How do Londoners Afford to Buy Houses?

Photo by Bruno Martins on Unsplash

If London house prices are so high, then how does anyone ever manage to buy a house? It is a real mystery to many people.

Actually, there are two easy ways and one hard way. The easy ways are to get help from the bank of Mum and Dad, or get a job where you are fabulously well-paid.

The hard way takes a fair amount of time and also a fair slug of luck. This article provides all the details, including an actual example.

Why are London house prices so high?

A house in London is almost always going to be a seven-figure purchase regardless of the area. The reason is that when you buy a house, a whole house, you are buying a plot of land. Land in London is incredibly short supply, so if you want it you have to pay up.

Even if the house built on the land isn't great, the land itself, with the existing planning permission to build will be very valuable.

The value of property in London is of course tied up with the value people place on living in London compared to the rest of the UK. Why do people want to be in London so much? Well, like most of civilisation, it is rather circular. There is something of the emperor's new clothes about it.

The capital has the biggest international businesses, the greatest cultural exhibits and is the political centre of the country. These factors draw people into the city, those people who, on some level, value those things. The type of people in the city then draw in more businesses, who need a workforce. Entertainment for the city folk follow, again scaled to the pockets of the workforce. The cycle goes on, with the capital getting more and more powerful, and the provinces become commensurately less economically important.

Then you strap the Green belt around the waist of London, and you have a perfect recipe for house price growth.

What is the Green belt?

Portrait of Elizabeth I

Attributed to John Bettes the Younger, Public domain, via Wikimedia Commons

Was Elizabeth I the first tree-hugger?

The green belt is an ancient idea, dating back to Queen Elizabeth I, who, for a period after 1580, banned the erection of new buildings in a 3 miles zone around the City of London. The aim of this was to stop the spread of the plague.

The idea for the modern version first emerged in the late 1800's in the form of a 2 mile wide zone around the city. This time the aim was to prevent urban sprawl, the natural growth of the capital which led to surrounding towns being swallowed up.

After a long period of debate, including the First World War and the interwar housing boom, the Green Belt Act 1938 was passed. It then took another 14 years for local authorities to define the exact areas to be designated as green belt, but the general idea was a zone of '7 to 10 miles deep all around the built-up area of Greater London' according to the Minister for Planning in 1955.

The green belt is currently an area around 3 times the size of Greater London. There is constant pressure on the authorities to reduce its size and allow building. Hopefully they will resist, as once built upon, it can never be reclaimed.

In reality, there are many nicer places to live than London. Even when you leave out the cost of living in the capital, there are plenty of places with shorter commutes, more green spaces, better outdoor activities, lower crime rates, even nicer people for heaven's sake!

But London still pulls the crowds in the UK, both tourists, the international business community and the global rich. There doesn't seem any prospect of this changing for the foreseeable future, so if you want to live in the big smoke for the long term, you might as well start planning how to buy a house.

How to buy a house in London

There are essentially 3 ways to end up owning a house in London. You might mix and match the 3 ways in different proportions, but these are the main way the feat can be achieved.

Have rich parents

Having rich parents is not really something that you can choose to do. It is more a question of luck.

For the vast majority of the people in the UK, parents give birth to you, look after you when you are growing up, and launch you into the work of study or work as appropriate. After that, while love and emotion support will still be there, financial support is slim to non-existent. You are on your own.

For rich families (the kind of families who live in London in fact), financial support exists on a wholly different level. It starts with nannies. Then there is schooling. A decent London day school costs £20,000 a year. Some are much more.

After school, there is university, that's currently £9,000 per year for fees, with living expenses on top. And skiing trips - they are an essential aren't they?

And after that? Well, little Harry (not little any more of course) gets a job and needs somewhere to live. Having spent the best part of half a million on his education, his kind parents wouldn't be keen on him living in a grotty flat in Bethnal Green. So they either buy him a flat in a nice part of town, or contribute an exceedingly significant deposit.

So at 24, Harry is the owner of £750,000 worth of property in Fulham or Chelsea. It probably won't be a house, not yet, but the leg-up he has received is so enormous, that within a few years, he'll have traded up to a seven-figure property. So easy when you know how, hey?

