Mayoral Election Issues: The homes affordability crisis

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Photo: Tom Gowan ┃Shutterstock

London may like to see itself as a forward looking and progressive city but when it comes to property it is heading back to the 70s. Owning your own home is a long-held aspiration for millions of people that was realised in the property booms of the 80s and 90s, assisted by the Right to Buy scheme where tenants were allowed to purchase their council-provided property.

But the data on property tenure across London reveals that trend is being rapidly reversed and the pattern of ownership, private rental, and social housing now resemble London in the 70s.

After climbing to its peak in the 90s owner-occupation had fallen to 50% by 2011.   For the majority of younger Londoners, buying a home is no longer an option and those in their 30s appear resigned to belonging to what has been labelled “generation rent”.  In 1990 nearly 60% of people aged 25-34 owned their own home, by the end of 2014 that had dropped to 26%[1].

For those under 25 the picture is even starker.  Just 6% of this age group own their own property. In 1990 it was nearly a quarter of them.

The data shows that the only group where home ownership is climbing is the over 65s.  These people mostly own their own home outright, having paid off their mortgage.

Property ownership by age

The proportion of homes owned outright now exceeds those owned with a mortgage across England and Wales according to the English Housing Survey carried out by the Department for Communities and Local Government[2].  According to the figures collected in 2014/15, 33% of homes in England are mortgage free compared to 30% households that are still paying the mortgage.  61% of those who own their home outright are over 65.  London is the only place where this tipping point is yet to be reached and mortgaged homes (27%) still outnumber wholly owned ones (23%), but the gap is closing as the number of properties owned with mortgage falls.

The problem for young Londoners seeking a mortgage is not just one of meeting the monthly payments but in raising the funds in the first place.  The median property price in the capital is now 11 times average earnings, compared to 7 times across England.

The price to earnings ratio is at the national average in Barking but in Wandsworth it is 17 times earnings, in Hackney nearly 15 and in Kensington and Chelsea 38 times earnings[3].

house to earnings map

This situation is worsening more rapidly in London than elsewhere in the UK.  In 1997 the median house cost 4 times the median salary. That ratio has since more than doubled across the country, but nearly tripled in London.

The reduction in home ownership in London, particularly for under 35s has fuelled the growth in the private rental sector.  The most recent English Housing Survey revealed that 1 in 4 of the private rented houses in England are in the capital and the private rented sector increased from 14% to 30% in the 10 years between 2004 and 2014-15[4].

As the population of the capital grows, demand is outstripping supply and the affordability of rent has become a problem for people who were already priced out of the ability to buy a property.

For these people, rent takes up a very large proportion of their income. The English Housing Survey revealed that London households were paying 72% of their gross income in rent. This was reduced to 60% when housing benefit was included. By comparison, rent accounts for 52% of income for households across England.

The plight for young people under 24 was worse. The survey found that they were handing over 88% of their income in housing costs when benefits are excluded.

The latest data from the Valuation Agency Office[5], a body that advises the government on property prices, shows the high level of London premiums in the private rental sector.

We looked at median prices to iron out the highs and lows that affect averages.  The proportion of the price difference between London and the rest of England is biggest for 2 and 3 bedroom houses – the types of property that families need.

Median monthly rental
London England
Room only £550 £350
Studio £875 £500
1 Bedroom £1,200 £540
2 Bedroom £1,450 £595
3 Bedroom £1,750 £695
4+ Bedroom £2,700 £1,200

Across London there are distinct variations with the highest median rate for all properties in Westminster, and only 4 boroughs – Sutton, Havering, Barking and Dagenham and Bexley, where it is below £1,000.

Rental all prop map

The rise in rents seems relentless. Data from the ONS’s Index of Private Housing Rental Prices, a quarterly index that tracks the prices paid for renting from private landlords shows a 4% rise in Feb 2016[6] compared to the same period last year. Over a 10-year period prices in London have risen by 35% compared to 17% for the rest of England.

Faced with high costs in the private sector there has been a growing demand for Londoners for rental property at an affordable price.  Previously this fell into the category of social housing – property provided by a council or a housing association with long, secure tenancies and rents at around 50% of the market rates.

