An interesting phenomenon is taking place in London: the priciest tiers of its housing market are increasingly being driven by overseas investment, primarily from the Far East. The most interesting - and perhaps most concerning - aspect of these investments is that at least 37% those who buy property in the most expensive neighborhoods of central London do not intend to use that property as a primary residence. This results in upscale neighborhoods and residential properties that are largely abandoned and contribute almost nothing to the local economy of the city. Parts of Manhattan are experiencing similar behavior, leading us to ask the question "what is happening to our cities as they become more and more globalized and how will this trend affect city economies around the world?"
Read more after the break...
Neighborhoods such as Belgravia, one of the most expensive in London, are transforming into villages with fewer and fewer people in them. With prices that range from $7.5 to $75 million, it's no surprise that a recent report by the London-based Smith Institute says “many areas of central London have become prohibitively expensive for local residents.”
So who can afford to buy property in these areas? The super-wealthy, of course. More and more buyers hail from places like Russia, Kazakhstan, Southeast Asia and India, and London - and similarly parts of New York - are merely stops in a "peripatetic international existence" that may also include Moscow and Monaco. For them, investing in foreign real estate is seen as a safe place to put their money, in addition to the feeling of accomplishment resulting from owning one or more trophy homes. But because these residents of the world are rarely in one place for too long and see no need to rent them out when they're gone, the areas surrounding their properties are not only exclusive but practically ghost-towns.
This is having a tangibly negative effect on those who do call these areas home. One woman living in an exclusive part of London described how difficult it was to meet people who spoke English, how many of her neighbors she had only seen once and how lonely and oppressively quiet life could be in such a neighborhood. In New York, high-end properties such as the Plaza Hotel in Manhattan are only about 10% permanently occupied, leading to a residential building that stands dark, lonesome and empty on a regular basis. Although peace and privacy are often good selling points for these residences, clearly they aren't desirable to everyone.
For London moreso than Manhattan, this has resulted in a significantly "more international, more expensive and more empty" city - and it's only getting worse. For single-family housing in the prime areas of London, British buyers reportedly spend an average of $2.25 million while foreign buyers spend an average of $3.75 million, which increases to $7.5 million if they're from Russia or the Middle East. A house in Chester Square that sold for $2.4 million as a long-term lease in 1987 was sold last year as an outright purchase for a whopping $48 million. But most of this money only goes into real estate, leaving the local economy struggling, with some shops that have so few customers they have to close for a month at a time.
As the Smith Institute writes in its comprehensive evaluation of the London housing market, there is an urgent need to make London a city that can "actually house its citizens decently at a cost that they can afford." The London market is meant to serve Londoners and because many believe it no longer does that, the system has been deemed dysfunctional and is in dire need of analysis, strategy and action by the city's mayor and his advisors. If this behavior grows in Manhattan to encompass not only individual properties but entire neighborhoods, New York will also have to face the facts and find a solution to this growing urban dilemma.
References: NYTimes (1, 2), Savills, The Smith Institute
