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This summer, when London property prices still looked unstoppable, Rob Perrins, managing director of the Berkeley Group, came out with a curious comment for a man whose commercial interests are very much aligned with those of rising house prices.

“London is getting self-sustaining now – it doesn’t need the stimulus . . . it should probably have a higher interest rate than elsewhere in the country,” he said, as his company, one of the capital’s biggest property developers and a major beneficiary of the London boom thus far, announced a 40 per cent rise in full-year earnings.

Almost six months later the situation is very different. Property developers are no longer talking about the need to impose brakes on runaway prices, estate agents are being open about a slowing-down effect and the latest price forecasts from estate agent Savills warn of underperformance in the years to come. With such strong hints that a correction may finally be in play, it’s a good moment to pause and ask whether giving London its own interest rate policy would ever be a good thing.

The logic behind the theory lies in the assumption that London, like some other economic megacities around the world, is transforming into a sovereign city-state – and with that change comes the rise of a self-contained economic system.

A year ago, this may have sounded like a bizarre proposition. But in light of the recent Scottish referendum, it’s probably a more realistic idea than it once was. Of course, London devolution isn’t on anyone’s campaign agenda just yet. But it can’t be denied that public understanding about the potential benefits of economic fragmentation and the rise of self-governing regional states is growing. European history teaches us that borders do have a tendency to be dynamic and the stable border history within the UK in the recent past is beginning to look more and more like a historical anomaly.

If that is the case, who’s to say we won’t end up disrupting borders dramatically in the not-too-distant future? Note, for example, the recent proposition from Jim O’Neill – the former Goldman Sachs economist who coined the emerging market category “Brics” – that cities in the north of England should band together and form an economic union known as ManSheffLeedsPool.

Might this lead to a modern-day revival of the Hanseatic League, the city-state system that dominated in the late Middle Ages, in contrast to the alternative – an increasingly unionised and interwoven megastate?

As Citi’s global perspective report recounted this month, one in 25 people already live in a megacity. By 2025 the report’s analysts expect the proportion of the world’s population living in cities to rise to 70 per cent.

But it’s also the case that megacities won’t be able to accommodate such numbers unless major investment flows into their infrastructure, logistics, and urban transport systems. And that, as any economist will tell you, means there must be some financial incentive for investors to keep allocating capital to achieve these aims.

So let’s work with the notion that a growing network of independent and co-operative commercial city-states is indeed what lies in store in the not-too-distant future. And let’s assume that one such megacity will end up being a fully autonomous and self-ruled London, complete with its own currency zone and central bank.

What would its approach to interest rate policies be? Would it really want to raise rates in a bid to scare off investment and cool a potential bubble? And what exactly would the repercussions for the borderlands of Oxfordshire, Cambridgeshire and beyond be, if and when it did?

I’m going to assume that London would want to keep rates anchored and house prices bolstered at levels that can continue to encourage its transformation. It’s hard, then, to see how raising London rates could help.

Don’t forget the thrust of the recent boom was fuelled by interest rate-insensitive foreign cash buyers. Nor would tight policy improve housing affordability in the capital or anywhere else. At best London’s higher rates would create a subsidy effect for anyone prepared to settle and work anywhere but the capital.

Yet all this would do in the long run is open a new type of “regions to London arbitrage” (with the flow of hot money into London’s financial sector as opposed to its property sector). While it may temporarily discourage property development, it would likely appreciate the cost of living in London in other ways, making nobody in the city better off.

Without a fixed flow of new residents – the sort that stick around for the long-term, not just the summer – there would then be no incentive to make long-term building or improvement plans for the city’s infrastructure.

London’s transformation into a top-tier megacity would soon be suspended, threatening not just the capital’s own economic viability but that of the peripheral regions that depend on it for trade.

Yes, there might be some benefit to London setting its own interest rate policy. Still, all things considered, it would always make more sense for the capital’s rates to be lower, not higher, than the rest of the UK.

Izabella Kaminska is a reporter on FT Alphaville

Illustration by Dan Mitchell

Copyright The Financial Times Limited 2017. All rights reserved.
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