taking up space that could be used for a building full of cheaper apartments. I don't think the number of cheap cars available is in any way influenced by the number of expensive cars available.
Robert May 27, 2016 at 3:53 pm
It's worse than that – people knock down existing housing to erect the luxury apartments they keep empty, often after keeping them empty for months to years before the knock down while they organise approvals, finance etc. (or just dither)
The makers of McClarens don't go around 2nd hand car yards buying up all the cheap Toyotas and Mazdas to cannibalise for their next supercar…
Are P1 owners buying up Corollas at inflated prices, pricing would-be Corolla buyers out of the market and then renting the Corollas to priced-out buyers?
Does a surge in P1 prices, caused by a speculative frenzy, spill over into a surge in Corolla prices, also for speculative reasons?
Is there a scarcity of supply for Corollas?
Do people even *need* cars?
The comparison is not a good one. We can sell expensive luxury goods like cars, art, shiny rocks, etc to foreigners all we want, without there being any damaging effects on the locals. These markets are isolated and don't spill over into the lower-tier (but related) markets that impact poorer people, because there are different supply dynamics.
For example, art or cars. High end, luxury items are subject to artificial scarcity (limited release) which causes prices to rise. At the lower end, reprints and economy cars are abundant so the surging price of a limited release supercar has no impact whatsoever on the price of a Corolla. The surging price of an original piece of fine art has no impact on reprinted photographs of that piece.
There is no such market isolation for urban property. The whole sector is under both artificial and real scarcity. Speculation in any segment of the market effects other segments of the market.
The only way your car analogy holds is if the boot is lifted from the throat of Corolla suppliers (a lot of new land is developed for cheap housing) AND the subsequent commutes do not cause a loss in productivity (eg, a good NBN to a satellite city that specialises in digital business).
That's not the case right now.
Funny I've often thought, what will happen when the Chinese cotton on to the classic car market? I follow the Japanese Classic cars in particular and I can't help but this negative interest rates has caused these cars to surge in value (in Japan in particular), I do wonder if the Chinese will eventually open their eyes to this investment class.
I think the difference between a McLaren and housing is that if you don't drive your McLaren or use it nobody cares. If you leave an apartment empty that's just 1 additional house off the market someone could be renting and living in. Therefore creating supply. Housing in this case is a different asset to say a gold bar, diamond or exotic car.
By leaving them empty they extract wealth via capital gains (tax payer subsidized), where as a McLaren might actually depreciate in value of course there is exceptions and some exotic cars cost more now than when produced due to limited numbers and demand.
The other problem with speculating in housing is that higher prices paid for apartments drives prices of similar units in the area up with it. You are correct it's how much banks are willing to lend that makes a difference but also 'dodgy' money or funds also has an impact and many earning local wages and paying income tax simply cannot compete. The game is rigged…
This is why land taxes set appropriately are important… we must punish undesirable behavior.. You have to pay taxes to use your exotic car on tax payer funded roads. Why not pay taxes for leaving property vacant also!
Just as long as they never discover rock guitars.
http://www.reuters.com/article/us-column-yourmoney-vintageguitars-idUSBRE85D0PS20120614
TailorTrash MEMBER May 27, 2016 at 5:06 pm
What will happen ? ……simple ….they will create their own genuine vintage classic cars ……apparently a huge amount of the antique coin market is polluted with Chinese fakes ……..
adelaide_economist MEMBER May 27, 2016 at 5:16 pm
Yep – as crazy as the tulip boom was at least it didn't impact upon people being able to have a roof over their heads or choosing to not have a family.
Allowing speculation into the broader housing market (rather than confining it at least to new construction or inner city highrise – still not ideal but with correct standards still would leave something of value) will prove to be (and already has been proven) one of the dumbest booms of all time.
China started to privatise its nationalised land(also a terrible idea) in about 1999. So, given the general business cycle(pyramid) lasts about 18 years when real estate is the vehicle, China is looking at a recession quite soon. Of course she will smother it all up with a couple of million pointless deaths so it will be difficult to observe. Australia will certainly feel it hard.But even then her real estate will continue its onward march.
point that I wanted to make is that there is no much difference. Both cases act as direct export that contributed to local economy and used very little of limited natural resources. In case of 50 storey luxury building the amount of land being used is insignificant – probably around 3-4sqm per unit worth million pounds – quite a good price of around 300k GBP for 1 sqm of land.
If Britain manages to expand this kind of "exporting" of land at this price it will take to sell only about 7 million sqm of land to come up with annual GDP of UK. To put that into perspective that is only 7.2km2 or 2.6 by 2.6 km (only 2% of Inner London). The whole UK could live without doing anything for 45 years just by selling Inner London at these prices. 250 years for Greater London and even that they will still have 99.4% of UK left for themself to built as many homes as they want.
my point is that use of land for such developments is so small compared to benefits gained that none should ever argue against. The reason for high house prices in London is clearly not the fact that 0.01% of land in London is being sold to foreigners at extremely high prices. The reason is that banks give everyone in London so much credit money to outbid each other while bidding for existing poor man units somewhere on the outskirts of London ghettos
All the P1s are driving up and down Chelsea Road at 10 mph, with the exhause in "Sport"mode. Its the mating ritual of the oil baron's kids in the Saudi Summer. You can read about the locals complaining about the noise in another secction of the Guardian. P1s are for parking in front of Harrod. They're a good export industry anyway.
Humans can set up speculative price bubbles for anything. Tulips, shiny metal bars, polished rocks, art, pokemon, etc. Why did it have to be real estate? Such an astounding waste of physical resources and a conflict with something people actually need: shelter & means of production.
wasabinator May 27, 2016 at 6:51 pm
All we need in life are 3 basic needs: food, clothing, and investment properties
and love?
Jacob May 27, 2016 at 11:45 pm
How big are these luxury London apartments.
In MEL we have a colossal oversupply of dogbox flats because it is legal to build sub 50 sqm flats here.
The London flats will eventually come onto the market and people will live in them.
While the MEL ones will have to be torn down due to being sky-slums.
There are a million empty homes in the UK too. All spread evenly across the nation, all ready to move into. Are these dodgy money too. Should they be singled out for 'special treatment'? Funny.