How London’s property market became an inheritocracy

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© Stephen Collins

As a professor at the London School of Economics, one of the world’s top universities, Paul Cheshire earns well above the average Londoner’s salary. And yet his home, in Islington, has made even more.

“We’ve generated housing equity that’s more than my salary throughout my life,” says Cheshire, whose specialism is economic geography. His daughter, who attended Oxford university and is now a practising lawyer, “lives in something the size of a couple of our bedrooms. And that’s with parental help,” he adds.

In the time between Cheshire buying his home in 1996 and helping his daughter buy hers in 2010, average local prices roughly quadrupled, according to the Land Registry, and have continued to rise since. Prices have shot up as real wages have stuttered; the supply of new homes has not kept pace as demand has steadily risen and regulations governing mortgage lending have tightened, limiting access to finance. Without a leg up from parents, first-time buyers on average earnings are stuck looking up at the bottom rung of the housing ladder.

Forecasts of falling property values have given some would-be buyers hope that an era in which wages have decoupled from prices might be drawing to a close. But the higher interest rates that are a drag on prices are also pushing up mortgage rates, a scenario that tends to hit first-time buyers particularly hard. The cold reality is that life has rarely been so hard for a first-time buyer in London as it is today.

Cheshire describes this state of affairs as a “distortion” with grave consequences for the UK capital — damaging London’s competitiveness by driving talent further afield.

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Would-be buyers interviewed for this article describe a choice between accepting much lower living standards than they currently enjoy in order to get a toehold on the ladder, enduring the precarity of a rental market in which prices are rising fast or turning their backs on the city they would like to call home.

Their experiences are backed up by data that emphasise how profound the shift in London’s housing market has been over the past 30 years. Together, they paint a stark picture of a city that has become more inhospitable for the young, talented and aspirational, where equity-rich parents have increasingly become lenders of last resort.

There is little argument that life has become harder for first-time buyers over the course of a generation. This is not exclusively a London phenomenon, but the jump in prices has been far more pronounced in the capital than elsewhere in the country. Thirty years ago, the average property bought by a first-time buyer in London was worth £122,000, roughly 1.5 times the UK average price, according to Nationwide building society. Last year, the average first-time buyer in London spent £462,070, double the average price around the rest of the country.

That has been good news for anyone who bought a London home in the early 1990s, but ruinous for many young people who harbour aspirations of owning today.

Michael Seal, a 28-year-old vice-principal at an east London school, is one of those people. “I studied hard, went to LSE, then went straight to teacher training. I don’t really know what society wants from me if not to be a hard-working teacher in a deprived school. But I’m still eating hummus sandwiches in a leaking flat. I’m angry about it.”

Seal is in one of the highest earnings brackets for teachers across the UK and has saved since he started work so that he could achieve his “dream” of home ownership. Now, he feels, “on balance it’s not worth it . . . I can get on there [the housing ladder] but not somewhere I’d want to raise a family.

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He grew up on the north-eastern fringe of London but Seal and his partner are now thinking of moving to Germany in pursuit of a better foundation from which to build a life together. “The solution for me personally is to get out of London,” he says.

The ratio of house prices to earnings in London hit a record level in 2021, at just under 14 times, according to the latest official figures. “You’re totally obliterating the possibility of owning in London for most people. It’s why we see people leaving London — they can’t move there or can’t afford to be there in the first place,” says Anya Martin, a housing expert and campaigner for more homes to be built.

Prices in London have in fact fallen almost 9 per cent over the past seven years, according to Nationwide figures. But that is of limited help to buyers, because Londoners’ inflation-adjusted earnings are 8 per cent lower than they were when the financial crisis struck in 2008, according to official figures.

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High prices represent the most obvious hurdle for first-time buyers, though one which would be surmountable if finance were readily accessible. But having been pushed to the brink during the financial crisis, banks are more heavily regulated and reluctant to take on more risk than is necessary, lending at relatively low loan-to-value ratios. That means mortgages are the preserve of those with big deposits and high incomes — the second reason why London’s housing market has become accessible to a narrower pool of buyers, a rising proportion of whom are tapping their families for support.

According to an analysis of official data by estate agents Savills, the average first-time buyer in London last year had a deposit of just under £150,000 and a household income of £92,000.

“The great financial crisis did two things: it lessened the availability of high loan-to-value mortgages which then substantially increased the deposit requirement. Then, when mortgage regulations were introduced, that became entrenched. It was no longer about whether the banks were willing and able to make the lending available, it was whether borrowers could meet the stress tests,” says Lucian Cook, head of residential research at Savills.

Tighter regulation was understandable in the aftermath of a financial crisis triggered in part by reckless lending, says Cook, but “regulation to avoid a debt bubble has reduced accessibility to housing”.

Lenders are uncomfortable loaning first-time buyers high multiples of their incomes, wherever they are in the country. But in London, where homes cost twice the national average, that is a more serious impediment.

