BBC – An Investors Insight On How to Tackle London’s Housing Crisis

London property investment & empty homes

In the UK there are currently 635,000 empty homes according to the latest statistics from the government, and around 72,100 in London alone.

This is startling, at best these empty homes are reducing the number of homes & available housing stock in the area (at a time when housing is already seriously strained) and at worst actually damaging local communities.London property investment & empty homes

Recently I was invited on to BBC Radio 4’s Today Programme with John Humphrys and Councillor James Murray to discuss a very modern phenomenon which is adding to London’s Empty Home Crisis, called ‘Buy-to-Leave’.

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To expand on this and look at the real issues causing the housing crisis, and more importantly the solutions, I’ve covered this further below.

What Is Buy To Leave?

Buy-to-Leave is a strange concept as it goes against many core investors principles when looking for an investment.

It’s a very high-risk strategy that relies on significant Capital Growth.

Because of this, it’s a very niche issue that only really affects the most affluent of areas and a very small selection of the overall London and UK housing market.

(However it’s not unique to the UK, as New York, Vancouver, Hong Kong, and other major international cities are experiencing similar issues)

It’s agreed that it’s not an ideal situation to have, but focusing on this issue as a way to tackle London’s Housing Crisis is a drop in the ocean, compared to the real issue, a sputtering supply of housing overshadowed by vast growing Demand.

There is simply not enough homes to meet the needs of the local community in many areas across the country and especially in London.

In this article, I want to look in detail at how to tackle London’s Empty Home’s Crisis from an investor’s point of view. I also look at the real underlying reasons as to…

  1. Why ‘Buy To Leave’ Isn’t Really the Problem
  2. The Real Problems of Supply
  3. & How to Tackle it

Why I Don’t Think ‘Buy-To-Leave’ Is An Issue

london property investmentsBefore we look at the various successful ways on how to tackle Empty Homes,  I want to tie up the issue that we addressed on the BBC Radio 4 Today Programme on Buy-To-Leave specifically.

Including (& importantly) why it’s really a non-issue in terms of London’s long-term plan in tackling the Housing Crisis.

Firstly as an investor, there are fundamental criteria that need to be met when considering an investment.

The Return on Investment, Exit Strategy & Liquidity of funds is part of the mix but the Security of the Principle investment is vital.

For these reasons, London Property Investment is very appealing for many investors.

But unlike stocks and shares, there is a significant cost and timeline to buying and selling houses.

Forgetting the cost of the legal fees and estate agency fees to actually purchase and sell for a moment, the tax alone adds a significant amount to any property deal and ownership, meaning an  investor won’t step lightly into the process of buying property at the very top level of investment in the residential market, without a good strategy in place.

Tax comes into play at all angles…

> Stamp Duty

(which isn’t insignificant at the price of properties that were talking about in London &  Islington, which falls into the category of ‘buy to leave’ type properties)

For example a one bedroom flat in the Bezier Building, (which is often cited by the council as a prime example of  the’Buy to Leave’ problem) can be purchased today for £850,000. At that level the stamp duty on purchase alone is £32,500.

> Council Tax

As a property owner council tax will be payable. If your renting the property, this is often paid by the tenant, but when owner occupied or in the case of Buy to Leave & empty properties, the property owner picks up the Bill.

In the same Bezier Building the council tax bands are mainly E & F. The rates for Islington council for 2014/2015 would be £1,541 to £1,821 in these brackets, which is a yearly charge.

> Corporation Tax or Capital Gains Tax

Depending on the situation of the purchaser (if it’s a Ltd company or an individual) if the property is not their main home and lived in, (ie: it’s purchased for investment reasons) then there is likely tax payable on the profits on the re-sale. This could be as much as 28% if your a higher rate tax payer.

This is not insignificant!

As you can see the cost implications just from Tax alone are very high to buy and sell a property at this investment level, in prime London Property locations.

If we add into this mix, the ongoing costs of ownership incurred just for keeping the property running of

> Ground rent

> Leasehold Management & Maintenance fees

> Insurance

> Utilities

Which are likely to add another £3,500+ easily per year in running costs of the property, just to stand still.

Finally, as an investor, you have to consider opportunity cost and the cost of finance.

Even if your buying with Cash, that cash still needs to provide the highest return possible for the risk vs reward.

At a purchase price of £850,00 + stamp duty + purchasing costs your nearing £900k of investment.

risk vs reward property investmentIf you can get a 5% return on investment elsewhere (so £45k per annum on £900,000) on less risky investments that aren’t gambling simply on house price growth & the property bubble continuing, then why take the risk?

Investors at this level won’t ignore the very real risk of opportunity costs.

Is it worth the risk, gambling on Significant Capital Growth?

When you take into account all of the costs (and TAX) associated with property ownership, you can see it starts to add up.

Purely as an investment, the very concept of ‘Buy To Leave’ is a very high-risk strategy.

It doesn’t make much sense to buy and simply leave the property vacant in the hope of Capital growth. London may be unique in the Property Market as it experiences its own bubble & house price growth, but it’s not infallible.

