The Isles of Scilly, where Britain's poorest people live

With an average income below £17,000, the archipelago has been identified as the nation's poor relation.

It is an area of outstanding natural beauty, enjoys Britain's most clement weather and attracts more than 120,000 visitors to its unspoilt shores each year. Ever since the former prime minister Harold Wilson descended on the Isles of Scilly in his shorts and sandals, the sub-tropical islands off Cornwall have been seen as one of England's most desirable tourist spots.

Yet behind the picture-postcard image lies a very different reality. According to a report this week, this is the poorest place in Britain. A study of differing wealth levels across the EU, carried out by Eurostat – the statistical arm of the European Commission – put Cornwall and the Isles of Scilly at the bottom of the table and on a par with former eastern bloc countries such as Slovakia and Slovenia. Taking 100 as the benchmark for wealth, the Scillies and Cornwall scored 77.4 – far below most of the EU.

The figures for the islands were not separated from Cornwall but the Isles of Scilly Economic Development Council believes that, if taken alone, the average wealth of those living in the archipelago would be even lower than that of their Cornish neighbours, making the islands' 2,153 inhabitants the worst-off in Britain.

In 2005, the average wage for a Scillonian was £16,672, almost £2,000 below the national average. Yet with house prices almost as high as in London and higher charges for food and supplies imported from the mainland, making ends meet can be a struggle. "The islands have London costs of living but Cornish incomes," said Andrew George, the Liberal Democrat MP for St Ives and the Isles of Scilly. "A lot of people's preconceptions of the islands are based on their holiday experiences, which gives them a very false impression of life there, and does not reflect the reality of the challenges islanders face."

While tourism shores up the economy, the influx of outsiders has caused problems. Mainlanders have flocked to buy holiday homes, causing property prices to soar beyond the means of those on a local wage. "Nobody on an island average income would ever be able to save enough for a mortgage that could get them more than a garden shed or a garage", added Mr George. "The market is a receptacle for the retired and the wealthy who want second homes, not for people who have a housing need. The housing market just isn't serving local people."

A quick glance in the window of the islands' only estate agent reveals the extent of the problem. A small family home is on sale for £685,000, while a tiny two-bedroom flat is going for £289,500. In the only supermarket, a small Co-op, the story is the same. A loaf of bread costs £1.50, and a two-pint bottle of milk is more than £1 – similar prices to those found in wealthy Kensington. Inner London, which has the most comparable housing and food prices to the Isles of Scilly, scored 303 in the Eurostat report, making its residents almost four times as wealthy as Scillonians.

Young families are only too aware of the problems. Vicky Perry, who lives on the main island, St Mary's, worries that her four-year-old son Daniel will not be able to stay there when he leaves school. "Unless he wins the lottery, I don't think he will ever be able to afford to buy a place here," said the 40-year-old. "The prices are going up all the time and I imagine he will just have to leave."

If the next generation is priced out altogether, the fabric of the islands could be at stake. "Eventually, there won't be any locals left," added Mrs Perry. "It will just be retired people and those from outside who can afford it. Within 20 years, it will be a very different place. Most people who live here now are on minimum wage, so it will hard to keep it as it has been."

Tourism accounts for an estimated 85 per cent of the islands' income but between November and March the place is deserted. During those months, residents have to live frugally to ensure the money they save during the visitor season lasts. Fraser Hicks's family has been on the islands since the 1400s and the 48-year-old lives on St Mary's with his wife and daughter. But as he readied his boat yesterday for a summer of ferrying visitors around the islands, he explained the difficulties they face. "I don't earn any money at this time of the year and I'm having to spend lots on paint and parts to get the boat ready," he said. "I'll start off the summer in the red and it will take a while for me to get that money back."

For Mr Hicks's daughter Rebecca, 22, a future on the island she loves will be tough. "There is not a lot for people my age to do here and you can't have a career, you just work," she said. "My main problem is getting a place to live on my own. I want to live on Scilly because it's my home but I don't think I will ever be able to afford a house. The big issue is people with second homes here who don't use them. If people want to move here that's fine, but Scilly cannot afford people who just use their houses a few days a year. Lots of my friends don't live here now, simply because they can't afford to."

Despite the challenge of living with such precarious finances, it is a sacrifice many islanders are happy to make. Luke Paulger, a bus driver who came to St Mary's on holiday and "forgot to go home", said it was worth the struggle.

Looking towards the sea across fields of wild flowers, he said: "None of the other stuff matters. If you could put a value on the quality of life, we would be the richest people in the world."