No Mr Hunt, £100k really doesn't go far these days
But this is a symptom of a dysfunctional housing market which you and your chums have knowingly created
This is the first in a short series about the UK housing crisis, and what needs to change if we’re going to end homelessness and make the very reasonable aspiration to own your own home a reality for more young people.
The Chancellor of the Exchequer, Jeremy Hunt, was recently subject to widespread criticism after doubling down on an earlier claim that ‘£100k a year doesn’t go as far as you might think’.
Perhaps Hunt thought he was on safe ground lecturing viewers of Laura Kuenssberg‘s Sunday morning show. After all, he clearly knows of what he speaks, unlike the vast majority of Kuenssberg’s viewers, who don’t earn anywhere near £100k.
But it was an utterly daft thing to say in an election year. As Prof. Paula Surridge said, “It will really reinforce the idea that the Conservatives are out of touch”.
An annual income of £100,000 puts you in the top 3 per cent of earners. No wonder so many people including, I suspect, most of the journalists putting Hunt on trial were so outraged.
Nonetheless, I think he has a point: As he later explained to Trevor Phillips:
‘What sounds like a large salary – when you have house prices averaging around £670,000 in my area and you’ve got a mortgage and childcare costs – it doesn’t go as far as you might think.’
And with this, Hunt went straight to the crux of the matter: it is the cost of owning or renting a home that is currently driving the perception among many people of gross economic injustice and an economy that has been badly derailed.
I bought my first flat, a two bed in Charlton (South-East London) for £64,000 in 1989. At the time I was earning £16,000 a year. A straightforward multiplier of 4, which was what mortgage providers were prepared to lend at the time, even without a deposit. I remember being pleased to have secured a fixed rate mortgage at 12.5 per cent for the first year: by the time I moved in, rates were pushing 15 per cent.
Fast forward 30 years to 2019 and my old flat (I sold it for £105,000 in 2001) sells again, but this time for £435,000. I don’t know how big a deposit the new owner needed, but they would have benefitted from record low mortgage rates: if they’d been really savvy they could have fixed at 3 per cent for 10 years.
In 2019, when researching the difficulties faced by young people in London wanting to buy their first home, I came across someone exactly the age I was when I bought my Charlton flat. Let’s call him Ben. He was well established in his first job in a relatively well-paying sector. He was earning £35,000: more than twice what I earned at the same age, but pretty much what you’d expect for someone with an income in the 70th percentile, once you take inflation into account.
But do the sums: the same flat, one that he would reasonably have aspired to buy, would have cost Ben more than 12 times his salary. Borrowers in 2019 might have been enjoying record low interest rates, but qualifying for a mortgage as a first time buyer was virtually impossible, especially in London, where the average deposit required by lenders was 27 per cent of the purchase price. He would have needed over £100,000 before it was even worth approaching a mortgage company. But since graduating and returning to London, he had been paying £1,200 a month in rent. And as soon as his salary had passed £27,000, student loan repayments kicked in. And like me, Ben enjoyed the occasional pint, and why not? So he hadn’t managed to save a penny.
A further five years on, and the average deposit paid in London has risen to 34 per cent of the purchase price, or nearly £150,000. Without recourse to the ‘bank of Mum and Dad’ you’re going to need to be earning £100,000 a year for at least a decade if you’re going to save a deposit of that size.
If you prefer averages to anecdotes: In London 1989, average earnings were roughly £13,000 a year while the average home cost around £60,000: a multiple of 6. By 2019 these had risen to £38,000 and £592,000 respectively, a multiple of 15.
Nationally, the gap has also increased though not by as much: In 1989 average income across the UK was around £10,0000 and the average price of a home was £60,000. A multiple of 6. By 2019 the figures were £30,400 and £235,000: a multiple of 8.
Whichever way you slice it, the gap between incomes and property prices has increased substantially over the last 30 years, and London has raced ahead of the rest of the country.
So when Jeremy Hunt says that £100k doesn’t get you very far these days, he does have a point, at least if you live in London or one of Britain’s other more popular locations, and you want to own your own home.
