Why does property cost so much?

Way back in 1900’s when most of Fulham was still being built you could buy a brand new property for the princely sum of about £230, which works out at about £25,000(1) in todays money. The average wage of a rising professional during that time was about £700(2) per year, minus about £500 in living expenses, paying for your maids, food, buying wine and paying your rent and taxes etc. This left over approximately £200 for extra spending or saving. Now, on those figures your average London professional could afford to buy a house outright, easily within two years savings, provided he didn’t lose his job of course.

The average cost of a property these days in London is currently hovering around £500k and the average Londoner takes home about £35k(3) a year in salary. Based on the average cost of living in London and including taxes, which depending on who you ask, comes in around £23k a year we can see that the average professional in London has approximately £12k a year spare for holidays, mojitos and savings. Now on the face of it they have about 6% more disposable income comparatively speaking than their Victorian ancestors, and hey life is much better right. This is certainly true except when you compare it to the biggest cost of living of all, property.

“Back in the 1900s you could buy a Victorian terrace house for the princely sum of £230.”

Whereas back in the 1900’s you could save for a few years and buy your property outright, these days, based on todays figures, the average Londoner would need to save all of their free cash for over 40 years on the trot in order to make the same purchase. Of course when you consider that property is expected to increase about 30% in the next 5 years alone it’s clear that short of a large lottery win or a Cadbury’s inheritance payout the average Londoner will never be able to buy a property in ‘cash’.

Why is this? Long story short, mortgages. Of course the population has also risen increasing demand, but not nearly as much as you’d think. Based on the 1901 London population of 6.5m(4) it’s only increased by a meagre 1.8m souls over the last century or so.
It may strike you as crazy that a two bedroom apartment in Fulham can be ‘worth’ over £1m, but as all fledgling economists know (or any Foxton’s employee will be quick to quite rightly tell you) something is worth what someone is prepared to pay for it! The problem is the great majority of the time the majority of the cost is being footed by a bank in the form of a giant loan. The actual up-front cost to the buyer is considerably lower, usually about 15% of the actual amount, plus taxes. Granted the buyer will ultimately pay off the full amount in time, but more on that later.→

Over the years it’s easy to see how person A, let’s call him Tom, can out bid person B, we’ll call him Henry to buy that property he really wants, simply based on securing a larger loan than the next guy. This drives up the price of property as you can bet your bottom dollar Tom won’t be selling for any less than he bought, after all he’s got a large loan to repay. This forces Henry to go out and seek an even bigger loan in order to compete in the market. Fast forward a few decades and voila, hey presto house prices are in orbit.

Of course the real winners here are the people in charge of dishing out the loans, the banks, as almost every home in the country are their customers, repaying vast sums over the term of their mortgages. The problem is that house prices cannot decrease without stratospheric implications, the likes of which we saw in 2008, so they continue they’re upward march, all the while the size of the loans needed to buy them increasing. As the loan size increases, so does the monthly repayments and so does the total repayable, increasing the financial burden even further, and without getting too socialist on you, creating an entire swathe of society addicted to credit and working in part for the banks. This is interesting because there does become a point, which we are approaching, when the average London wage cannot support even the 15% deposit required to get the loan, to get the property. This results in a massive slow down in people being able to get on to the housing ladder, creating a large and growing rental sector, which based on recent figures has tripled in the last 5 years alone, to over £900bn.

Of course the solution to this issue is to build more houses, and despite what you may think this is possible in London. Indeed there are already over 230 planned high rises being built over the next 10 years (see page 24 for more on this).

Nobody wants, or can afford for the value of their biggest asset to decrease, and many people, despite, and because of their mortgages have made a killing on the inflation of house prices driven by the availability of credit. But, often overlooked is the fact that this capital is usually never realised until the property is ultimately sold, usually not until retirement.

So for those of you who can remember when you could still buy a property in London for under £100k, spare a thought for your children, or at the very least offer to pay their deposit!