Risk of another housing bubble, warns report

New research by the Future of London and The Smith Institute warns that unprecedented growth in overseas investment in London’s property market creates the risk of another housing bubble and is pricing out local people.

The report, London for sale? An assessment of the private housing market in London and the impact of growing overseas investment, by Andrew Heywood (visiting fellow, Smith Institute) examines latest trends in London’s private housing market and highlights the negative effects of the sharp rise in overseas investment.

The report shows:

London’s housing market has become distorted and dysfunctional. This is partly due to the huge rise in overseas investment in expensive properties for the super-rich. Investment in luxury homes has doubled to over £5bn a year – five times more than the affordable housing budget for the whole of England for 2011-15 and a third of all loans made for house purchases in London.

Despite higher rates of stamp duty, over 60% of new homes in central London are currently being bought by overseas investors. Anecdotal reports suggest that a high proportion are kept empty.

The growth in overseas investment in London property (mainly from the Far East) is set to continue, despite the higher stamp duty rate. There is a real risk that investment on this scale could create a “housing bubble”.

As overseas buyers seek out homes for investment purposes they risk pushing prices up and reducing the availability of homes to buy for local people.

The surge in overseas investment in London homes will exacerbate the fall in home ownership, which is already down to 53.5% (compared with 66% for England).

London house prices remain far higher than those of the rest of the country, and look set to widen further. This is partly due to the surge in demand for high and mid-range priced properties.

Affordability has been tightening in England for four decades but in London the situation is significantly worse.

Nevertheless, there is a contrast between inner London and the “desirable” boroughs where affordability is deteriorating.

The report calls on the Government and London Mayor to curb speculation in the property market and recommends: better collection of data and information on the scale, distribution and sources of overseas investment into London, especially on empty homes held by investors domiciled overseas; more analysis of the impact of overseas investment on prices, affordability and supply; and incentives and regulation to ensure that overseas investment is not simply capitalising on rising asset values and that it bears costs that are proportionate to the financial benefits

Ben Harrison, director of Future of London, said: “London faces a significant housing challenge in the years ahead. If the stated aims of the Mayor to promote more homes and provide assistance to first-time buyers are to be met, then more attention must be devoted to the dynamics of the private housing market.

"Within this focus, the most urgent task is to understand and develop a strategy in relation to overseas investment. London practitioners must do more to boost their knowledge of the scale, distribution and sources of overseas investment into the Capital, and the impact that this has on prices, affordability and overall housing supply.”

Paul Hackett, director of the Smith Institute, added: “The Mayor and the Housing Minister seem to have a blind spot on the negative risks Londoners face from excessive growth in overseas speculative investment in London housing.

"There is a need to ensure that the homes that overseas investors are buying are lived in and that more of the profits are directed towards improving the supply of new affordable homes. We can’t sleepwalk towards another housing bubble.”