But as Britain’s senior finance minister, he seems disturbingly unaware of the reasons for this rapid and unsustainable increase in the gap between earnings and house prices in London.
Hunt's Conservative Party has been in government for 22 of the last 35 years. And even when it wasn’t, it had little to say about how Gordon Brown was running the economy, because in economic policy terms there was little to choose between the Labour and the Conservatives. Let’s just say the Tories have been better positioned to tackle the problem for more of the last four decades. Assuming, of course, that they see it as a problem.
Problem, what problem?
Which rather brings us to the nub: for decades now, politicians of all hues have used the housing market as an electoral get-out-of-jail-free card. They have succeeded in persuading voters that rising house prices is a good in itself. It’s good politics after all: if the majority of voters own their own homes, why wouldn’t you use economic policy to boost house prices? And why wouldn’t you pour cold water on any suggestion that the housing market has been boiling over for decades? But boiling over it has been, to the point that it’s boiling dry:
Back in 1989, 66 per cent of homes were owner-occupied, almost the high point in a century long rise from 23 per cent in 1918. It topped out at 69 per cent in 2001, before dropping to 64 per cent in 2011. Today it’s back down to 50 per cent.
What happens when the majority of voters can no longer afford to buy a home? Is there any point in continuing to pedal the myth that continually rising house prices are a good thing? It looks very much as if the Conservatives will be found out at the general election later this year. But then Labour have been pushing the same narrative for years.
As regular readers will already know, my economic world view derives mainly from the thought of Adam Smith, Karl Marx, David Ricardo, Thomas Malthus, John Stuart Mill and others of the classical school, with a dollop of J.M.Keynes thrown in for stability. Less so from the Chicago school: Milton Friedman, George Stigler et al, inspired as they were by Austrian thinkers like Friedrich Hayek and Ludwig von Mises. Though of course, it’s been this latter group whose thinking has shaped economic policy since the early 1970s.
When I bought my first home back in 1989, Margaret Thatcher, a big admirer of the Chicago school, was celebrating the success of her plan to turn Britain into a property owning democracy. I’m no fan of Thatcher, but I do share her belief that not only is it a perfectly reasonable aspiration to want to own your own home, it also has enormous potential as a strengthener of the social fabric. What greater leveller could there be, what greater emblem of a fair society, than one in which everyone owns their own home?
So why have we made such a mess of it? Why is the housing market in the UK now so utterly dysfunctional? Why are so many working people priced out? Is Thatcher’s dream simply not realisable, or is it the way we now organise the economy (following her lead) that makes it impossible? If we can identify the reasons behind the growing earnings gap, then we might find some answers.
In the rest of this series, I shall try to identify these causes by looking at the following:
Is the problem a shortage of housing, with demand outstripping supply?
What is the impact of excessive incomes for high earners?
Where does the money for mortgages come from?
The consequences of seeing home ownership as an investment.
How the crisis plays out as a generational issue, but really isn’t.
The rise of private landlords, and the implications for home ownership.
The difference, in economic terms, between land and buildings.
Why the ‘Overton window’ is jammed shut in respect of housing market policy.
A Failure of Economic Imagination
In December 1969 we moved from Essex to Birmingham, my father having secured a new job with better pay in Britain’s second city. He would be earning £2,000 a year for the first time. As a result, my parents were able to buy a house costing £7,000. Back to multiples, yes: 3.5 times. Despite the Barber boom of the early 1970s (they sold that same property for £21,000 in 1973) and a steady increase in house prices throughout the 1970s and 1980s, the earnings gap had barely changed by the time I bought my first home in 1989. But in the decades since, consecutive governments have presided over the creation of a dysfunctional housing market that leaves millions with no choice but to rent, well into their thrities and often beyond.
Britain is still the sixth richest nation on the planet, yet we can’t even arrange things so everyone can enjoy the basic human right of a roof over their head. There is nothing stopping the extension of that right to all people. And, as we shall learn in the rest of this series, there is nothing preventing the realisation of Margaret Thatcher’s dream of a property owning democracy, except for a failure of political will and even bigger failure economic imagination.