Where's The Build Up?

The advice I got on finding a flat in London was pretty dire: Lower your expectations, and then lower them again. The prices are so high you can’t afford to do anything else. It’s completely true, too: London’s home prices are man-on-the-wing crazy.

They’re not slowing their rise, either. The newspapers have a laundry list of dramatic figures about property values in the capital, but one sticks out as most shocking to me. Prices in the London Boroughs of Hackney, Fulham, and Islington have all more than doubled in the last decade. And in the last decade, there was a massive recession. Without the recession, maybe prices would be up three times. We all knew homes were expensive in Chelsea and Kensington, but now in previously-scummy Hackney, too?

Clearly there’s something interesting happening in London. I’ve heard three main explanations being kicked around. Only one passes the smell test. The main problem with the others is that they’re totally wrong, so I’ll deal with those straight away.

The newspapers – which to be fair, are never a good source for news in this city – are trumpeting the arrival of a new real estate bubble. I don’t buy it. Prices in the last year have risen 10% in London, which is actually lower than my home city of Minneapolis and a lot of other metropolitan areas that don’t have bubbles. In normal circumstances 10% would seem like a lot, but after the Great Recession, it is less alarming, since the market is finally getting wind in its sails (and sales. Pun alert!) after the recession. What’s more, not every price increase is a “bubble.” Bubbles only occur when prices rise based purely on speculation, which isn’t the case here. More on that later.

Another thought is that David Cameron’s Help to Buy scheme is partly to blame. The program is basically a subsidy for first-time homeowners to get into their own place. The explicit goal is to give more families the ability to buy a home, which of course is going to raise the demand (and consequently, prices) for homes. (Interestingly, some observers blame a similar, but on a larger scale, program in the US for leading to the subprime mortgage crisis). So, Cameron and Co. might be responsible after all.

The problem is that Help to Buy is only just starting now, but until last week was always slated to start in 2014. That means no Help to Buy mortgages have been issued yet, and that nobody expected it to start so soon. That doesn’t square with the story. Remember, the rise in real estate values happened before Help to Buy started (and even was announced!). Unless you believe that the markets proactively increased all their prices in a coordinated fashion, which I don’t, then Help to Buy isn’t to blame.

There is a reason that London home prices are rising so fast, and it’s equally not the fault of a bubble or David Cameron: Lots of people want to live in London! People from China want to live in London; people from Spain want to live in London; people from the US want to live in London. On the other hand, not many people want to live in a lot of other parts of England, like Sutherland or Norwich. That means that there is huge demand for homes in London. That, my friends, is not a bubble. It’s a straightforward issue of demand outpacing supply, leading to an constantly rising price.

In the markets for most products, when demand grows faster than supply, producers make more of their product. Take, for example, the band Kings of Leon. Five years ago, record companies didn’t make many of their records; then, “Sex on Fire” became an international megahit and record companies made several million more copies. The supply of homes isn’t nearly as flexible as the supply of CDs, but there’s a lesson in the analogy for regulators and developers.

There just aren’t enough homes in London and looking into the future, not enough homes being built (The shortfall could be up to 300,000 homes by 2025, according to the Institute for Public Policy Research). So how can the demand for London housing be met, and is there a way it can be met without excessive suburbanization?

That’s where my wild proposal – a proposal crazy enough that it just might work - comes in: every time a building in London is redeveloped, it has to be built at least three stories taller than it was. All across the city, more office and residential space will be generated with every project. It’ll slow down urban sprawl, too. It’s taken 60 years, but more people realize how terrible suburbs are, and with my plan new development won’t be running into the Green Belt and former farmland far from the city.

Right now, London and New York City have about the same population. They are also world centers for business, culture, and just about everything else. Even though New York City is in the US (where everybody is big, has big stuff, and therefore can’t be very close to each other), its population density is double London’s. If that isn’t the sign that London is a medieval city, I’m not sure what is. Isn’t London due for a more widespread update?

I know there are criticisms and questions. Let me take on a few.

Why Three Stories?

Originally, I thought that each building’s height should be doubled, but I got a little carried away. Three floors is a bit more realistic and elegant. Three stories is a significant amount of space, and for all the work that would go into modifying the structure of a building, anything less wouldn’t be economical. It also avoids being too steep of a change. A twelve story building doesn’t necessarily belong between two four story buildings, but that could happen more easily with a doubling requirement. Also, the ground underneath London is fairly soft, so it might not be able to support skyscrapers on every block.

But You’ll Ruin London’s Charm!

*Yawn* - charm is so boring. Give me a city full of Shards, Gherkins, and Walkie-Talkies. But seriously: considering how many historic buildings in London have been restored in the last few decades, how many of the existing Victorian or Edwardian buildings (that are worth keeping) will be affected? Not many, I would think. The history will still be entrenched on almost every block of London by not only its culture but also the National Heritage List, so a few buildings won’t ruin the city. Of course, museums and palaces and the like would be exempt. On the other side of the coin, a city isn't a museum. It’s a dynamic system that needs to respond to the ever-changing needs of its growing population.

Won’t Your Plan Create Skewed Incentives and Promote Weird Loopholes?

Realistically, yes, it will. Enforcement is never perfect, and getting everybody to work within a law’s original intent is impossible. Someone will have to think a lot longer and harder than I have so far to work out the plan’s wording so as to avoid demolishing important properties or sneaking under the threshold that constitutes “redevelopment.” This idea will give a fair amount of leeway to developers and property owners and it gives them a larger revenue stream for the same physical footprint.  

Isn’t Public Infrastructure in London Already Overworked?

Of course! I ride the Piccadilly Line of the Tube every morning and it feels like a bunch of sardines living through the Lord of the Flies. But no matter where you have new Londoners live, infrastructure will be taxed. Further out in the suburbs, more roads and commuter trains will have to be built, plus utility hook-ups to the new homes and businesses. A more realistic look at the issue of infrastructure is that it is a challenge everywhere, and that the tremendous costs to update infrastructure are going to have to be paid out at some point.

Will the three-story rule ever be enacted? No! In all honesty, it is pretty wild. I didn’t even begin to address the inevitable NIMBY and BANANA (Build Absolutely Nothing Anywhere Near Anything) complaints. But it is at least *an* answer to a complex problem. Lots of people want to live in London, and there are only a fixed number of dwellings. For even poorly-connected, formerly-dangerous neighborhoods to be affordable for middle-class Londoners there needs to be creative action. If we don’t want to build out, we can always build up!