How England’s flats turned into second-class housing

If Zoom, Peloton and pet shops were some of the unexpected winners of the early phase of the global pandemic, one of the biggest losers was apartment living. From March 2020 onwards, trends in house and flat prices diverged dramatically as lockdowns and remote working put a premium on domestic space.

So ubiquitous was this sudden sense of mild claustrophobia that it can be hard to remember that, until lockdowns struck, apartments and houses had enjoyed equal status almost everywhere. Their prices had previously moved in virtual lockstep as they climbed steadily upwards through the early 2000s, crashed in 2008, and then resumed their ascent over the decade since.

I say almost everywhere because there are two glaring exceptions: England and Wales. Whether you look across the Atlantic, over the Irish Sea or north of the border with Scotland, flats held their own with houses in the years leading up to the pandemic. But in England and Wales, flat prices rose just 0.6 per cent between January 2017 and March 2020, while house prices climbed more than 5 per cent.

The stark contrast with the other UK nations is especially significant, because it helps identify the culprits. Broad economic conditions were similar over this period, and the only significant regulatory change affecting the housing market — an additional 3 per cent stamp duty rate in 2016 for people buying additional dwellings — was UK-wide, and so cannot explain a divergence that happened in only two of the four nations.

Instead, the statistical smoking gun points to two prime suspects. First, England and Wales’s deeply dysfunctional leaseholding system, which applies to 95 per cent of owner-occupied flats but just 8 per cent of houses. And second, the cladding crisis triggered by the Grenfell Tower fire.

Despite paying hundreds of thousands of pounds to become “homeowners”, leaseholders in England and Wales do not fully own their property, are subject to arbitrarily determined service charges whose increases sometimes far exceed inflation, and can spend years tied up in disputes with the property owner over building repairs and maintenance.

By contrast, owners of flats in Scotland and condos in Australia, Canada, and the US are commonholders, meaning they fully own their individual unit and jointly own and manage the larger building, cutting out the middleman and keeping fees in line with maintenance costs. And while leasehold does exist in Ireland and Northern Ireland, in reality their structures are more similar to commonhold, and owners have the right to buy out their ground rent, turning them into freeholders.

The particular plight of leaseholders in England and Wales was highlighted following Grenfell, when a review of safety measures found that hundreds of high-rise blocks in England — housing tens of thousands of leaseholders — had been built using dangerously flammable materials. There were fears that the costs of replacing the cladding would be passed on to leaseholders. The use of aluminium composite cladding on residential blocks — chosen primarily because it was cheaper than safer alternatives — was widespread in England and Wales, but only found in one development in Scotland, a single building in Northern Ireland and none in the Republic.

Taken together, this dysfunctional form of tenure, which privileges developers over residents, and is absent from the rest of the developed world coupled with a build-cheaply-and-charge-exorbitantly approach to high-rise development paint a damning picture of the English approach to dense housing.

In a particularly bitter twist, the pain from leasehold and cladding issues falls disproportionately on first-time buyers, who are more likely to purchase new-build flats as an affordable way to get on to the housing ladder, especially in light of the government’s Help to Buy scheme. London house prices have climbed by 17 per cent since 2017, but flat prices in the capital are down 1 per cent over the same period. An analysis earlier this month by The Times found that two-thirds of London new-builds bought using the scheme had lost value.

There may be some light at the end of the tunnel. Labour leader Keir Starmer has now pledged to abolish leasehold for new developments, though he has stopped short of ending the system for current leaseholders. But all things considered, it’s little wonder that Britons are especially averse to living in high-rise developments.

john.burn-murdoch@ft.com, @jburnmurdoch