Vacancies even in my tony neighborhood?

That concerns me.

Leave it to the Wall Street Journal to peep through Mayfair’s lace curtains:

LONDON — At an abandoned home with yellowing newspapers on its front stoop, Paul Palmer peeks through a mail slot to find letters and leaves carpeting the entryway. The house next door has a dead plant chained to its porch, which is covered in faded utility bills.

Mr. Palmer investigates abandoned homes for a living. But his turf isn’t a poverty-stricken corner of this financial capital. It’s the Mayfair district, home to wealthy financiers, celebrities, the U.S. Embassy — and a few squatters.

Who owns it, and why don’t the owners live here?

In the city of Westminster, where Mayfair is located, homes can cost up to £50 million ($81 million). Yet Westminster is fifth among London’s 33 boroughs in the number of unoccupied properties. In 2008, 1,737 homes had been vacant six months or more, the third highest number among all London boroughs, according to the Empty Homes Agency, a nonprofit group that seeks to put empty homes back into use.

Not confined to the bad neighborhoods: red means vacant

Unlike our recently-profiled case of no landlord at all, the problem isn’t loss of equity leading to economic abandonment:

Unlike people facing foreclosures in other neighborhoods around the world, Mayfair’s homeowners aren’t down on their luck. Rather, the properties serve as investments for owners who pay the bills to keep them empty — something the neighbors and city object to when the homes fall into disrepair.

Real estate, particularly well-located and well-built real estate, has long been a ‘brick safety deposit box’ for the world’s rich people.  More durable than gold or gems, it also can serve as a bolthole should things get too hot in the home country (as in Dubai, where defaulters on condo loans buy a one-way plane ticket and leave their Mercedes at the airport, escaping to avoid being thrown into debtors’ prison):

[New York Times, 12 Feb 09.]  With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

The owner fled, leaving the Merc behind

People are economically rational, so when you see a perplexing behavior, look for a missing incentive – which in this case is easy enough to find:

Many owners decline to rent the homes due to local council tax rules [Local real estate taxes – Ed.], which tax properties at a lower rate if they are empty and unfurnished.

As we saw in the case of California’s economic teardowns, where plowing a brand-new home under was less costly than securing it and holding it for eventual sale, localities can miscalibrate the relative incentives of different property types and tenure configurations and induce perverse outcomes.

So it is here in London, for the unseen owner’s equation probably looks like this:

Net benefit (cost) of renting a luxury owned flat in Mayfair

+ Rent from the unknown possible new tenant

– Leasing commissions to the estate agent

– Operating costs of heating and maintaining the apartment

– Unrecoverable damages (wear and tear) done by the tenant during the occupancy period

– Inconvenience of having the property rented/ needing to move the occupant out

– ‘Brain damage’ of having to think about it

– Loss of privacy/ anonymity by having to report the rent and expenses

– Increased council taxes resulting from being rental rather than vacant

= Net benefit (cost) of renting rather than holding securely vacant.

The optics – one positive, seven negatives – are deceiving, because this equation is conceptual rather than numeric, and we cannot assign accurate weights to each factor.

I don’t think so

Notice though that the richer you are, the more the intangible risks (inconvenience, brain damage, loss of privacy) rise in value relative to the quantifiable and probably minor (as a percentage of property value) net operating income from the rental.

Well bred and well concealed

The unseen owner’s caution makes more and more sense – which partially explains its frequency:

The high concentration of rundown, empty homes is striking for a posh neighborhood like Mayfair, with its ornately gated manses. The hub of aristocratic society before World War II, Mayfair’s modern-day image is demonstrated by its prominent place on the British Monopoly board.

The highest-rent color group on the board? Mayfair

Some locations, being psychological trophies, attract more than their share of interest.  How many luxury flats in Cairo, London, Miami, New York City, Los Angeles, Paris and Seattle are sitting empty, havens for jet-set plutocrats who think it’s worth taking out insurance against political or economic chaos at home?

In real life, the empty-home phenomenon touches some of the UK’s more famous residents. A few years ago, Mr. Palmer met comedian Tracey Ullman and her husband, Allan McKeown. They wanted to know why the house next door to theirs was derelict, recalls Mr. McKeown.