House Prices in London can and do drop and are as subject the usual Property Cycle as anywhere else.

If prices aren’t increasing to a significant level then the investor runs the very real risk of losing a significant amount of money on the deal. Not what any investor aims for or wants.

So Why Are London Councils Targeting It?

Hopefully you can see from the case above it doesn’t make sense for the average investor to adopt a Buy to Leave Strategy.rich overseas investors sitting & waitingSo is this really a problem that needs to be addressed?

Well, the Councils claim is that this isn’t fueled by the average investor. They’re citing the main cause of this potential ‘Buy-To-Leave’ issue as Wealthy Cash Rich Overseas Investors, buying property, leaving it empty (and therefore taking the property out of the housing stock) and forcing up prices.

The Councils perceived main aim is to bring empty homes back in to use, as the pressure on London housing stock is so severe.

A principle I agree with.

But the way in which councils like Islington are seeking to tackle this, is I believe, short-sighted & simply a vote winning exercise.

Wealthy overseas investors are an easy target, who wants to be seen to be sticking up for them and challenging the policy? Very few. So it’s an easy horse for the council to back.

But it doesn’t solve the issue.

Firstly the Crisis is driven by a lack of housing stock. First and foremost this is a supply issue.

There is simply not enough new homes being built to tackle the increasing (year on year) demand of an over growing population.

This isn’t set to change.

There has been an increase in households in London of 540,000 over the last ten years, but only 430,000 new homes have been built.

This is a startling statistic and an increasing deficit of 110,000 households in this period alone, that haven’t been catered for, on top of the figures of where housing supply was at ten years ago.

This is a statistic that is getting worse year on year.

Buy To Leave Is Not The Problem

London housing crisisAttempting to therefore tackle the Housing Crisis, with sensational headlines of fining & imprisoning investors due to ‘Buy To Leave’ is not going to be the solution.

In fact, no amount of empty homes programmes and bringing existing stock into use will really solve this issue.

It’s a sticky plaster for a gaping wound.

This doesn’t mean to ignore empty homes. Quite the opposite, bringing empty homes back into use is necessary for both improving housing stock and local communities.

But the focus should be on more wide scale schemes that can bring 100’s of properties back into use, not just a small handful.

Buy to Leave affects a very niche minority of homes and being seen to tackle it is maybe good for winning votes but does little to actually improve the long-term situation.

As discussed already, very few investors will choose to adopt this method of investing and would usually look at other lower risk investment strategies.

The mainstream investor would prefer to buy and rent out the property, and as this continues to supply the local housing demand, Islington and many London Councils don’t seem to have an issue with this.

Their issue lies purely with Investors buying and leaving the property empty, therefore removing the property from the local housing stock.

Understood, and to an extent, I could agree if that is what was indeed happening on a wide enough scale to warrant such a strict and far-reaching policy change.

But these properties aren’t simply being left empty.

Those criteria the council are using to define if the property is left empty or not is by determining if people are on the electoral role at the address

In most areas of the UK, the criteria are different.

The local councils use council tax records to see which properties are paying their council tax and are listed as occupied or unoccupied.

The severe housing shortage in Islington & other Wealthy London Councils, though, has caused the Council to be more proactive at seeking out empty homes, which in itself is a good thing.

But is the electoral role the best way to show a property is empty?

Doubtful.

There are many reasons an owner might not show on the voter’s role.

Firstly, you have a right to choose to vote, it’s not a requirement.

So why should this mean you are penalised for not being registered with the electoral role?

From the owner’s point of view, all property owners, whether in high-value areas or not, should be allowed to enjoy the benefits of home ownership that the law allows.

Even in the very small minority of properties where there is no registered voter at the address, this in itself does not mean the property is empty and being wasted.

The owner may be working away for a large proportion of the year on work placements or contracts.

They may have purchased the property as a second home.

They may be travelling.

It may be kept as a bolthole for when they visit and work in London.

Does this mean they should be penalised by the council for owning a property with threat of fines or even imprisonment?

This surely takes away the basic principle rights of a homeowner to be able to enjoy their property peacefully.

Is New Legislation Or Policy Change Required?

When you take these situations in to account and many other very legitimate reasons for owning a property but not living in it for 3 months at a time (refurbishment, probate, ill-health & more), you are left with a very, very small minority of properties that would be classed, I believe, as a purposeful attempt by an investor to ‘Buy-to-Leave’.

With that in mind, is new legislation required to tackle this problem? and should a legislation that threatens homeowners with imprisonment simply for not living in a property they own, even be considered?

Even if you disagree with the points I’ve mentioned above… and you feel like Buy to Leave is an issue that is seriously affecting the Supply of housing in London and Islington…

Is the policy being put forward by the council the best solution and is it even possible to implement?

In a short answer… No, I don’t believe so.

Firstly, it is impossible to implement.

mission impossible stopping buy to leaveWhy?

Well, if the owner or a representative for the owner registers to vote on the electoral role and they’re paying council tax, does this remove them from the figures and any investigation?

Even though the property could still be empty, the council won’t be able to act as it has no way of knowing.

