TOO MANY PEOPLE, TOO DAMN RICH

James Sproule advances an

explanation for Peter Mandelson's housing difficulties

POOR Peter Mandelson, victim of the curse of Notting Hill. The first house he wanted was so eye-wateringly expensive that he secretly borrowed another minis- ter's money, and was sacked. Now he has settled for a kind of leaking bed-sit and, because it's a leaking bed-sit in Pembridge Villas, he has had to find a quarter of a million and been accused of some devilry to avoid the very stamp duty Gordon Brown imposed.

Is there no end to his house misery? What is it about these white-painted schlosses in west London, with their ulcer- ated stucco, that drives a man mad? What has gone wrong with the world, he must ask himself, that he, a man mindful of his reputation, has been driven to these extremities to buy a house? I will tell him.

It is a new economic phenomenon and one which is important for all of us who may be in the same perplexity. It explains why so many of us are richer, in real terms, than our parents and grandparents; and yet, when we try to pay for a decent house in central London, or for school fees, or for paintings — things they effortlessly splashed out on — we find ourselves in positions of Mandelsonian embarrassment.

Consider the Sloane Ranger Handbook, that primer of early 1980s upper-middle- class living. Anyone proposing to live in the manner of an '18th-century gentle- man', says the SRH, needs £18,000 at 30 and £35,000 at 40. Taking inflation into account, that would mean today's gentle- man needs a mere £34,000 at 30 and £65,000 at 40. These are, of course, jolly respectable incomes. But to use them to live the life of an 18th-century gentleman would be stretching things, especially in London; in fact, it would mean making economies that would have been unthink- able 20 years ago.

Something dark and terrible has hap- pened to the value of our money relative to the things we really want. To see the prob- lem, we need to go back to about 1980. Until then it was inflation that was regard- ed, reasonably enough, as the killer. After a slow start, raising prices just tenfold from 1300 to the Napoleonic wars, inflation kicked in hard during the first world war. It was inflation, not the trenches, which caused the extinction of Bertie Wooster and the idle rich. But if, per impossibile, Bertie Wooster had gone out to get a job, things would still have been pretty good. Earnings generally kept pace with prices, and most things the upper classes wished to buy were affordable.

All that changed in or around 1980. Rapid cuts in the top rate of tax substantial- ly increased the disposable income of the high earners, and there were wider eco- nomic shifts. The move away from collec- tive bargaining, the rise of a multitude of smaller employers —Thatcher's supply-side reforms — produced a greater disparity of income across society. In 1979 the average income after tax was £215 per week, and roughly two-thirds of the working popula- tion earned within £65 of this figure. By 1996, the average income had risen to £300, but now earnings were more widely spread, with two-thirds of the population taking plus or minus £90 of the average.

The richer class began to expand, to challenge the position of those who had formerly thought of themselves as rich. In fact, the problem wasn't really inflation per se. The problem was that there were too many rich people. And the trouble with money today is not that you don't have enough; it's that other people have too much. This doesn't matter when it's just a question of your poolside Tuscan idyll or your snazzy new Merc, or other services and products which can be boosted in accordance with demand. Look at the things on which the richer classes tradi- tionally spend their dosh.

Take, as poor Peter Mandelson attempt- `It's been a year, how come nobody's been released for it yet?' ed to take, a house in central London. According to Knight Frank Research, a house that cost £100,000 in 1976 would today cost £1,750,000. But if we allow for inflation alone, the price rises to £446,000 — a snip, comparatively speaking.

What accounts for this vertiginous increase? Obviously, demand for prime- location houses is high, but what we are really seeing is the price of finite assets being driven up, not in response to inflation- ary pressures, not even to earnings, but in line with a greater disparity in incomes. In other words, despite ever-rising earnings, what really matters is how much more you earn than others who want the same things.

And if you break your back and take out the requisite mortgage, there is then the problem of furnishing your Notting Hill pad. Despite Alan Clark's snooty strictures, there are plenty of people from good fami- lies who do not inherit enough furniture (his brother Colin, for instance), and they need to buy more. Still, there are many more bits of furniture than there are decent paintings. In this related field the prices have become truly stratospheric.

Christie's have archived every catalogue they have ever produced, along with the hammer-price of each lot. To look back through these catalogues is enough to make you faint. A Rubens for nine guineas, in 1850, adjusted solely for general economic price inflation, would be £575 today. A Brueghel, sold in 1800, went for six guineas: allowing for inflation, that is £238. Even in 1970, a Brueghel was sold for only £94 (£772 in 1998 pounds). These are paintings which, of course, fetch millions today. In fact, the private collector would have been doomed, if the auction houses and dealers had not hit upon the idea of hyping lesser artists.

Finally, take a term at Eton, which cost just £83.6s.8d at the end of 1945. Adjusted for inflation, this turns out to be £2,118 in today's money — but as any parent of a future Old Etonian can tell you, the fees this half are more than double that, at £4,932. Interestingly, it was not until 1980 that fees started to outpace inflation, nor is it hard to conclude why: Eton is able to charge what the market will bear, and for a finite luxury good the market will bear a lot.

And that, to ram the point home, we might generously call Sproule's Law: your ability to buy the goods your class has always bought depends not on your own wealth, but on the wealth of the rest of your class.

Alas for the rich; alas for Mandy. We may have more money than ever before, but no matter that inflation is subdued and our incomes are increasing, some prices are increasing faster still. It is not enough to keep up with the Joneses; you have to do better than the Joneses. Otherwise they, not you, will nab that Notting Hill home.

The author is an economist who has the good sense to work in the City.