Proudly British, and proudly funny: Tracey Ullman

Former Prime Minister Tony Blair’s home is adjacent to a crumbling property that’s been vacant for more than a decade. The owner keeps up on its payments, according to Mr. Palmer. But one look inside indicates they likely haven’t visited in years.

It’s an economic sanctuary – and London is the beneficiary, at least financially, since whoever owned the house before made a large profit selling it, and today London collects taxes on it without having to provide any services.

That loophole frustrates Mr. Palmer.

Is it a loophole? 

Depends on what you think is behind the door

To me, a loophole creates an unintended option, something that is exploited by program participants to achieve outcomes that lawmakers would have prevented had they through of the possibility.

“We shouldn’t be rewarding these people,” he says.

Palmer doesn’t believe in rewarding absentee non-landlords

It’s not being rewarded – or is Mr. Palmer chafing at the real estate tax differential treatment?

As the Westminster City Council’s empty-property officer, Mr. Palmer strolls the area’s streets six hours each day to identify vacant homes and track down their owners.

Actually, Mr. Palmer has no interest in finding the missing owners, he can coax them from their foreign rabbit holes simply by seizing their property.

Once he identifies a vacant house, Mr. Palmer consults property records.

Because one cannot move property, it can be taken economic hostage.  Further, because property is immobile, one can mandate transparency in its ownership through a registry of title.

To claimownership, you need your name on the deed

After that, he often finds himself sending letters to the British Virgin Islands, a known tax haven for foreign companies, and a place where many of the property owners in question have mailing addresses.

Above we speculated on the value of anonymity; BVI and Netherlands Antilles addresses are a further clue that these are the discreet rich, who want to conceal either the source of their wealth, or its uses.

He says he rarely receives a response back. Except, that is, when a court action is about to begin.

Court action?  What court action?

Under British law, local authorities have the power to seek an order to claim ownership of the ghost properties and put them up for sale.

If a property is still empty after six months, with no effort on the owner’s part to occupy, rent or renovate it, Mr. Palmer begins a “compulsory purchase” — a process that forces an owner to relinquish possession.

‘Compulsory purchase’ is British for ‘eminent domain.’

Not as strong as the Fifth Amendment, but similarly evolved

Real estate, being immovable, makes a Tocquevillean asset in two ways:

1.  Its possession depends on a property-rights-respecting citizen-responsive government, so those who possess real estate property are invested in making their government work.

2.  Its value realization requires being physically present to claim the property, so municipalities and citizens who want better communities have a means of making their neighbors shape up.

As I posted nearly four years ago, tax liens act as the housing finance ecosystem’s anaerobic bacteria:

In this real estate taxes and their corollary, tax liens and tax lien takings, act like anaerobic bacteria, breaking down decayed dead organisms and turning them into a nutrient-rich environment that sprouts new growth.

And this is how we return it to its essence ….

That’s how London is using compulsory purchase:

After assessing the value of the property, officials typically sell the house.

If the owner fails to occupy/ maintain the house, even if minimally – then the municipality treats it as provisionally abandoned property, and returns the property to more active use and occupancy, by compelling its sale to someone who presumably will live in it (or actively rent it).

London doesn’t steal the property, however:

If the original owner hasn’t come forward, funds are paid to a local court where they remain for up to seven years.

The city forces the sale, but sequesters the proceeds.  The issue is use, not confiscation.

Most owners eventually turn up to claim the cash.

However, even this approach has a sharp edge in the boundary between private property rights and public-use imperatives:

And the bridge is out too …

The compulsory purchase, says Mr. Palmer, is a “tool we use as a last resort to take empty property away from owners who refuse to do anything to it.”

Isn’t the right to do nothing with my own property one of my fundamental rights?

I have the wight to be idle

If you tried this in New London, you’d have a major legal and political fight on your hands.

Wouldn’t it be better – and simpler – just to eliminate the favorable taxation of vacant property?

Now that you’re PM, Gordo, would you take care of that for me?

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