Since the downturn in 2008, global investors have looked to property as a safe home for
their money. Sales of properties valued over £10 million in London, Singapore, Hong Kong
and New York doubled between 2009 and 2013. This popularity can be contagious and can
spread beyond prime properties – average prices here are some of the highest in the world.
Is this a bad thing? Rising prices may be somewhat offset if it increases the supply of new
homes while properties bought by the world’s wealthiest are not the types of homes that the
majority of would-be homeowners can afford. Moreover, a booming housing market is a
reflection of desirability which could spill over to nearby cities.
However, these arguments miss a crucial point. The rationale for investing in property of any
value is rarely to increase the value of that property through large redevelopment. Nor is it
based on an expectation of low supply of that property size in the future. The misconception
is that investors speculate on houses when they actually speculate on location.
Land is the commodity which investment into property buys. Between 1955 and 2007, real
house prices in the UK increased five-fold while land prices increased 15-fold. This has
meant that up to 80 percent of the value of a property today is accounted for by the price of
land. Land is no different to other goods in that its price will respond to supply and demand
factors. As demand increases and supply is restricted, the price will increase. In turn this will
impact on the value of adjacent land (and properties) through speculation, producing winners
– existing home owners looking to sell – and losers – people who are priced out of local
In order to increase land supply and unlock new viable sites public investment is required,
particularly in infrastructure. Vacant land adjacent to a train station is more valuable than
land in the middle of nowhere. So this isn’t simply a story about housing planning allocation
and restriction but also a story of investment and viability.
Governments have two choices: they can choose not to intervene and end up spending
money in the long run on social security to help people pay high housing costs, or can invest
capital into social infrastructure today and retain assets. Indeed, ensuring the state,
particularly on a local level, can capture some of the private uplift in value will incentivise
further public investment, increase land supply and ensure more homes are built.
The fine balancing act for global cities is to embrace foreign investment while ensuring land
prices don’t become a run-away train. Public investment that can improve viability, increase
the supply of land and provide assets – as well as a possible a return for the state – is the
way to cover all bases.