Or if providing utility bills shows proof or residence surely that’s easy for any homeowner to prove and side step this intended legislation.

Also, there is no legal route that has yet been put forward that will allow the council to target ‘specifically’ wealthy overseas investors.

What is more likely to happen is if agreed and once passed, is a legislation or change in planning that would affect every single local resident, if they left their property vacant for a period of longer than 3 months.

This could end up hurting the very people and community it seeks to protect.

What happens if you legitimately buy the property with a view to living in it as your principal home. Then later down the line, your circumstances change.

So you’re now not able to live and occupy the property regularly due to work commitments, ill health, family matters, a whole host of legitimate reasons.

You could be on the receiving end of a large fine, a court summons and even threat of imprisonment.

Are Policy Changes The Best Solution?

I doubt it.

Why government interference is even necessary, I would debate.

The property market for sure has more concern and sway on the Political stage than other industries.

It’s not just about supply and demand, it’s people’s homes and communities at stake.

Which makes it a hot topic that needs to be heavily considered.

But at its core it is still a market that is driven by Supply and Demand, and more red-tape, legislation and government involvement often has a negative overall impact not positive when forced on a marketplace.

For an area to be stable it needs a mix of ownership. If all the properties in a new build block of flats were owned by investors and were regularly left vacant the appeal of the development would go down hill and the balance of buyers would eventually shift.

The same as any market, guided by regulation but not ruled by it, if left to its own devices it will find it’s own level.

So implementing a long-term policy that is founded on tackling short-term issues like ‘Buy to Leave’, (which is only prevalent in small numbers due to the current mix of the housing bubble and overseas investors taking advantage of currency fluctuations) cannot work to achieve the actual intended result over the long term, because it’s a very rigid policy to try and tackle a very fluid situation.

Successful Policies Embrace Change Not Fight It

Change is inevitable, just like the changes that are being seen and felt on local high streets up and down the country, housing is changing.planning policy change to improve housing crisisIt’s requirements, the demand and it’s use.

Just look at the likes of Air BnB, Spareroom,Housing Guardians, these are all organisations setup in recent times, that were created to fill a demand in Housing from the market.

Now, these maybe don’t directly reflect the housing issues identified by the ‘buy to leave’ phenomenon, but they do reflect a sea change in the way housing is used and needed.

Short term housing is a necessity (and a growing one at that) and Rigid, Out Dated Planning laws need to change and adapt to that, not seek to stay rooted in the past and pursue aims of penalising owners instead of working with them.

In some ways central government should be applauded for helping with some of the issues, the recent changes in stamp duty, and changes in planning regulations to allow commercial premises to be converted back to residential are a step in the right direction, but these are not going to help local areas, especially when local councils opt out and choose to carve their own path to try and tackle the issues.

In many instances of state involvement, the carrot approach often see’s more benefit than the stick approach.

In Holland they have had success with getting the community involved in bringing properties back in to use.

In New York, Urban Homesteading is proving a great Success.

Closer to home in Manchester, leasing programmes and empty homes loans have had a massive impact  in reducing Overall Empty Homes and bringing more housing stock in to use, which is lets face it, is ultimately the desired result.

Even changing planning policies to allow for more people to have the right to build their own home. Must be considered in depth first as a way to tackling the housing crisis.

To be fair, Islington Council does have a few schemes in place to bring empty homes back into use, which is the right approach in my view.

But their Policy of targeting so-called ‘Buy To Leave’, with a proposal that can very easily end up hurting the very community it is trying to protect, is short sighted, very difficult to implement and won’t solve the issue in my honest opinion.

It may win votes initially, but I think it’s flawed in many respects and won’t tackle the real problems of housing supply.

So will these other schemes solve the ‘Buy to Leave’ issue?

No, but they would tackle the issue of empty homes. How do we know?

Because it has already been proven to. The figures from the above housing projects show drastic reductions in the number of empty homes in the local communities because they are projects that empower people to make changes not penalises them.

Combine these approaches with a solution that actually addresses the real issue of Housing Supply, and then you start to come close to the solution.

So What Is The Answer?

This is a debate that think-tanks around the country are being paid large sums to solve and in essence there often tasked to create a solution that is ‘Voter Friendly’.

But this seems to mean they skirt around the problem and don’t face it head-on.

the answers to the housing crisis

To face it head on you need to tackle the great disparity of what’s being required from Households (in terms of demand) to what’s actually being built (the supply),

By:

  • Bringing more land in to use
  • Improving planning regulations to help not hinder, and actually empower homeowners to bring more housing stock back in to use.
  • Support owners to change more buildings to residential property with permitted development rights.
  • Improving planning resources to allow planning applications to be cheaper, quicker and easier to process with less Resistance.
  • & Working with Homeowners & London Property Investors with a Carrot approach (incentives, improved access to resources, right to build, homesteading and other open source models to allow people to take ownership on providing their homes) not a Stick approach (taxes, threat of court injunctions and imprisonment).

I believe, personally, that this is surely the best way to tackle London’s and the rest of the UK’s housing crisis over the long term.

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