The worst hostel I ever stayed in was the Hyde Park Hostel in London. It was cheap, but I would gladly pay $10 more to stay somewhere decent. Here is the review I wrote about it at the time, posted on bugeurope.com hostel reviews (I try to review all the hostels I stayed at when I get back):
i stayed in mid august 2003, and granted it was hot all over london, but this place doesnt even own a fan. the security was good, staff very nice, good location, useable kitchen, reasonable internet (50p/30min), curbside pickup for straytravel tours. BUT, when i checked in at about 11am, clean sheets werent available until the afternoon, and my duvet looked like it had either been a tablecloth at a bacchanal or a communal napkin at an indian restaraunt. it could have been puke, but i was optimistic. my matress had multiple brown and yellow stains in the obvious places. i was so tired i was delirious and just wanted to take a nap, which was obviously impossible on any level. there was only one toilet and shower for at least 20 people, and after one guy got a hold of the toilet, everyone had to use the ones upstairs. while upstairs i could see down a shaft of sorts to the windows on the lower levels, and i watched a mouse jump in through the open window and disappear onto peoples gear and beds. the shower was tiny and had no hooks whatsoever. the bed was only comfortable if you are either exhausted or extremely hardy. i would definitely give this place a pass unless its the only thing left in london, and any more than one night would be a trial."
London has a thriving backpacker scene, and some are whole neighborhoods of them. For partying, socializing, and cheap sleeps, its fine. If you have any desire for clean sheets, fresh air, working toilets, clean showers, security, quiet at night, edible food, etc, there are entire areas of London you should avoid like the plague. I have stayed in a few other London hostels, notably the pricey St Pancras YHA hostel, and it was like the Ritz compared to Hyde Park Hostel. Goes to show, in London, you very often get what you pay for.
Suffice to say I would never stay there again. I also stayed in the USA Hostel Las Vegas, on Fremont St, and it was pretty depressing and dodgy. The ten blocks of crackheads, prostitutes, and drug dealers you walked to get to and from the hostel (cabs will not go there) was pretty off-putting. I think the other backpackers were there to sightsee and gamble, and didn't care how it looked. I spent the next night sleeping on a greyhound bus, and it was definitely preferable.
I haven't stayed in the infamous 'ghettos' like the Pig in Amsterdam, but I have heard some very disturbing first hand accounts of them (getting date raped). I have also stayed in some low budget hostels that were bare bones and a total blast. There is a fine line between cheap and fun and cheap and filthy.
Always be prepared to bail and find another hostel if the one that looked so great on the net turns out to be a backpacker oubliette :)
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