London’s foreign money bubble is bursting – but will we be better off?

London is in danger of becoming a doughnut, its centre empty of people living there

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The Independent Online

Over the past few years, I’ve heard the Mayor of London, Boris Johnson, deliver broadly the same speech. That’s not a criticism – he’s required to perform frequently, sometimes on several occasions in the same day. It’s also part of his brief to sell London, to make the capital city appeal to inward investment.

He does it in typically barnstorming fashion, bigging up the foreign influx into London. Here he is at the Tory annual conference: “It is one of the joys of this job that I am the mayor of a pretty sizeable French city, a pretty sizeable Russian city, a pretty big Australian city, an Italian city, a Chinese city – I could go on.”

In which case, Johnson and his cohorts must be feeling somewhat gloomy. A combination of factors, domestic and overseas, threatens to turn off the flow of which he is so proud.

The EU and US continue to apply sanctions to Russia over its actions in eastern Ukraine. Those measures, aimed at the circle of senior officials and business figures around President Vladimir Putin, but also taking in major companies and banks, are bound to stifle the ability of Russians to take their cash abroad.

In China, the crackdown against high-level corruption shows no sign of abating. Far from it – the purge is popular. Again, that is likely to reduce the numbers of Chinese investing in the UK.

At home, the growing clamour over inequality and the need to raise revenue have seen the Chancellor target wealthy foreigners buying property in the UK. In his recent Budget he hit them with a promise to make them subject to inheritance tax from 2017. He accompanied this move with a flurry of blows against those foreigners who enjoy privileged, non-domicile status.

This week, the Prime Minister has waded in, saying the Government is determined to curb the amount of “dirty” foreign money pouring into the UK and buying up residential property. British companies purchasing flats or houses will shortly be required to divulge who owns them. Applying the identical requirement to foreign companies will be more difficult; they shelter behind secret offshore tax havens unlikely to comply. But given that so much of the foreign money snapping up luxury apartments in London is thought to be the proceeds of corruption and crime, it is likely to have an effect.

If nothing else, it sends a signal that money launderers are not welcome. The UK’s position as a tax destination for rich foreigners is likely to be damaged.

If this ends the upward spiral of property prices, especially in London, which has seen soaring values, then the consensus would say that was to the good. If the prime property bubble bursts, and London apartments and houses start to command more realistic prices, ones that are within reach of those that are not billionaires and multi-millionaires then that can only be for the common benefit.

But is it? There’s no doubt that London becoming a playground for the world’s super-rich is a fairly odious spectacle, whatever Johnson says. The streets of the capital’s smarter districts – Mayfair, Knightsbridge, Belgravia, Kensington and Chelsea – are jammed with supercars belonging to Middle Eastern playboys. They drive them round tight circuits, showing off their fortune, believing the vehicles are evidence of machismo prowess.

At night, the lights of flats in the new blocks and neighbouring mansions are darkened. Their owners are away, staying in their other residences. London is in danger of becoming a doughnut, its centre empty and devoid of many people living there, lifeless in the evenings and at weekends.

In that same conference speech, Mr Johnson said: “We have to recognise that the sheer global charisma of London is putting pressure on Londoners, with average house prices in our city now six times average earnings and for the bottom 25 per cent of earners, the house prices in the bottom quarter are nine times their earnings.” That’s even without disapproving of the origins of their wealth, and watching as our once great city becomes a sleazy magnet for drug barons and fraudsters. Put like that, anything that reduces the flow of foreign super-rich money must be a positive.

There is, though, what economists refer to as the “trickle-down” effect. While they differ in their views as to the level of its application, it’s also the case that not much of this ripple has reached beyond London, indeed outside the very core. That’s if their benefits are confined to employing gardeners, car washers, cleaners and security guards. But if they include siting businesses and employing large numbers here, then that perspective suddenly alters.

And arguably, without the interest of wealthy foreigners, no luxury housing would be going up in London at all – and, thanks to planning gain, each of these developments includes at least some affordable housing. The required deal with the council may also encompass a community centre or new roads (a new Underground link in the case of the American embassy project).

This was stressed by Johnson in his speech: “It’s a good thing for our country because that foreign money brings jobs and it fills our restaurants and it puts bums on the seats of our theatres, helps finance our universities very considerably and it enables London developers, some of whom I see in this great audience, to embark on projects that otherwise would be stalled.”

Who is going to take the foreigners’ place? Who, without a severe drop in land prices, is going to supply anything that is really affordable; where is the public funding to replace their planning gain contribution? The government could allow London to devolve and to raise its own taxes and spend its own money, but that would drastically reduce the Treasury’s national pot.

Having, under successive governments, tilted our cap in the direction of rich foreigners we’ve become complacent and used to their money. It’s all very well driving them away, but we must be prepared to replace them.

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