A single fact says everything about what’s happened to the UK economy in the past 40 years.
In 1978 aged 23, I purchased a two-bedroom flat in South Tottenham, an unfashionable suburb of London about five miles from Piccadilly Circus, for £9,900. My salary as a very junior reporter was £4,000, so the ratio between what I earned and what I paid was about 2.5.
Fast forward to September 2021, and the same flat is probably valued at £400,000. For the same ratio between pay and price in 1978 to apply now, you’d have to be on at least £150,000.
Average pay in London is the highest in the UK at £42,000. Not one teacher, nurse or bus driver working in London is close to earning enough to secure (without an existing wad of cash) the privilege of living in what remains a drab part of Britain’s capital.
Nothing else in common use has gone up so much. A new four-door family saloon car in 1979 cost around £3,000. If its price had gone up like London housing, you’d have to pay £120,000 today. A loaf of bread would now be £11. A pint of milk, which sold for 12 pence in 1978, would sell for almost £5.
The only item sold in UK shops that’s risen anything approaching London’s house prices is cigarettes. A pack, if it had gone up like housing, would be more than £20.
A similar trend is evident in renting a private home in the city.
The result is that the overwhelming majority of British people can’t afford to live in the capital of their own country. For them, the location of the official residence of their head of state, their parliament and the headquarters of most of Britain’s big companies can only be glimpsed in short visits where a long weekend stay for a family can cost almost as much as a seven-day holiday on Spain’s Costa Brava.
Why has this dramatic change occurred and why is it seen to be — though there is some handwringing — inevitable, essentially benign or both?
…..buying a London home has been and still is a tremendous
The conventional argument is that there is an imbalance between supply and demand. London is by far the most populous city in the UK and has almost twice the number of residents as Berlin, the EU’s largest conurbation. Its population now is estimated to be almost 9.5m – around 40 per cent higher than it was in 1980 — and that figure is increasing by more than 1 per cent annually, again one of the highest figures for any British city.
Why London’s growing so rapidly despite its much higher housing costs is complex. There’s a structural inflow from other parts of the UK. More than one in five graduates move to London in the year after they leave university. It has a high proportion of people born outside the UK and they tend to have a higher birth rate.
London accounts for around 25 per cent of UK GDP. The service sector accounts for the bulk of its economic activity and banking and finance employs around 350,000 people. Most large UK corporations and many foreign ones have their offices in the capital. London’s one of the world’s leading media and marketing centres. London University and its colleges have an international reputation. And then there’s the city’s cultural industries including brilliant galleries and museums which are mainly free to visit and no less than six football clubs in the Premier League.
London’s also benefitted from high levels of investment in public infrastructure. Its publicly-owned underground and overground railway and bus network is comprehensive and, for pensioners like me, free.
Exceptionally low interest rates since the global financial crisis in 2008 have fueled demand. Mortgage providers were stung then but have since relaxed their lending terms. Buyers now need only make a deposit on buying a home of 5 per cent of its purchase price. People with secure jobs and collateral can borrow up to 4.5 times their annual earnings.
Increases in the price of a person’s home are exempt from capital gains tax. The UK’s system of local taxation, which is based on property values, hasn’t been updated for almost 30 years. The consequence is the local property tax for my home is under a 800th of its market value. The average in the US is 1 per cent. There’s no wealth tax and inheritance taxation can be circumvented by careful estate planning.
In short, buying a London home has been and still is a tremendous, largely risk-free investment. And unlike shares, you can live in your investment. But it’s not just homeowners that are cheering. There’s also been an enormous increase in buy-to-let housing demand from small, private investors.
…It all looks unsustainable
Supply, on the other hand, has failed to keep pace with demand. The number of dwellings completed annually in London has been consistently fewer than 25,000 and is on a declining trend. This is probably under half the number needed. Tight restrictions on building in London’s green belt that surrounds the city haven’t helped.
But the most important factor behind London’s house price ascent is decisions taken since 1979 to deregulate all areas of the housing market as part of the economic policy revolution that began with Britain’s late prime minister Margaret Thatcher. Rent controls in London were finally abolished in 1989 and landlords were given the right to terminate tenancies at their own discretion. The market has been unshackled to work its wonders and the results of the experiment are now in.
Large parts of London’s choicest districts are owned by non-residents. Ageing home-owners — again like me — are occupying underused family homes that can deliver on-paper returns greater than the annual salaries they ever secured. Low-paid workers are often packed into costly, privately-rented accommodation. Essential professionals such as teachers, nurses and even doctors are being forced to live outside London and commute increasing distances to work. This is spreading London housing trends to almost the whole of the south-east of England.
The only countervailing factor is social housing owned by local authorities and non-profit housing associations which set rents well below market levels and provide secure, long-term tenancies. They control about one quarter of London’s 3.3m homes, but there’s been almost no new building of affordable homes for 30 years.
One response to the demand from people wanting to get on the housing ladder has been to relax restrictions on brownfield sites in London which has almost no undeveloped land. Across the city, there are dozens of developments involving the construction of hundreds of high-rise buildings
First-time buyers flocked to invest in apartments in the new blocks. But to their dismay, it is now estimated that at least 90 per cent of them will fail to satisfy the proposed Building Safety Act which defines new safety standards, particularly against fire risk, following the blaze at the Grenfell Tower in West London in 2017 in which 72 people died. Many face enormous bills for removing flammable external cladding and other material used in the construction of towers. Some apartment owners in London are being asked for more than £100,000. It’s estimated that more than 1m homes, many owned by first-time buyers, will be affected across the UK.
The government has announced it will contribute £5bn to the cost of repairs, but only for high-rise blocks. The likely total cost will be around £20bn. Most will have to be paid for by leaseholding apartment owners. There are fears that it will send the London housing market into a slump which will have knock-on effects across the UK.
But what’s almost as striking is the lack of any meaningful public response to the unjust mad-house that the London housing market now is.
The first explanation is that about half London’s homes are privately-owned. Home-owners are less likely to move and more likely to vote. It would take a brave politician to call for the price spiral to be halted, let alone reversed.
The number of landlords has grown and as many as half the members of Britain’s houses of parliament may be — directly or indirectly — among their ranks. More than 10 per cent of the value of donations to the ruling Conservative Party comes from real estate developers and companies. Britain’s Housing Minister owns two London homes. Even the main opposition Labour Party’s housing spokesperson is both a landlord and a shareholder in a London property company.
It looks therefore like London will continue on its present direction until there is a sobering shock brought about a housing crash. The consequences of that for lenders, homeowners, the government and the British economy could be mind-boggling.
But only then might it be possible for policymakers and voters to face up to the inherent unsustainably of what’s been happening in London for so long. Housing is a key part of the physical and social infrastructure that the UK’s economy and society need to flourish. Making it largely dependent upon private finance and the workings of the market not only leads to massive inequality. It makes no economic sense. A huge proportion of investable savings are being funneled into an industry that mainly makes relatively wealthy people even wealthier and adds very little to real national output.
Once that’s recognised, more or less any remedial measure including rent controls and action to take private housing into public ownership will be seen to be appropriate. The pity is that it’s going to take a disaster to force a radical change in policy direction – as the tragedy of the Grenfell Tower fire has brought about for apartment block safety.
No prudent investor, however, would bet against the likelihood of the price boom going on for a lot longer. Last month, Lloyds Bank — evidently tired of financing other people’s property gains — announced that it aims to buy 50,000 homes in the next decade to become one of Britain’s biggest landlords. But it’s never too soon to reflect on a 40-year revolution facilitated by successive governments that has decisively shifted wealth and power to those who own from those who don’t.