Be extremely well-paid (or marry someone extremely well-paid)

The second option is not down to luck in quite the same way as the last one. Having rich parents is complete chance. Getting a very well-paid job still requires a fair amount of luck. You need to be born with the potential to do something that an employer values very highly, and then you need the opportunity to train and develop that skill.

There are quite a lot of jobs that could earn you enough to buy a London house very quickly. At the high-profile end are sports stars, and entertainment stars such as presenters on TV.

A much more reliable way to earn those big bucks is to work in finance or consulting. You'll need a good degree from a top university though to get into this though.

The law is always a reliable money earner in every country, and London is no exception. The only problem with the law is it take quite a few years to climb the partnership ladder to the point when you are earning multiple 6 figures.

The ladder approach

Ladder out

Photo by Ricardo Cruz on Unsplash

The final method, that we'll call the ladder approach, is available on some level to most of us. It does still require a bit of luck though, in the form of rising house prices.

The basic idea is that due to the shortage of land in London and the high demand for property, prices tend to go up faster than the rest of the country. So, if you can get onto the housing ladder, then all you have to do is cling on while the escalator keeps rising. Simple hey?

The key thing to understand is that when you buy a property with a mortgage, if the property rises in value, then you will benefit disproportionately. Let's look at an example:

Say you buy a flat for £300k with a £30k deposit. If in the next year the property increases in value by 10%, to £330k, then your equity (i.e. the amount that you own) will have doubled to £60k.

You need to bear in mind though that if the price falls 10%, then your equity will fall to zero. There are risks to owning property!

In a bit more detail:

  • The first stage is to get together a deposit. Depending on the current market conditions, you'll need at least 10% of the value of the property that you want to buy.
    Outside of lottery wins, there are only 2 ways to get a deposit. You can save it, or you borrow it/be given it. Saving a £30,000 deposit is hard to do for most people on anything like a normal salary. But no one said getting a house in London would be easy.
  • Find a property that you can bear to live in and that you can actually afford. Most banks and mortgage companies will give you 4-5 times your salary, depending on current market conditions. If you are earning say £40k then you can borrow up to £200k. Add this to a £30k deposit and you can spend up to £230k on a property.
    That isn't a lot of money, but it enough to buy a place in London. Put your maximum price into Zoopla to get an idea of what is available.
    Places in your price bracket might not be the glamourous residence of your dreams, but they will help you get onto the first rung of the ladder.
  • Wait for prices to rise. Hopefully your salary will rise too. When the time is right, sell the property and use the enlarged deposit and increased salary to buy another property. You might be able to afford a slightly better place in a better area.
  • Rinse and repeat. Depending on how quickly prices rise, you should be able to trade up to a seven-figure property in 3-4 moves, say 10 years.

My story

To give a concrete example of how this works, I'll let you how I managed to buy a house in central London that is now worth around £1.5million. In my case, I worked in finance, but not in a massively well-paid area.

1999 I bought a small terrace house in Harrow with my girlfriend. We paid £128k. We had a minimal deposit, perhaps £10k. The area was far from fashionable and the place needed a lot of work.

2002 House prices shot up at an amazing rate and we sold the house after 3 years for £230k. Sadly, while house prices went north, the relationship went south, and we went our separate ways, each with £50k from the property.

2003 After renting for a year, I bought a flat in East Dulwich for £225k with a mortgage of £175k and using my £50k deposit. It was the top two floors of a tall Victorian house and it had great views over a park. East Dulwich was, at the time, a quirky little suburb of South London.

2007 House prices had grown strongly again and I sold the flat within days of putting it on the market for £335k. By now my equity had grown to about £160k.

I moved immediately into a house in the centre, near London Bridge station, which cost £595k. The deposit I had meant that I need to borrow £435k in mortgage. Although this sounds a lot, you have to remember this was just before the Great Financial Crisis and banks were giving away money at high multiples.

2012 With 5 years, despite the financial turmoil that hit soon after I bought, the price of the house had increased to over £1 million. Bingo!

2020 The house is now worth about £1.5 million. Some of that is due to an extension I added, but most of the increase comes from house price appreciation.

Warning: this is a general interest article. It is not intended to provide specific financial advice on purchasing property.