Sunday, May 13, 2007

UK House Prices

A horrifying story in today's Observer about houseprice inflation in the UK. It focuses on a particular road, Albion Drive in Hackney, which has a reputation as being one of the poorest boroughs in Greater London. In fact many of those who own property there are at least half-millionaires. Their children, on the other hand, cannot afford to buy property since property in central London now costs an average of £2300 per square foot. That's about £23,000 per square metre. I have some friends in Vilnius who used to live in a flat of 22 square metres; it was tiny, but perfectly formed. That would cost half a million pounds in central London.

There are two further aspects in this - people earn more money sitting in their house than going out to work (though of course that would do them no good since they still need a roof over their heads) - the story is that T Blair has earned more money by leaving his new Connaught Square house empty than he has done as a prime minister. Interestingly, on the other hand, rental costs have not increased at the same level, so there is not actually an actual shortage of housing, just a shortage of housing to buy. In other words, lots of people are buying to let, and own more than one house.

This can only be due to the low level of pensions provision in the UK, both in terms of the state pension, and in relation to private pensions (especially those mis-sold pensions of 10 or 15 years ago). And then there has been the stock market performance which in the last 10 or so years has not matched the expectations people had placed on their endowment policies which they expected to repay their mortgages (another mis-sale). In other words, people have no confidence in the stock market, or indeed in the government to provide for their future. The banks pay really poor interest rates (though these should increase), so the only investment with a half-decent return is in bricks and mortar.

The author portrays it as a scandalous state of affairs that young people cannot afford to even start building their nest egg. And indeed it is the case that young people of today face many more hurdles than my generation or that even 10 or 20 years older dealt with, and for many it is impossible to start to buy property, and thus accumulate wealth.

But of course the only reason for this is the investment angle - if there were other at least secure, if not similarly performing, investments for a guaranteed old age and other social risks, then it would not be necessary for everyone to rush into buying bricks and mortar. Which would keep prices lower and free property for young people to buy, if they must. Interestingly those European countries which have home ownership rates as high or higher than the UK (almost 70%) (Italy, Spain, Portugal, Ireland, Austria and Greece) almost all also have relatively weak welfare states, apart from Austria, and relatively agricultural economies (agricultural workers tend to have low pensions).

But is it necessary at all for people to buy houses? Those European countries who pay high pensions (Finland, France, Belgium, Netherlands, Denmark, Germany and Switzerland) have significantly lower rates of home ownership; half the UK rate in the case of Switzerland. Some of these countries have poor economic performance and others perform much more highly, with also much lower poverty rates than in the UK.

It would be nice if a culture of renting decent property could start in the UK, where people have some limited freedom to do to their flats what they like. But people would only feel free to do so, and comfortable with this approach if they could be sure of a decent income later in life. Will the government support that? Let's see, Mr Brown.

Coincidentally I'm reading the book 'Estates, an intimate history' by Lynsey Hanley. A fascinating book about the history of council estates, written by someone who is still angry about the way people are dealt with both by officialdom and by other people, if they are in need of council accommodation. Review will follow - but here's an interesting quote from Mrs Thatcher (1986) 'A man who, beyond the age of 26, finds himself on a bus can count himself as a failure.' In other words, don't use anything public, whether it's transport, housing or pensions - you are on your own!


varske said...

I saw recently that Vilnius was now more expensive than Copenhagen, which doesn't seem right somehow. Especially given the wages in Vilnius compared with wages in Copenhagen.

violainvilnius said...

Yes, I heard that, too, but cannot find the article. But it's the same syndrome - lack of trust in the government and low pensions provisions, or general state security. Added to that the people from abroad who buy flats in Vilnius and those people with Lithuanian passports who prefer to invest their tax money in property rather than the government...

Homes in Hackney said...

In Hackney there are property that are worth £5Million. I cant see how hackney is a bad area when there people there that can afford houses that cost that much?!