The secret about renting that landlords & politicians don’t want you to know.
Renting in London is a losing proposition…
… if you rent throughout the course of the cycle.
Of course, no market goes up in a straight line and there will be periods when you may look downright foolish for buying, but that will be temporary and renting is a mistake in the medium to long term.
Here is why.
As mentioned in my previous article, focussing on house prices is misleading because the price is made up of two parts – the value of the physical building plus the value of the land that it sits on. And the value of the land moves far more than the value of the building itself.
Let’s take, as an example, the Duke of Westminster’s Grosvenor Estate in London which covers most of Belgravia and Mayfair. He and his family have done rather well purely by owning some of the most desirable land in the world. But how much of their wealth have they actually created?
Yes, they have turned what was originally fields into houses, offices, shops, etc. In other words, they built the properties and this definitely created some value. But in reality, the vast percentage of the uplift in value of the Grosvenor Estate has been down to the improvement in not only London’s infrastructure but global infrastructure.
So, the obvious improvements such as the advent of trains, the underground system, the Jubilee Line and soon Crossrail have all added value to the land.
Likewise, the growth of London including the legal system, (relative) political stability, the complex array of services and skills, the opportunities available, the schools and everything that has contributed to London being consistently featured as one of the top three cities to live and work all benefit the Grosvenor Estate.
Likewise, the British Empire led to the English being the dominant language.
This has been compounded by globalisation and the ease with which money and people themselves can move. Heathrow has arguably been the most important infrastructure improvement because it is now one of the key global hubs and it feeds directly into London. I could go on about all the points that make London a great city, but you get the picture.
However, the Grosvenor Estate has paid for none of this infrastructure but benefits disproportionately.
So, how can you use this knowledge to benefit you? Because you may be thinking “McGivern, this is all very well and good but I don’t have a thousand acre estate which was created a few centuries ago”.
Indeed not, but don’t worry! If you own good properties in good locations in London, you will benefit from the same dynamic. Indeed, there are people who bought “undesirable” properties in London 30 years ago who are now sitting on a fortune despite having done nothing to generate that money.
A brief Health Warning – please note that I am making no moral judgement here. I am just showing you how the system, which is embedded in centuries of law, works. Nothing that has happened in the last ten years has changed this system so the property cycle will repeat as it has done for centuries unless the system is changed. Nothing indicates this will happen.
So, why does this happen? Well it is very simple. When you buy a property to own or rent out, you pay transaction costs and taxes. You will also pay income tax on the rent and Capital Gains tax when you sell if it is not your principal residence (this is a simplistic overview of tax).
The key point is that those who rent a property are actually paying for two things – the shelter offered by the property itself AND access to the local amenities (this is why an identical property in different parts of London rent and sell for completely different prices – the amenities in one area are better/more desirable).
But the amenities and infrastructure are paid for in large part by taxes and also the investment made by businesses. So, tenants pay tax but reap none of the benefit of the infrastructure improvements AND they pay rent to the property owner which subsidises the owners’ upkeep of the property while they benefit from the increase in land value.
So, tenants pay negligible transaction costs but in the medium to long term they will get left behind by property prices.
Meanwhile, the owners simply sit on the property/land and enjoy the uplift of the land value while contributing little to the infrastructure improvements that are happening around it and creating the price increase.
The tenant does not benefit from any of the uplift in the value generated by business investment and the taxes that he/she pays. The rent is spent and lost. This is also why you need to think carefully where you buy. Certain areas benefit from higher infrastructure spending.
So, to use Crossrail again – this will massively boost house prices for anyone who lives near one of the stations. However, those who rent these properties receive none of the gain and nor do any of the taxpayers who live in the rest of the country!
This is a process that is repeated over and over. In the big scheme of things, the SDLT hit that buyers pay is actually small compared to the massive gains that accrue through the increase in land values over each property cycle.
One other thought for you. In 1910 house prices were a tiny fraction of where they are today. £1 bought you $4. The Hong Kong and Singapore dollars didn’t even exist and the U.S. and U.K. dominated the global economy. The majority of the world’s “billionaires” (or today’s equivalent) lived in these two countries.
In other words, house prices in London were much lower in 1910 but constituted a much higher percentage of global wealth than they do today.
Now there are more billionaires in Asia than the U.S. and this is a trend that is accelerating – and it is not only Asia where vast wealth is being created. There are more people in more jurisdictions making more money than ever before.
Is London an unattractive location for these people?
Conventional wisdom will tell you that Brexit will change this. But conventional wisdom has been saying that forever:
1. 2008 would be the end of London and the financial system
2. The dotcom crash and 9/11 and terrorist attacks in London would change the world forever
3. The United Kingdom would suffer after we fell out of the European Exchange Rate Mechanism in 1992
4. The UK was the sick man of Europe in the 1970’s and doomed
5. The collapse of the British Empire in the late 1940’s was the end of London as a global centre
6. In 1783 a “cash-strapped” Great Britain conceded defeat and had to recognise the independence of the United States.
This is far from an exhaustive list. Yet, UK property prices have continued higher decade after decade, century after century despite these “massive” and in many cases, devastating events. Why, because the system which hasn’t changed in centuries actually demands it.
When the system changes then the cycle of will change. That hasn’t happened yet and history has proven two things. The gains during the cycle dwarf the losses at the end of the cycle and the majority of the house/land price gains come in the second half of the cycle.
We are just at the end of the first half of this cycle and despite what conventional wisdom will tell you, prices will increase massively in the coming years. Remember the end of the first half of the last cycle was 2000/2001 - Everyone would have told you were an idiot if you had bought in 2001. Was that good advice?
Now, what I have described here is really just the tip of the iceberg. Some properties and locations will massively outperform others and you want to ensure that the home or investment you buy is one of these “best in breed” properties.
If you are not sure how to do this or if you want specific advice on what is happening in your target area and price range, then simply email email@example.com or call 02034578855 (+442034578855 from outside the U.K.).
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Who am I and why should you listen to me?
My name is Jeremy McGivern. I am the founder of Mercury Homesearch, the internationally renowned property search consultancy, and author of The Insider’s Guide To Acquiring Luxury Property in Prime Central London. I have been acquiring property in prime central London for clients for over 13 years.
Having physically viewed over 22,000 properties in prime central London, studied the details of over 153,400 apartments, houses and investment opportunities and spoken to 232+ estate agents every week for over a decade, my advice is in high demand and has featured everywhere from Bloomberg Television, The Financial Times and The Daily Telegraph to Forbes India and Bahrain Confidential.
Please note that the strategies and techniques revealed in the book and CD’s are not just theory. They have been tested and proven over 13 years of acquiring hundreds of millions of pounds worth of prime London
property for my clients, who include some of the world’s wealthiest families and most successful entrepreneurs and business people - it may surprise you but over 30% of our clients are British and based in London so this information is relevant whether you have bought a property in London before or not.
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Good luck finding your ideal home in London.