Home is where my profit is made

Since the Tories, we have regarded buying our own homes as a great investment and a citizen's duty.

We've traded up. We've moved from a flat with one bedroom to a house with . . . two. Not the most incredible life change, you might think, but we also get a tiny garden. To achieve even that modest result we had to move still further from the centre of London. Specifically, we've moved from NW3 (Hampstead) to NW2 (Cricklewood, to be precise). We're still inside the North Circular, but the bus stop nearest our house - there's no Tube station - finds itself in London Transport's zone three. Journeys to work are pricier, and also take between ten and 15 minutes longer than before. But we're thrilled about our new home. We had looked around it for less than 15 minutes before calling the agent to offer the asking price. It's often remarked that people spend longer assessing a new pair of trousers than a new home, but the point is worth making again. Indeed, I may have occasionally taken longer to choose an ice cream.

In Britain, houses have become consumer items. Like a mobile phone, a house of your own is something you shouldn't be without. At the end of last year, a breakthrough occurred: more than 100,000 new mortgages were taken out in a month. That's around four times the number of marriages - surprising, since a 25-year mortgage probably represents a greater commitment these days than "I do".

Largely as a result of the strong demand, values continued to shoot up. In December, house prices rose by 2.6 per cent - the second-highest monthly rise since the summer of 1988; and the 12 months of 1999 provided the highest growth in prices since 1989.

So whatever the economists tell us - and let's face it, they have a big enough set of measuring instruments - this does feel like the mad days of the late eighties. Not that I have personal experience: I was too young to buy last time round, but entering employment at the start of the nineties, I soon became aware of the disastrous results of that boom. Vast numbers of people made "distress sales" (at prices below what they had paid for the property). Millions were trapped with "negative equity", where the property was worth less than the mortgage (some disappeared, abandoning the home and the debt altogether). And 300,000 homes - equivalent to the entire city of Birmingham - were repossessed during the first five years of the nineties.

Home ownership in the UK rose dramatically in the 1980s because the Tories gave council tenants the right to buy their homes. Nearly one-third took advantage of this, and for those situated in the right location, it was an extremely enriching experience: they bought homes at a discount and sold them on at great profit. Others were less successful. Some found themselves holding properties in streets that were being pulled down. Some simply couldn't afford the high service charges. And after the recession arrived, hundreds of thousands found themselves unable to sell because newly cautious banks and building societies refused to lend money against many ex-council homes.

Knowing this, I've always been cautious. The greater wealth represented by rising house prices is illusory. The money tied up in a building pays no dividends, and can't be realised unless you cease to be a homeowner - either by dying or choosing to rent. But who would be brave enough to do that - wiping out all hope of future capital gains?

Well, we nearly did. After the financial crises in Russia and the Far East in 1998, we persuaded ourselves that the time had come to pull out - to sell the flat and rent before the inevitable crash. How we pitied friends who told us they were going to buy somewhere more expensive. But prices kept rising. After some months, we invited an agent to reassess our one-bedroom flat, and found the value had risen by £50,000 in a year. Our modest home was earning more than the average Londoner - more, at any rate, than me.

Many people, reading this, will feel sick with envy. People in Hawick, for example: last summer a one-bedroom flat in Hawick, a town in the Scottish Borders, was sold at auction for just £6,000. Another, with three bedrooms, fetched three times as much. Using only my £50,000 "profit", I could have bought both, and two more like them.

In northern England, where too many new houses have been built and over-supply has pushed down prices, it's reported that you can buy a home in the pub for £250 in cash (Salford), or buy a house from the council for a pound (Newcastle). How about that: I could buy 100,000 homes. My own borough.

So the gap between north and south is widening. A recent study by Manchester University found 30 towns where more than a tenth of the homes were selling for less than £20,000. Of those towns, just one (Hastings) was in the south. In 1995, a detached house in the South-east was worth 46 per cent more than a similar house in Yorkshire; by 1999, the difference had risen to 86 per cent.

If I sound like I'm crowing, I'm not. Our old flat may have gone up by £50,000 in a year, but our new house, you can be certain, went up by more. In other words, if we'd moved a year earlier, we could have bought the same property with a much smaller mortgage. In our circle of friends, we're the ones who bought most recently, nearest the top of the market: if the market turns, it's us who will lose most.

So why didn't we get out?

Last autumn, I was sent to shadow a member of the Bank of England's Monetary Policy Committee - the body responsible for setting interest rates - on a two-day visit to the South-west. This was part of the regional roadshow that had earlier involved a diplomatic incident when Eddie George, visiting Newcastle, was unfairly accused of suggesting that unemployment in the North-east was a "price worth paying" for keeping down house-price inflation in the South-east.

Between meetings, I worked DeAnne Julius for advice. Should we sell up and rent? Stretch ourselves with a bigger mortgage and realise even bigger capital gains? To her credit, Julius was not prepared to prophesy: to each query, she responded only with an enigmatic smile.

In truth, even the best economist can't know all the answers. In the course of that trip Julius acknowledged that she'd not foreseen the Asian crisis of 1998, that she was unable to guess which way oil prices might go and that she had predicted a "blip" after the introduction of the minimum wage which subsequent calculations suggest did not appear.

Lacking high-level advice, we followed the crowd. Buying a house, after all, has practically become a civic duty. Thanks to the Tories, home ownership has risen over 30 years from 40 per cent of the population to almost 70 per cent (about the same level as the United States and Australia). Renting in the private sector accounts for 10 per cent, and the remaining 20 per cent is accounted for by social housing. (Actually, those percentages shouldn't quite add up to 100, because a large portion of the population is altogether homeless.)

But a report published last summer suggested that home ownership could be bad for jobs. The young unemployed find it hard to move to areas where there's work because the rental sector hardly exists. And others find it hard to switch jobs, or go self-employed, because they have mortgages to pay.

Professor Andrew Oswald of Warwick University made a study of 12 countries over the past 30 years and detected a link between high levels of home ownership and high unemployment. "Spain has 80 per cent home ownership and 30 per cent unemployment," he said, "whereas Switzerland has only 30 per cent home ownership and 2 per cent unemployment."

His thesis remains contentious, however. For example, home ownership in Ireland exceeds even our high levels, but unemployment is less of a problem. But Europe's most prosperous nations, the ones with the highest standards of living - Germany and Switzerland - have much lower levels of home ownership than us. Fewer than 50 per cent of Germans own the home they live in. Renting is more attractive - with tenancy agreements lasting five years and tenants having first option to buy from their landlords. And Germans are put off buying by high agency fees (two or three times as high as in Britain) and a history of low inflation (German houses haven't increased in value as dramatically as British ones).

Those Germans who do buy tend not to borrow on our scale. First, they save: the average deposit is 30 per cent of the purchase price, and 25-year mortgages are virtually unheard of. In France, too, they do things differently: though it's common to rent your principal residence, second homes are usually owned outright. And the French government awards higher tax relief on homes that are not inhabited by the owner - thus encouraging private rental. We could do with that here. If more properties were available, rents would come down. And tenants, though they can't make "profit" on their homes, enjoy other advantages over homeowners.

One of my oldest friends remains in Notting Hill Gate - where we both grew up - despite the extraordinary price rises in that now- fashionable district. Sebastian has lived in the same flat all his life and he is protected against high rents - and eviction - by an ancient tenancy agreement, a relic of more civilised times. Am I jealous? Of course not: my home is in Cricklewood.

John-Paul Flintoff is feature writer on the "Financial Times" magazine