City or Casino? The role of speculative investment in London's new build housing market
By: Catharine Banks Published: April 2016
This briefing looks at the practice of 'flipping' - the buying and selling of homes before they are built - and its potential impact on the London new build housing market.
There is a growing housing affordability crisis in London. Businesses, public services, and Londoners themselves are all suffering as a result. House prices have risen at a very alarming rate and are now more than 11 times the average London wage, far out of reach of most working families. Meanwhile, the number of genuinely affordable homes to rent has declined, pushing modest earners far out of the areas they grew up in.
For Londoners in their thirties, owning a home used to be a realistic hope, if you worked hard and saved up. For most it is now impossible without major help from the Bank of Mum and Dad. Rents are also unsustainable, and now take up half of Londoners' take-home pay. More and more renting families are being forced to live in poor conditions, without long term security, and with a higher risk of homelessness.
There is no silver bullet that will solve all of these problems. The next Mayor will need to be both bold and strategic, tackling chronically low levels of house building, reforming private renting and campaigning to ensure that a good safety net remains for those who need it. The national government should support the next Mayor in this task – and ensure the rest of the country benefits from efforts to lessen London's housing crisis too.
However, in London there is also another dimension for the Mayor to consider. There is a growing perception among the public that properties are being snapped up by speculators who have no intention of buying a home to live in. This phenomenon is particularly associated with new-build flats in London, which are the source of the majority of London's new housing. Even if speculative purchases are a relatively small part of London's total property market, they are often concentrated in its most important, most visible, and most politically sensitive developments. It is therefore likely that the next Mayor will come under increasing pressure to tackle this issue, so it is important to explore and understand its extent and its effects.
This briefing looks at the issue of speculative investment in London property. We outline the different types of property investment, of varying social utility, before summarising the evidence on the extent and scale of flipping (the buying and selling of new homes before they have even been built) in London's new-build market. This evidence includes new analysis conducted by Shelter in 2015, which outlines a generic model for how the process works, showing the incentives for investors – and presents evidence of flipping taking place on a significant scale in three central London new-build developments. We found evidence of the potential for speculators to make huge profits (and sometimes huge losses) by playing the new-build property market like a casino in this way.
While there are therefore real grounds for concern, there is insufficient market information to be certain of the scale of flipping or its impacts. At this stage, it is vital that steps are taken to regularise market practice in order to gather more data and to better understand these practices, before taking any steps to regulate or restrict them. Once a more detailed picture of speculative investment in London's new build property market has been built up, we believe it is likely that policy makers and politicians will want to explore measures to limit speculation, such as targeted taxation or planning policies. But before such steps can be properly considered, we need far more transparency in the market to understand the true scale and impact of this activity.