Since Britain voted to leave the European Union, global markets have dropped and people have begun to prepare themselves for a grim possibility: a world with a less stable Europe. But to foreign investors, particularly those with an eye to real estate speculation, the Brexit vote seems to present a golden opportunity. With the value of the British pound falling to its lowest level in decades, overseas buyers have snatched up London properties at a massive discount, with the consequence of an even more overheated housing market.
Significant currency devaluations can have devastating effects on a country’s economy as the costs of imports and exports fluctuates and the risk of inflation increases. For foreign investors, however, currency devaluations create an opportunity to make strategic purchases within the affected country that would not have been feasible before.
Since a dramatic 12% drop in the value of the British Pound Sterling, investors from Hong Kong, the Middle East, and nations with currencies linked to the dollar have begun to buy property in the United Kingdom. This activity has been concentrated in London, where property sales have increased 38% since the Brexit vote. The percentage of recent purchases that have been completed by foreign investors is unclear, but property investment firm Benoit Properties International and real estate consultants Knight Frank have reported a significant surge in purchases by buyers outside of the UK.
Foreign speculation in the London real estate market is not new. As the financial center of the United Kingdom and a rapidly growing metropolis, London’s real estate has generally been a safe, albeit expensive, investment. Between 2008 and 2015, investors purchased £100 billion of property across the city. These purchases mean more than lucrative long-term investment strategies – they provide an opportunity for the wealthy of other countries to move their money overseas, a financial strategy that is becoming increasingly attractive as economies such as China’s falter.
None of this is good news for the average Londoner. Foreign nationals have been buying real estate at a faster rate than UK nationals for several years, a trend which has been credited with causing to the steep surge in housing costs in London. Last year alone, average London housing costs increased 10.6% to $681,500 for a single family home, more than twice the national average, which was itself excessive. Renters especially have felt this squeeze, as rents increased 12.5% in the same time period, reaching a staggering £1,500 per month for a 1-bedroom apartment.
Considering the continuing rise of the tide of xenophobia in the wake of the Brexit vote, it’s important to clarify that foreign investors are not the enemy. Rather, they are driven by an economic and real estate system that makes UK property investments lucrative and accessible. The dearth of opportunities to invest gainfully in growing commercial goods and services industries spurs investors toward land speculation, fostering the housing crisis that is unfolding not only across the UK but worldwide.
The UK’s leaders must enact policies to ensure that Londoners have fair access to affordable housing. As it turns out, they have many other countries to turn to for ideas. Hong Kong and Singapore have instituted a 15% tax on properties purchased by foreign buyers, which has slowed the rise in housing costs. Australia has instituted a similar tax, citing decreasing affordability of homes while also legally interceding in the attempt by Chinese investment group Dakang Holdings to purchase the Kidman Farm empire, which controls 1.3% of the Australian landmass.
An alternative to such measures proposed by many economists is the taxation of land values rather than traditional property taxation. While other strategies limit land speculation by foreign investors, taxing land values would actually inhibit all speculative land grabs by making the holding of real estate for that purpose unprofitable. Instead, by making the ownership of idle land prohibitively expensive, taxation of land values would spur construction on prime locations, which in turn would decrease housing costs for all.
If foreign investors wanted to make money by purchasing land, they would have to develop that land with residential and commercial improvements. In other words, they would need to put forth effort and bear risk in order to see any returns, just as business ought to work. This would result in a growth of construction activity, meaning more residential units available at lower prices. In effect, taxation of land values would effectively convert the current foreign appetite for British property into a sustainable means for growing the British economy.
The movement to leave the EU garnered strong support in part for its assertion that too many UK citizens are being left behind economically in our globalized society. As uncertainty shakes the British economy, that problem will likely get worse. UK leaders must act immediately and decisively, and use the tax system to address the disparities caused by land speculation.