08. Getting on the Property Ladder

This expression arose from the time when ordinary homeowners realised that their home did not have value simply as somewhere to live, but also as an investment. It became evident that constantly increasing property values, reflected in house prices, provided, over the long term, a better return on capital than savings accounts, and at the same time a place to live. Paying rent when you could be paying off a mortgage did not make sense to most people.                      

The mortgage lenders were eager to oblige, and with the demutualisation of building societies in the 1980s the banks were more involved and lending grew enormously, became overextended and led eventually to the financial collapse of 2007-8.  it was all based on the hope that that house prices would go on rising forever, and everyone wanted to be a beneficiary.  But the house prices were caused by an increasing demand for a scarce commodity in the ‘right’ location, in the wrong location prices barely moved; in either case there was no increase of real wealth.  Josh Ryan-Collins and co-authors describe the events of this period of rapid mortgage lending as the ‘financialisation’ of land (1).

The figures of Table.1 below have been compiled from data on the Design Lab. Website, which gives comparative values of average annual wages, cars and houses from 1900 to 2016. Part (a) shows the actual values, Part (b) the equivalent 2016 values adjusted for inflation.

As can be seen, prior to the Second World War house prices had risen and fallen more or less in equal measure. By 1940 the price of a house (adjusted for inflation) was only 9% more than in 1900.

After the Second World War house prices rose sharply then stabilised for a period in the 1950s, before beginning the inexorable rise that would continue to the present time. Homeowners recognised that in the longer term their home would generally appreciate in value despite temporary declines during economic recessions. Of course property developers had always understood the opportunities available in appreciating property values, and also that these values varied according to the demand for good locations – reflected in land values. Their success depended on their ability to make advantageous choices about where and when to buy and invest and when to sell. From the late 1950s onwards their ranks were swollen by a growing number of aspiring homeowners who saw the same opportunities (see Fig.1).  This is when the idea of getting on the property ladder became current.

Fig. 2  Average Values in £ (adjusted) for Houses, Cars and Annual Wages, 1900-2016

 

The graph of fig.2 is based on the figures of table 1(b), the adjusted values being more meaningful, especially in the earlier years, although there is some distortion at the end of the period

The following comments are worth making on the above graphs:

In 1900 a house cost just under four times the annual wage, a car 3.4 times; a car was certainly a luxury.

Wages rose slowly from 1900 to 1935, then more rapidly, peaking in 2008 after which they show a decline.

Car prices after 1930 remained remarkably stable. Car prices and annual wages were about the same in 1966, after which car prices were always lower.

At the end of the Second World War house prices jumped from nearly £25,000 in 1945 to over £62,000 in 1947 before returning to £47,000 in 1954. Thereafter house prices continued to climb, apart from disruptions in the 1970s and 1990s, until reaching a peak in 2007, before the economic crash of 2008.

The ratio for average wage to house prices fluctuated in the first 50 years, no doubt due to distortions caused by the two wars and the 1930s depression but the ratio in 1970 (3.89) had returned almost to what it had been in 1900 (3.79).  Thereafter the ratio increased steadily until it had reached 7.19 by 2016. For the younger generation in 2016, owning a home was becoming impossible. Private renting, which had previously been in decline, starts to increase again from 2000.  The annual national minimum wage in 2016 was about £15,000, well over double the average wage in 1900, but taxes on the individual then were less onerous than today. However in 1900 there was a larger proportion of the working population that could be considered ‘poor’.

It has to be borne in mind that during the period in question tenure varied considerably, as shown in Fig.1. In the early years the majority of people were private renters; social renting was only just becoming established, but increased rapidly after the First World War. The trends indicated in Fig.1 could also be seen to represent the changes of political influence of the different social blocs as exercised through the vote. From the middle of the period the politicians would have been more concerned with the votes to be gained from the growing number of social renters up until the 1980s and after that from the homeowners, until the 2000s. In the case of homeowners (those safely on the property ladder) there was, and still is, a vested interest in constantly increasing house price, reflected in the land values.  This increase is not due to any increase in the overall wealth of the community but merely an increase of existing asset value for homeowners, or as noted by Ryan -Collins and colleagues:

‘When the value of land under a house goes up, the total productive capacity of the economy is unchanged’  (2)

The media, encouraged by many politicians and economists still see any such increase as a matter for celebration.  LVT would of course arrest this process and gradually reverse it, so it is likely to be opposed by the many homeowners who would see themselves as the ‘losers’ in any such radical change (see further comment under item 3.07, ‘Winners and Losers’).

References:

(1)  Ryan-Collins, Lloyd, Macfarlane, Rethinking the Economics of Land and Housing, p.14.

(2)  Ibid. p.173.