London Property Cannot Be an International Reserve Currency

House’s ‘Earn’ Us More Than Jobs‘ was the Evening Standard‘s front page two days ago. It told us that on average, London house prices have risen by £50,000, more than the average London wage: £37,000. House prices in London have risen by 11.6% last year, 18.1% since their pre-recession peak in 2008. While our economy stagnates and prices continue to rise faster than wages, the surge in house prices point only to one thing: a bubble.

And what do bubbles do? They burst.

We’re falling for the same trap we fell into in 2008. The stupidity is almost palpable. While house prices skyrocket, wages stagnate. People who can’t pay for their mortgages are buying houses. It’s all happened before.

However, this time, the government is even more deeply involved. If a Help To Buy borrower defaults on his mortgage the government will either lose their 20% interest-free loan or have to guarantee 15% of the loan, or possibly both. (I’m not sure. The Help to Buy website is so vague and positive that there isn’t even one mention of default of bankruptcy.)

Let’s do some maths. Estimates state that 180,000 people will take out a mortgage using Help To Buy. The average house price in the UK is roughly £244,000. So, how much debt is the government covering?

Value of property mortgaged with Help to Buy≈  180,000*244,000
                                            ≈  £43,920,000,000
Amount of debt guaranteed by the government ≈  £43,920,000,000*0.15
                                            ≈  £6,588,000,000

So the government in the end will cover about £6.5 billion, probably more given the fact that Help To Buy is mostly used in London and the South, where house prices are higher. As if a housing bubble was bad enough. When (not if) the music stops not only will the government have to again spend billions on bailing out banks ‘too big to fail’ but it will also have to pay back directly the mortgage lenders whose loans they have guaranteed. Plus the economy will slide back into another deep recession.

Oh won’t we look foolish. As Europe slowly climbs out of economic stagnation, London’s big banks collapse again and jeopardizes any chance of continental growth for another few years at least.

The situation has come to head like this because of a) we aren’t building enough houses and more importantly b) London (and South Eastern) property has become some sort of reserve currency. London is a great city, of course, and so house prices are always going to be higher. The problem is the fact that the property is not being bought by Londoners, or even British people for that matter. Wealthy individuals, hedge funds, investment banks etc. all see London property as an amazing investment. They’re not wrong. What other investment gives yearly returns of sometimes 16%, while at the same time being extremely stable and safe? Luxury developments are springing up all over London, even in neighbourhoods that are in desperate need of affordable housing, then promptly being sold abroad and lying empty.

So instead of a mansion tax that would bite hard those who are asset rich but income poor and which would be absolutely awful for London, how about a foreign property tax? Those who are not British citizens would have to pay higher stamp duty when they buy property.

This would mean that foreign demand for London houses would die down. This in turn would lead to the housing bubble deflating and economic growth being saved. It would also stop the gentrification and social cleansing that London is currently in the grip of, as prices would fall (or at least slow down) and normal people will once again be able to live in London comfortably. Along with building new homes and potentially, entire cities, this brake on house prices would allow us to solve our housing problem.

The government is trying however. Their cunning plan is, by gradual impoverishment of the population and erosion of public services, Britain will become a 3rd world nation, thus lowering prices and saving us from another recession. It’s all part of the plan, you just can’t see it.

That’s sarcasm. If you hadn’t realised.