London impoverished by rise of the plutocrats

LONDON Tue Mar 20, 2012 12:12pm GMT

The sun rises above the financial district of the City of London April 23, 2011. REUTERS/Kieran Doherty

The sun rises above the financial district of the City of London April 23, 2011.

Credit: Reuters/Kieran Doherty

Related Topics

LONDON (Reuters) - Art dealer Leigh Ford nurses his latte at a coffee shop table overlooking Notting Hill Gate, a busy traffic-choked street running through west London that gives its name to one of the city's most famous neighbourhoods.

Once home to a patchwork of communities including the Caribbean immigrants who founded the Notting Hill Carnival, Europe's biggest street party, this once bohemian area now sits firmly within London's "bonus belt" of banker neighbourhoods.

"You used to get people here from all different backgrounds. Now you get people from all different banks," he says of the area where he was born and grew up during the 1970s and 1980s.

London's population of millionaires has boomed in the last decade, both because of the lucrative jobs on offer in the finance industry and the arrival of thousands of foreign super rich, for whom it has become a favoured playground.

The process has turned central London into a boom town, increasingly decoupled from the wider British economy. Land values and other economic variables bear little relation to national trends.

But while it is a rare bright spot in a sluggish British economy, economists are starting to warn of the dangers of displacing the middle classes and exaggerating a broader trend of rising inequality by importing more plutocrats.

A relatively equal distribution of wealth with a substantial middle class is a feature many economists associate with advanced levels of economic development and is what distinguishes the UK or France from countries like Nigeria or Brazil.

London, some warn, may be drifting closer to the population profile of the latter.

According to the OECD, income inequality among adults has risen faster in Britain than in any other developed country since 1975.

In London, wealth disparities are even more pronounced.

A study by the UK government's Department for Work and Pensions shows central London is Britain's most unequal region. Splitting the population into five income brackets, the study found that Inner London had 30 percent of people in the poorest fifth of the population, 27 percent in the richest and just 12 percent - the UK's lowest concentration - in the middle fifth.

Of all Britain's regions, only London and its surrounding southeast and eastern regions have less than a fifth of the population in the middle income group.

SHRINKING MIDDLE

Data compiled by London's administrative authority the GLA shows inequality in London has risen in the last decade. The GLA uses the Gini score, a common measure of income distribution that rises from 0, representing total equality, to 100, where all income goes to one person. London's score rose from around 34 in 2002 to 36.2 in 2010, well above 32.4 for the rest of the UK and an OECD average of around 32.

"I think the concept of the squeezed middle is misplaced. It's actually a vanishing middle, or a shrinking middle," says Stewart Lansley, economist and author of a book about income inequality.

The absence of a middle puts the brakes on social mobility and aspiration, he argues, because there is no realistic passage out of the bottom income brackets.

"That's very bad for running economies, because you don't have this continuum, you don't have aspirations. It makes it difficult for cities to manage, and we're becoming much more of a low-paid economy with this big top," he says.

What is happening in London is an exaggeration of a process that has gathered pace across most developed economies, in which society is becoming "hourglass shaped", with a bloated super rich elite, a large underclass and little in between.

In the central London borough of Westminster, the average property sells for around 670,000 pounds ($1.1 million), having doubled in 10 years, according to the Nationwide House Price Index. This is more than four times the UK average of 160,000 pounds.

When median annual earnings for full-time British workers is 26,200 pounds, according to government figures, owning a home in much of metropolitan London is off limits to all but a tiny elite.

"A normal family of professionals, even earning a pretty decent salary, was priced out a long time ago," says Charlie Ellingworth, director of consultants Property Vision, a subsidiary of HSBC Private Bank.

FINANCE CURSE

The most conspicuous driver of super-gentrification in once-scruffy residential areas is the high-paying financial services industry, one of London's principal employers and accounting for about 10 percent of the whole UK economy.

John Christensen, an economist who runs Tax Justice Network, which campaigns against tax havens, equates the dominance of finance in the UK economy to the "resource curse" that exacerbates inequality in the developing world.

Finance in the UK, like oil and gas or mining in the developing world, has crowded out other sectors and therefore narrowed opportunity for the working age population.

"The Finance Curse is every bit as corrupting as the Resource Curse which hits mineral rich countries," he says.

Others point to government efforts to attract a super-rich international jet set by pledging not to tax foreign "non domiciled" residents - known as "non-doms" - on their overseas wealth if they retain a nominal link with another country.

The non-dom status means London is an effective tax haven for the international rich, in contrast with other countries such as the United States, where long-term residents are taxed on their global income. So while New York, London's chief rival as a global financial centre, is home to large populations of high-earning financial professionals, it is less attractive as a base for international oligarchs.

A third feature is the increasing popularity of London real estate as an investment asset. Upmarket property consultant Savills estimates 3.7 billion pounds of foreign money flowed into the top end of the real estate market in 2010. According to left-of-centre thinktank IPPR, homes in the city's smartest districts "have become a kind of global reserve currency for the wealthy elite of capital-rich countries".

MANSION TAX

Growing resentment among Britain's middle classes at the advance of the super rich at a time of rising unemployment and falling living standards after the financial crisis has become a potent political issue.

Britain's coalition government is currently debating whether to introduce a "mansion tax" that could charge a 1 percent annual rate on properties valued at over 2 million pounds.

The UK has also made an effort to extract more tax from non-doms. In 2008, the Labour government, which lost power in 2010, said they should have their overseas wealth taxed or pay a 30,000 pound levy after seven years' residence. In March last year the current government said the levy would rise to 50,000 pounds after 12 years of residence.

Private bankers catering to the non-doms say these measures have so far had little impact on the flow of new arrivals to London.

"We're still seeing a fair amount of interest. We've got some non doms doing some pretty big stuff in property. I spent the whole of last week dealing with those sorts of proposals," says Julian Lamden, a client partner at private bank Coutts, whose portfolio includes some of the bank's richest clients.

Some say that sending a signal to the international wealthy that they might no longer be welcome could be economically damaging.

"Income disparity is not going to be solved by getting rid of the internationally wealthy, who support a number of service industries," says Sophie Dworetzsky, London-based partner at law firm Withers.

Yolande Barnes, head of research at upmarket property consultant Savills, agrees.

"The whole strategy of attracting foreigners is being questioned, but it's quite a perilous thing to question at a point where the economy is so fragile," she says.

"We know that chief execs don't set up new businesses where they don't want to live."

Barnes suggests improvements to transport infrastructure might allow more distant suburbs to act as an effective safety valve for the growing numbers of displaced former Londoners.

"The exclusion zone has grown, but actually London is a surprisingly affordable city for those middle classes because of its outer suburbs. I don't think we'd be talking nearly as much about a housing problem if we didn't have a transport problem," she says.

Stewart Lansley acknowledges the arrival of wealthy people settling in London has had some beneficial economic impacts.

"There's no doubt the London boom and the opening of posh restaurants and the general boom conditions in London through the 90s and 2000s was in part down to this inward flow of cash," he says.

But the new money has also fuelled frothy asset bubbles that are potentially destabilising, he argues.

"I do think we risk an era of near permanent instability with short-lived booms and deep troughs," he says.

($1 = 0.6292 British pounds)

(Reporting by Chris Vellacott; Editing by Will Waterman)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.