Odd Economics

AOG, Madrid

I was last in London over Christmas and I hadn’t gone back until now, late May. 

My how the place has changed!

First of all, there’s the Shard. 

A tall pyramidal structure made of glass and which some are referring to as Mordor.

Although impressive from a distance, close-up it suffers from that thing that so often occurs in the UK: location, location, location. Or rather, a lack thereof.

It is not in a good neighborhood and, for a building intent on promoting finance, it is not in the City.

I got pretty close to it from London Bridge’s station’s platform 6, which takes you straight to Charing Cross.

From there, you get a glimpse of the glass behemoth, and you can't help but be taken aback by the fact that the thing looks a) unfinished, and b) empty.

As is the case with many European cities today, there is an overabundance of empty office space, and London is not the exception.

According to FT,  “In a survey of the industry by CBRE, the world’s largest property fund by assets, three-quarters of banks with a presence in London said that they were planning to cut the amount of office space they used.”

And according to The Telegraph, in 2009: "Approximately 11.9% of City offices are vacant – equivalent to 10 large city towers – up by a tenth already in 2009 and more than double the 5.2pc prior to the onset of the credit crisis in 2007, as increasing numbers of businesses collapse or downsize.”

So it would appear that another glass tower is not really what London needs. 

And yet, there is something amazing about tall buildings. 

The way they defy our human perspective and make us dream of the views we would see from them. Yes, there certainly is a dreamy aspect to tall buildings.

Second of all, my trip to London also informed me of the fact that the city is living trough a construction boom. 

Around the Greenwich area, any empty lot has been turned over to a building company which will gladly erect one of those boring looking, yet ever so trendy, housing plots with pseudo-modern architecture (which, in case you are wondering, just means pricey properties with small rooms and hardly any storage space).

A friend of ours who lives in the area said he was appalled at all the construction and mentioned how these days, most of those properties are being snapped up by wealthy foreign nationals, who will be in the UK for, maybe, a week per year, and city types who commute into and out of Canary Wharf, but never set foot in the area.

And according to Londonist magazine, this boom is only helping to make property even more expensive: “Average asking prices in London have gone past the £500,000 mark for the first time, and Camden has joined Westminster and Kensington and Chelsea as a borough where average prices are over £1m. 

We’ve also noticed a little flurry of articles pointing out the extent of foreign interest in high-end property. 

The New Statesman points out today that only 45% of buyers in central London are UK nationals; Russians and Middle Eastern citizens are those who seem to find the posh bits of the capital most tempting. 

The New York Times recently looked at the effect on local businesses of increasing numbers of owners using their London homes as temporary stop-off points. 

This phenomenon is exemplified in One Hyde Park, where Vanity Fair found that just 17 of the 76 apartments sold are registered as primary residences, and seems to be practically empty.”

I wonder about how healthy this is for a country.

On the other hand…

During my stay, I also met with a couple of friends. They corroborated this idea about London’s average housing prices being too steep, especially for a country where average wages are around £26,000. 

Who in London can afford half a million for a place to live?

Some can, no doubt, but most people, most Londoners, cannot. 

On that subject, we talked about recent studies which mentioned how, it is now becoming very obvious, that all the wealth being created in the City of London is not filtering downwards. 

Yes, the City of London creates jobs, that is, it creates employment for the people who serve the people who work -mostly in finance- in the City.

However, all that wealth being amassed there is not percolating down to the rest of the country.

In fact, a large proportion of it is not even taxable, thanks to the UK’s myriad of legal and financial loopholes and tax havens (Gibraltar, Channel Islands, etc etc etc).

London might be one of the planet's financial capitals, but if you are living outside of London, in a council estate, how is that benefitting you and your family?

None of this is illegal, of course (because politicians pass the laws which benefit their friends), but is it ethical?

Desirable?

A really bad precedent...

In Spain, meanwhile, people often like to bring up the example of Mr. Álvarez Cascos, PM's Aznar's Development Minister who, a few years ago, when asked why property in Spain was so expensive, replied "if it is expensive it is because Spaniards can afford it".

What he was trying to say was that he was proud that property was expensive because it meant the Spanish were doing well.

This was before the Conservative party lost the 2004 elections and Spain was hit by an economic crisis from which the country has yet to emerge.

Unfortunately for Mr. Álvarez Cascos, as well as for Mr. Cameron in the UK, most citizens were not so rich that they could afford a property.

In Spain this meant that banks took advantage of people, prices were inflated, and the property boom turned into a bubble which burst.

It meant that property for lower middle class, and middle class families, suddenly went up in price, and many people, as is the case in the UK, were priced out of the property market.

It means that, given Spain's anachronistic mortgage and property laws, you may turn your property's keys to the bank, and it may sell it, but you will still own the bank whatever was left on your mortgage.

It means that many people are being made homeless even today in Spain, while the Government looks on.

It means that many immigrants left the country, the home they bought, and their debt, in Spain and went back to where they came from.

All of this points to Spain's failure, especially since Madrid, unlike London, is not so international a city that many Russian or Middle Eastern investors are willing to pay half a million Pounds (or the equivalent in Euros) on average for the privilege of having a property there (although they will pay this much for property on the Costa del Sol, but that's a different story).

In the UK, where this has happened in the past, what is happening is that people are slowly being forced to move elsewhere. In many instances outside of London.

It is not a crazy idea to suggest that in the not-too-distant-future, London will be a half empty city where a lot of rich people don't live, and a lot of crime takes place.

Is this really what the British Government would like?

And before anyone says 'but what can they do', let me just say, if you are the Government and you don't know what to do, then you shouldn't be the Government.