I promised to return to the subject to deal with the third unanswered question. Yesterday, figures from the Office for National Statistics offered me the opportunity to return to some of the broader issues raised by the property revival, which, in London at least, is no longer a matter of dispute. The ONS figures show the biggest monthly jump in unemployment since the 1992 recession. Worse still, they suggest that while unemployment is now steeply rising, there is not much chance of relief in the form of lower interest rates. For despite the increase in unemployment, wage increases have jumped from 3.6 per cent to 4.2 per cent, seriously raising the risk of accelerating inflation if the Bank were to try to boost the flagging job market and economy. Indeed, it is looking increasingly as if the next move in interest rates may be up.
Today’s deteriorating job prospects, rising house prices and accelerating wages are all related to the same underlying cause — the tectonic shift in Britain’s industrial, regional and political structure as the economy adapts to life in an increasingly competitive and globalised world.
Looking beneath the baffling coincidence of simultaneously rising house prices, unemployment, wages and interest rates we find two common themes: the widening divergence between London and the rest of Britain and the complex interactions between the two main driving forces of the Britain’s economic and political life in the past two decades — a booming financial sector and an ever-expanding government.
The ONS job figures show, for instance, that the whole of the jump in wage inflation has been due to rapidly increasing bonuses paid by the private service sector around the turn of the year. In the property market, meanwhile, we find house prices flat and home sales pretty stagnant in most of the country; but this weakness is offset by a boom in London, especially in the top end of the market where the millionaire financiers live. What connects these paradoxes is that financial and business services — which include accounting, law, consultancy and many other professions in addition to banking and insurance — are by far the dominant employers in Britain’s private sector. And these services are now so globalised that their fortunes bear almost no relation to Britain’s domestic economy. They depend entirely on international financial markets and the growth of world trade.
London is now the centre of international financial activity not just for Britain but for Europe and the world as a whole. According to estimates by the Centre for Economics and Business Research, roughly 3,000 people working in the City received year-end bonuses of more than £1 million — on top of their already huge salaries — and roughly half of these bonuses were likely to be spent on property. Is it any surprise, then, that the CEBR now forecasts a rise of 7 per cent in London house prices, while investors in IG Index are betting on almost 12 per cent London property inflation?
The rest of the country, meanwhile, has enjoyed much less direct benefit from Britain’s successful exploitation of its comparative advantage as a financial powerhouse. The North of England in particular has become increasingly dependent on government jobs — so much so that, according to one analysis, two thirds of the growth of output and 100 per cent of the employment growth in the North East and North West since the start of this decade has directly depended on government spending. With public spending now slowing after a huge expansion, it is hardly surprising that house prices in the North are expected to show no increase at all.
If London’s prosperity is now largely a function of global finance, while the rest of the country depends on public spending, what will happen to Britain if global financial activity keeps growing while government spending is restrained? And what if these trends keep diverging not just for the next few years, as appears inevitable, but for decades ahead?
One inevitable consequence will be that house prices in London continue to rise rapidly. At first sight, this may suggest an even wider divergence in prosperity between North and South, but in reality property inflation is likely to have the opposite effect. Many Londoners on moderate incomes are now living in houses worth hundreds of thousands of pounds. As they sell or rent these houses to bankers and then move to cheaper parts of the country, they will suddenly enjoy undreamt-of financial freedom — and will simultaneously achieve a redistribution of wealth between regions greater than by any past socialist government.
The growing significance of home ownership in redistributing the wealth accumulated in Britain by the world’s financiers and bankers will result in big political and social changes. Home ownership has already helped to turn Britain into a much more capitalist society, with deeper public support for private property and free markets, than anyone would have imagined 20 years ago. In the decades ahead, the country may move even further in this direction. Soon Britain may not be just a nation of shopkeepers but a nation of financiers and rentiers.
This idea may stir indignation among nostalgics who pine for the clear class divisions of 20th-century industrial society. But the rest of us can feel reassured; financiers and rentiers tend to be much more prosperous than shopkeepers, never mind industrial wage slaves.
