Stephen King: London is the driver of the economy — so let it determine our EU course

Estimates vary but let’s just say that around half a million people turned up on Saturday to demand a referendum on the final deal regarding the UK’s departure from the European Union. That’s quite some number. Does their protest, however, represent the mood of the country? It’s all rather tricky. Latest opinion polls suggest, first, that an increasing number of people say they are undecided and, second, that those who firmly wish to remain in the EU are only marginally ahead of those who firmly wish to leave.

Not enough, one might think, to assume that a second referendum would be any more politically conclusive than the first — unless, that is, Saturday’s protest decisively moves the needle for the undecided.

I’m not for a moment going to suggest that people’s views on Brexit are predicated on self-interest alone. Yet something rather odd has been happening to the British economy since the 2016 referendum. It’s reflected in house prices. According to the Royal Institution of Chartered Surveyors, the only UK region to experience falling house prices over the past 12 months is London. Historically, this is a bit of an oddity.

London house prices have typically risen much faster than those across the rest of the UK — one reason why, today, London homes are on average twice as expensive as those elsewhere. More recently, however, it seems that London has lost out, even as many other parts of the country have continued to make modest progress.

London is peculiar in other ways. It was hugely in favour of staying in the European Union, in contrast to the “will of the [British] people”. Almost 2.3 million Londoners voted Remain, with only 1.5 million voting Leave. The only other UK regions voting the same way were Scotland (1.7 million Remain, one million Leave) and Northern Ireland (0.4 million Remain, a smidgen less for Leave). All other regions voted Leave, even if these leaver regions contained lonely Remain enclaves.

To date, the prospect of Brexit has done little damage to Brexiteer housing markets (although, in the past few months, house prices have begun to decline in the South East and the East, taking their cue from London’s own experience).

London has another oddity compared with the rest of the UK. It has been hugely open to immigration. According to the Office for National Statistics (ONS), the five local authorities with the largest proportion of non-British nationals are Kensington and Chelsea (37 per cent), Brent (34 per cent), Westminster (34 per cent), Newham (33 per cent) and Ealing (32 per cent).

Across the UK as a whole, the equivalent figure is 9.3 per cent, 3.6 million of whom are from the EU and 2.4 million from elsewhere. The North East of England, which overwhelmingly voted to leave the EU, has the lowest immigration rate in the UK: only 4 per cent of its population is made up of non-British nationals.

A final comparison relates to income gains in previous decades. On average, Londoners have always been rich relative to the rest of the UK. Over time, however, they have become even richer. In 1998, average incomes in London were 63 per cent higher than the UK average; by 2016, they were 77 per cent higher. Other regions, in contrast, have fallen behind. Average incomes in the North East of England, the UK’s poorest region, were 46 per cent of those in London in 1998: more recently, however, they’ve dropped to just 41 per cent.

Piecing this all together, it’s not difficult to conclude that membership of the European Union has served London remarkably well, even as other parts of the UK have, relatively, fallen behind. London has become a truly international city, in some ways connected more closely to Europe and, indeed, the rest of the world than it is to the rest of the UK. In the unlikely event that voters within the M25 were offered a referendum on whether to stay in the European Union — and, by implication, whether to leave the UK — it would come as no surprise if we witnessed a re-run on the grandest of scales of that old Ealing comedy, Passport to Pimlico.

Seen this way, London faces a problem. In recent decades, London has flourished: it has been the European Union’s premier financial centre and one of the major hubs of — for want of a better word — globalisation. People from all over the world have voted with their feet, choosing to make London their home. Their arrival, in turn, has contributed to greater economic dynamism and, inevitably, to higher house prices.

Yet, as London house prices have risen, so it has become more difficult for those from elsewhere in the UK to move to their capital, contributing to a growing economic divide. If Brexit persuades non-British nationals to head elsewhere — and, as a consequence, London house prices come down again — we may witness economic reconvergence, not so much because the rest of the UK will flourish but, instead, because London will be cut down to size.

The irony of all this, however, is that the rest of the UK is incredibly dependent on London’s tax revenues. According to the ONS, London has a fiscal surplus of £32 billion whereas the UK as a whole has a deficit of £46 billion. In other words, what London does for the rest of the UK is precisely what Germany does not do for the rest of Europe: London, unlike Germany, is part of a fiscal union and, thus, the proceeds of its economic success are spread far and wide. If Brexit makes Londoners worse off, the rest of the UK will probably suffer too.

Which makes me wonder: if there really is a difference of values between London and the rest of the UK perhaps the People’s Vote should focus not so much on another UK-wide referendum but, instead, on self-determination for Londoners. The M25 might be a useful border after all.

• Stephen King (@kingeconomist) is HSBC’s senior economic adviser and author of Grave New World