LSE report shows value of overseas housing investment, despite its flaws

Of all the scapegoats for London’s shortage of housing that people on low or average incomes can afford, none have been more convenient than wealthy foreigners. The charge sheet against them is long and familiar, ingrained in public consciousness by media and politicians alike: they push up prices across the city; they purchase job lots of luxury flats and leave them empty while rough sleepers beg; they are agents of “social cleansing”; they are, according to some social media moralists, practically responsible for the horror of Grenfell. It’s quite a sin list. But their guilt is far from proven.

When City Hall invited bids for an investigation into the effects of property investment in the capital made from abroad, it was clear that Sadiq Khan’s housing experts were well aware that the populist case against “rich foreign investors” of rhetorical cliche was thin. Its briefing document referred to “overseas investors”, not “foreign” ones – a recognition that some investment from abroad is made by expat Britons and that some by foreigners is made from within London, where they live. It declared in its first paragraph that, “We welcome investment from around the world in building new homes” and went on to make clear that “the GLA wants to ensure any discussion of policy responses is underpinned by clear evidence and understanding”.

The contract was won by academics at the London School of Economics (LSE) who specialise in the capital’s housing market. Their report, newly published, and with complementary input from the University of York, dismantles some powerful and unhelpful myths.

Perhaps the most prominent is the belief that so-called “buy to leave” is widespread. The researchers’ conclusion about this is frank: there is “almost no evidence” of it, with less than 1% of new homes purchased from overseas left entirely empty. While some are second homes and used infrequently by their owners, members of their families are often in residence, typically children who are students in London. The vast majority, more than 70%, are rented out to Londoners and have high occupancy rates. A recent large increase in Build-to-Rent schemes, which London politicians and others have long desired, has stemmed directly from greater overseas investment, the report says.

Overseas investors’ responsibility for price inflation has also been exaggerated, it appears. Yes, average prices are higher because there are sufficient customers ready to pay them, many (though not all) of them resident outside the UK. However, “The direct impact on the price of London housing is clearly limited as new build is such a small proportion of overall transactions,” the LSE team say. And they add that while about 6% of new private dwellings aren’t available to Londoners, this downside is “more than offset” by the volume of new housing overseas investors’ money pays for and the speed with which it is built.

Much of this speed results from advance, “off-plan” sales, another area of controversy. The thought of super-rich individuals in marketing suites in Hong Kong piling high their metaphorical shopping trolleys with virtual apartments providing great views of the Thames is unpalatable. Even so, that upfront cash provides the financial foundations upon which real homes can then be built – including affordable ones of every kind. The LSE team puts it like this: “Pre-sales to overseas buyers enable developers to build faster and thus make more market and affordable housing available than would otherwise have been the case.”

That the supply of all housing, including affordable, is greater, rather than less, because of those “rich foreign investors” calls into question the pervasive narrative that such people “snap up” homes that Londoners might otherwise occupy. Without their money pouring into development projects there would be fewer new homes built in the first place, meaning that Londoners, including those in need of affordable ones, would have fewer available to them, notably in the “prime” central areas where the proportion of new housing bought by overseas residents is highest. The LSE researchers say, for example, that international finance has helped to get building going on stalled sites, of which there were many after 2010 when the effects of the financial crisis slowed housebuilding in London to a crawl.

No one half-sensible argues that this state of affairs is rational or ideal. It certainly doesn’t excuse dodgy “viability” assessments, puny affordable percentages or flawed regeneration strategies. As a mechanism for producing accommodation in the capital, it borders on the surreal. The design of homes produced has become skewed as well, flats in tall blocks being more attuned to what overseas purchasers seek.

What is more, the LSE report finds that the practice of selling homes before they are built puts first-time buyers at a disadvantage compared with investors. However, its authors point out that this is “really an issue about the financing structure of London’s housing development rather than about overseas buyers per se”. One reason so many advance sales are to people based abroad, especially at an early stage, is that they aren’t inhibited by UK mortgage procedures, as domestic “off-plan” purchasers, who form another part of this picture, are.

Can that financing structure be adjusted to improve it for the capital? Can the mayor regulate through policy to make it so? In his election manifesto Khan pledged to give “first dibs to Londoners on new homes” and complained that “too many are sold off-plan to overseas investors, only to sit empty”. But the report he has commissioned highlights the fallacies upon which that crowd-pleasing formula depends.

The risk of the mayor insisting on “first dibs” rights being written into planning permissions for private house building schemes at borough level is that there could end up being fewer new homes for Londoners to have “first dibs” on, including affordable homes and market homes to rent. He was quite right to commission the research. He must now ponder how best to intervene to produce the sorts of outcomes he wants. As ever with London housing, there are complex balances and stern practicalities involved.

What is clear from this report is that rich foreigners are not a principal cause of London’s housing problems but, if anything, an imperfect part of their solution. Yet the blaming of them continues, even in “progressive” media coverage of the LSE London report. They have become the liberal intelligentsia’s equivalent of the Right’s “scrounging immigrants”, revealing a UKIP streak in the property-owning London Left. This is a prejudice born of ignorance. Whatever else he does, the mayor should not appease it.

Read a summary of LSE London’s report here and the full document here.

Photograph by Max Curwen-Bingley.