The Logic of Derelict Houses

Why would you buy a house and then do nothing to it for twenty or thirty years? By nothing, I mean absolutely nothing. Nobody lives in it, no tenants, no repairs, not even clearing the mail. So much of nothing that the roof collapses and nature begins to reclaim it. Sounds crazy, right? Well it happens quite a lot.

An extreme example is in London, where a third of the houses in one of the most expensive streets have been derelict since the early 1990s. The owners are unknown because the properties are registered to companies residing in various tax havens which allow the beneficial owners to remain anonymous. But many are thought to be owned by Middle Eastern princes, Russian oligarchs and other billionaires.

These empty houses are a problem for the city. Ruins are scenic in the country, in the city they’re an eyesore. England is also suffering a housing shortage right now. London’s Lord Mayor, Boris Johnson, has tried to impose higher rates on vacant dwellings, but so far the Prime Minister has blocked him from doing so.

The situation is the same in most parts of the world. My sister had a vacant house next to hers in a leafy, exclusive suburb. The owners would visit about once a year to pick grapes, but the house was uninhabitable.

My grand parents once owned an old farm house that found itself surrounded by the growing city. It was so old and the facilities were so dated (outside toilet, no air conditioning, ancient taps and fittings) that eventually only the worst tenants were willing to live in it. It would have been too expensive to fix all the problems and modernize the old house. But the city continued to grow. Eventually squatters moved in.

But the value of the land was increasing by a much bigger amount than the rates and taxes they had to pay each year to the government and local council. Even though they received no income from the property, they were making a net capital gain. Sadly, they didn’t live to see that house get sold.

I keep my rent low because my tenants have been very good and I don’t want to lose them. But even when I was charging a market rate, my rental income (after expenses) was never more than about 2% of the value of the house. That percentage return may be higher in other countries that don’t have tax laws that are as favorable to land owners as they are in Australia. Anyhow, considering the amount of nuisance they cause and the wear and tear they inflict on the house, I have often thought it would be better to keep my investment property empty than to turn it over to tenants. The notion doesn’t appeal to me as I respect the rights of the neighbors to have an occupied building next door.

I guess a similar principle must be at work for the billionaires who own those London mansions. They are making far more money just by sitting on their assets. Paying for someone to maintain them is an unnecessary expense. Even more so if they can’t predict exactly what purpose the land will be used for when it is eventually put to an economic use.

They may not be willing to lift a finger to maintain their houses, but they will use their influence to ensure David Cameron allows them to preserve the benefits of their anti-social investment strategy.

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