In 2010 the government introduced a new category, which it confusingly called Affordable Rent.  This aimed to give social landlords a route to maintaining or increasing the amount of lower cost rental while relying less on public funding. It allows them to charge more and have less restrictive tenancies.  Affordable Rent properties can charge up to 80% of the market rate.

The problem for London is that for many, Affordable Rents are not affordable.  Let’s look at the numbers if we apply the social and affordable rent rules to the median monthly market rates we saw above from the VOA.

Market Rate Affordable Rent (80%) Social Rent (50%)
1 Bedroom £1,155 £924 £577.50
2 Bedroom £1,400 £1,120 £700
3 Bedroom £1,695 £1,356 £847.50
4 Bedroom + £2,500 £2,000 £1,250

A family that needs a 3 or 4-bedroom house would require a substantial income to afford an Affordable Rent and in many areas of central London the cost will be much higher.

Some families may be able to claim Housing Benefit to bridge the gap but the Benefit Cap introduced in 2013 means that the total claim for all benefits for a family is £500 a week – the amount needed just for rent of a 4-bedroom house in these calculations.

Increasing the supply of housing is one key to solving the affordability crisis. All mayoral candidates in the election are promising to do this but after years in which house-building failed to keep pace with demand this will be a mammoth task.

See also

Mayoral Election Issues: The Housing Shortage

Source data

[1] http://data.london.gov.uk/dataset/housing-london

[2]https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/501065/EHS_Headline_report_2014-15.pdf

[3] http://data.london.gov.uk/dataset/ratio-house-prices-earnings-borough/resource/122ea18a-cb44-466e-a314-e0c62a32529e

[4]https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/501065/EHS_Headline_report_2014-15.pdf

[6] http://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/february2016

This report was produced in association with London Live’s special election programme, London Votes.

Families face the biggest premiums for renting homes in the capital

terrace on hil-2The punishing premium on private rents in the capital is more severe for families who need 2 or 3 bedrooms. Rents for 1-bedroom properties are more than double in London but for those with children as well as themselves to house, a home may cost 150% more to rent.

Urbs analysed the latest data from the Valuation Agency Office, a body that advises the government on property prices, to look at the cost of different types of rental property in London.

We looked at median prices to iron out the highs and lows that affect averages.

Median Monthly Rental
London England
Room only £525 £341
Studio £850 £500
1 Bedroom £1,155 £525
2 Bedroom £1,400 £595
3 Bedroom £1,695 £675
4+ Bedroom £2,500 £1,175

The premium paid for renting in the capital is significant for all types but highest for medium size flats and houses.

Rental private premium

The most expensive region outside of London is the commuter area of the South East. Comparing the median rate for all properties the monthly cost in the South East is £779 but nearly double that at £1,350 in London.

But London itself see distinct variations with the highest median rate for all properties in Westminster, and only 4 boroughs – Sutton, Havering, Barking and Dagenham and Bexley, where it is below £1,000

Rental all prop map

Other data from the Office for National Statistics shows private rents continuing to rise. The Index of Private Housing Rental Prices, a quarterly index that tracks the prices paid for renting from private landlords shows a 4% rise between April and June compared to the same period last year.

Over a 10-year period prices in London have risen by 35% compared to 17% for the rest of England. The 4% rent inflation is a return to the higher levels of 2013 after less steep rises in 2014.

monthly rental

The last dip in rent inflation was in 2010. Since then prices have risen steadily with rises in London at least double the rate in the rest of England.

The affordability of property means home ownership is beyond the means of many in the capital and renting in the private sector is the only option. As previously reported by Urbs, there is a growing concern than many younger people will never be able to save enough for a deposit to buy a property in the capital and they are becoming a so-called ‘generation rent’.

Index of Private Housing Rental Prices

Valuation Office Agency

See also

Paying the rent takes up 72% of income for private tenants

Under 40s locked out of housing market destined to be “generation rent”

Urban chic or leafy charm? Inner city rentals catch up with affluent areas