The temples of the gods of capital

The London property market is booming. Property prices have risen by 9.7% in the last year and there is no sign of any decline. Such large price rises are, of course, only happening in London, not the rest of the UK, where property price rises are lower the further you are from London (in Scotland prices are actually falling). But the same is happening in other large cities such as New York. Prime real estate in big cities has never been so expensive - and so desirable.

Yet people are leaving London, apparently. Both the FT and the NY Times carry opinion columns by disgruntled journalists who have decided the cost of property in London is way too high and are moving elsewhere. And they report that others are doing so too. Here's Michael Goldfarb in the NYT:

"Matt, who had been looking for a house for more than three years, summed up the reason for leaving best: “I don’t want to be a slave to a mortgage for the next 25 years.” Given the astronomic rise in house prices here, he wasn’t speaking metaphorically."

So if people are leaving London, how do we explain such enormous price rises? Ordinarily we would expect what the NYT calls "London's great exodus" to cause prices to fall, not rise. But there is a simple reason, and it is due to the new role of property in the global economy. London's prices are rising at the same time as its residents are leaving for one simple reason. Property in these city centres no longer exists to provide homes for ordinary people. It exists to provide safe, high-yielding assets for the rich.  As Michael Goldfarb points out:

"This is what happens when property in your city becomes a global reserve currency. For that is what property in London has become, first and foremost."

The surplus of capital in the global economy, coupled with a growing scarcity of other safe assets, makes property in big cosmopolitan cities around the world an attractive prospect for risk-averse investors - and they are flooding into it. The FT reports that 82% of prime real estate sales in the centre of London were to overseas cash buyers. Not that they live in the properties they buy, of course. No, they rent them out. Well, at the moment they do, anyway. Though if people are leaving London, rental values on London properties should be falling. Well, they aren't - but the rate of increase is slowing, despite the huge increase in house prices:



(source: GLA London Housing Market Report)

So if rent rises are slowing, why are property prices increasing so fast? The Telegraph thinks Help To Buy might have something to do with it - it suggests that the movement from renting to ownership could cause rents to fall by as much as 5%. But the chart above shows that rises in rental values have been slowing since the beginning of 2013. That seems to be much more likely to be due to greater supply of rental property on the market relative to demand.

If the principal aim of a property investor is not to generate income from rentals, but to make money through capital appreciation, then rental values don't matter if the property itself is appreciating. An annualised return of nearly 10% is really pretty good. You could leave the property unoccupied and still get that return. So if you aren't planning to keep the property very long, it may not be worth your while letting it at all. However, if the plan is to keep the property as a longer-term investment, it does need to be occupied, or at least managed. Property that is not cared for by humans who have a vested interest in maintaining or improving it deteriorates. So it may be that the London market will see substantial falls in rental values while house prices continue to rise. Having a tenant caretaker protects the value of your investment.

Izabella Kaminska posits a nightmare future in which London, and other big cities, become "ghost cities":

"Imagine the scenario many years along: streets and streets of vacant properties and offices, because there’s simply no one left who can afford the rents that can make renting worthwhile for landlords. And even though high prices have encouraged large volumes of new supply to be created by developers these have ended up mostly in the hands of wealth-preservationists, going straight into dark inventory stores.

"The capital city retains value only as a retail showroom, a cultural tourist spot and/or an arts and social hub for visitors or legacy occupants. But it has all the same been significantly dehumanised because almost no-one can afford to work there. The workers have either been replaced by robots and technology, or forced (unwittingly) into servitude to a faceless overseer who grants them permission to live rent free. Yes, yes.. think Jean-Luc Godard’s Alphaville.

"Meanwhile, inevitably, the outskirt flourished as people from the city relocated to more affordable rural or regional parts of the country. This was facilitated by the internet which increasingly enabled people to work from wherever they choose."

But is this really a nightmare? Throughout history, humans have built large and beautiful places for no-one except a chosen few to live in. These places were (and still are) visited by thousands, and they were cared for by paid permanent staff, some of whom lived within their confines - and some of whom, indeed, were not allowed to leave. I refer, of course, to the various forms of temple that humans have built over thousands of years. Temples built as homes for the gods: temples where people congregate to worship their gods: temples to which devotees bring their offerings of money and goods. In days gone by, temples (cathedrals, henges, mosques, whatever you want to call them) were the focal point of the community. They were often centres for trade: markets and cathedrals are closely related - and of course Jesus threw the traders out of the Temple in Jerusalem. And they were places of refuge: people in trouble could find sanctuary in the temples of the gods.

It seems as if we are once again building temples to the gods - this time, to the gods of capital. We are making of our city centres beautiful places where people can come to worship the gods, bringing their offerings of money to spend in the art galleries, the museums, the theatres, the restaurants and the bars: places that are centres of trade, particularly in the goods of the gods (money and property): perhaps places where people who use the goods of the gods for illicit purposes can find sanctuary. Of course, these beautiful places must be maintained, so perhaps eventually there will be a class of people whose job it will be to look after the property of the gods - employed by management companies to live in the beautiful places, caring for them and maintaining the illusion of a vibrant human city. Such people would never be able to leave the city.....they would be tied tenants, owning very little but provided with the best accommodation in the world. Modern-day Levites, if you will. Or perhaps a new form of enclosed religious community.  And the rest of society could only visit the city, never live in it. Real life, except for the chosen few, would be somewhere else.

I suppose this is a nightmare, really.

Related reading:

House Price Index, July 2013 - ONS
The illogical pricing of property - Pieria
There's no point trying to live in London - Christian Oliver, FT (paywall)
London's great exodus - Michael Goldfarb, NY Times (paywall)
Dark Inventory, Death of a City edition - FT Alphaville
Modern gods and human sacrifice - Coppola Comment