That is in part why the government’s flagship Help to Buy scheme came with more generous terms for those borrowing to buy in London. The initiative was launched by the Conservative-led coalition government in 2013 and intended to support buyers of newly built homes by providing a government equity loan of 20 per cent of a property’s total value, or 40 per cent in London. That meant purchasers required a deposit of as little as 5 per cent.

The scheme, which ends in March, has been used by well over 300,000 people, most of them first-time buyers, to clamber on to or up the housing ladder. “Those who were unable to fall back on the Bank of Mum and Dad at least had an option to raise a deposit or bridge the deposit gap,” says Cook.

But the £29bn scheme’s legacy is also higher house prices, according to a House of Lords report published last year which says Help to Buy has failed to “provide good value for money”. In some boroughs of the capital where new building has been relatively high, such as Barking and Dagenham and Newham, prices paid by first-time buyers have doubled over the past decade, according to official figures.

Now Help to Buy is in its twilight, and private-sector alternatives are unlikely to pick up the slack in the short term. “The aspiration for home ownership remains very strong, it’s just become that much further out of reach,” says Cook.

Buyers in London must pull together huge deposits if they want to get on to the ladder. But how?

Thirty years ago, the average first-time buyer in London needed a deposit of less than £24,000. That has increased six-fold since, to more than £147,000, adjusting for inflation. Nationally, average deposits have fallen almost £16,000 since 2009, but in London they have increased by close to £12,000.

That has made owning a home harder. Fewer than a quarter of Londoners owned a home with a mortgage in 2021, a drop of 10 per cent from a decade earlier, according to data from the census published last month. More and more would-be buyers are instead being pushed into a rental market in which prices have risen sharply over the past year, hampering their ability to save for a deposit.

“For a lot of people the only way to buy is inheritance or the Bank of Mum and Dad,” says Cook.

More than two-fifths of buyers in London received help from parents in 2020, according to a report by Legal & General financial services — a far higher proportion than anywhere else in the UK. “Those figures really drill home the extent to which London remains dislocated with the rest of the country, with real issues in access to property,” says Cook.

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Mark, who chose not to use his real name, is facing these problems first-hand. He and his partner want to buy, but are struggling to see how. “We’ve been living together since the start of Covid, renting privately for some time, and it’s knackering not knowing how long you plan to be somewhere,” he says.

A combination of inheritance, the windfall from his partner’s grandmother’s house sale, savings and some parental help should give the couple a deposit of £140,000. On top of that they hope their salaries — both work for charities — will allow them to tap a lender for a mortgage of £210,000.

Fearful of the impact of rising rents, they would rather take the plunge. “If we were unable to buy now that might put it out of reach until our parents die. They are not mega-rich, but they have property they have paid the mortgage off on,” says Mark, who acknowledges how macabre that consideration is.

Line chart of ratio of house prices to earnings showing London house prices have outstripped wages for decades

After doing the sums, Mark and his partner feel that trying to buy is the least worst option. Despite the contortions involved, he is quick to emphasise the privilege of circumstances that enable them to even consider buying. “Without support we could maybe manage shared ownership or a studio in Zone 8 [but] we’d rather stay renting than scrabble on to the bottom rung for the sake of it . . . We’re not looking to have kids. If we had to make this sort of compromise it would be horrible.”

Paul Cheshire, the LSE professor, describes the parlous state of London’s housing market as “a self-inflicted injury”: a strain that has been exacerbated by a failure to release more land and build more homes. He highlights the greenbelt — a ring of land circling London that is protected from development — as the main cause of the city’s particular housing crisis. “We froze the supply of space in London. So you have a long run of rising demand for housing and an incredibly inflexible supply.”

Anya Martin, the housing campaigner, is also highly critical of the inflexibility of the greenbelt, which was introduced in 1955 to prevent London from subsuming nearby towns, and other planning rules.

“The greenbelt stops London from growing out into areas we wouldn’t consider green. Then you have height restrictions. Then more informal restrictions; local authorities have restrictions to maintain local character or reject stuff above a certain [height] level,” she says. All of that prevents London from building its way out of the problem.

Long term, if house prices flatline and wages catch up, or if housing supply in London increases, affordability issues might be addressed. But none of those interviewed for this article are confident of that outcome. Instead of waiting for an improved market, they are weighing their options.

Martha, who chose not to give her real name, works in public relations and rents with her boyfriend. “Our combined salary is £110,000, enough to get a mortgage and we have some savings. We feel the pressure to [buy] but wonder if it will be worth the effort. What can you buy in London if you want a family and have to pay childcare?” she says. “I don’t think we’ll be in London in five years if we want kids — it’s just so expensive.”

Michael Seal, the teacher, goes further, saying the inaccessibility of housing is one part of “the social contract breaking down”. He can’t tap the Bank of Mum and Dad and sees little prospect of the ratio of wages to house prices falling dramatically soon, so is unlikely to buy in the city where he grew up, studied and works.

“People say I’m trying to get too much but for the past 30 years we have had our cake and eaten it [with house prices rising fast from a relatively low base]. It’s a fairness issue. I just want to be playing a fair game,” he says.

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Source: Financial Times

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