For decades, the promise of capitalism in Britain was simple: Get a job, see your pay rise over time, buy a house, see the value of your home rise too, and at the end of the day your financial future will be secure. Since World War 2, that has been the standard path to prosperity in the UK.
But as new data from Barclays analyst Jon Bell show, the promise may be broken.
Generally, there are two main ways to gain wealth: through earned wages and through owning a house. If any part of your wealth was in property after the 1970s then you probably did well. If, on the other hand, you relied solely on your take-home pay, you did not do so well.
That is because the UK’s housing economy and its real economy have been on two different planets for the last 40 years.
This chart shows price growth of houses compared to growth in GDP, indexed back to the same benchmark in 1974.
For comparison, the housing boom in the UK was much more pronounced than in the US. UK prices have gone up 3.8X since 1991, while American prices rose only 2.4X.
The average price of house in Britain rose from about £10,000 in 1975 to over £220,000 in 2016.
That is a compound annual growth rate of about 7.5% per year: Even if you re-index the numbers for inflation, the price of an average house has more than doubled in that time, from an inflation-adjusted £90,000 or so in 1975 to about £220,000 today, according to Barclays.
It has been a completely different story in terms of wages. Average weekly pay has grown at an annual compound rate of about 3%, less than half the growth rate of housing.
The price of a house was, at its lowest in the 1990s, 2.8 times the earnings of an average person. Now, prices are 6.1 times earnings.
Prices are so high it now takes three years longer to save enough money than it used to: In 1974, first-time buyers were 26 years old, on average. Today, they are 29.
We have written before that Britain is becoming ever-more divided into two classes — people who own property and people who are getting poorer. Barclays’ data put that in sharp perspective.
Not only has housing become more difficult to afford, it is also setting younger workers back years in their ability to start accumulating significant wealth and watch it compound over time. It is one of the main reasons inequality went up after the Thatcher era and never really came down, despite successive Labour governments.
This is an opinion column. The thoughts expressed are those of the author.