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.

Buying a home gets further out of reach, now 11 times annual salary

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Photo: Tom Gowanlock ┃Shutterstock.com

The cost of a home in London has risen to 11 times the annual salary. This startling statistic is revealed in the data on earnings and house prices from the Office of National Statistics.

Each April the ONS does a survey on earnings and it has just released this date revealing that the median weekly pay in London was £660 or £34,320 annually. The median is the mid point, thus avoiding the distortion of the high and low numbers in calculating an average.

Data from the Land Registry shows that the median house price in London for the same period was £379,000 or 11 times earnings.

Someone earning the median wage who had managed to save perhaps £20,000 as a deposit and then took out a maximum 4.5 times salary mortgage would still only have raised 46% of the cost of the median property. It is hardly surprising therefore that the proportion of homes bought with a mortgage is falling. As reported by Urbs, cash buyers are becoming the dominant group in some areas of central London. They are mostly older people who have sold a more expensive property, or overseas investors.

The ratio of earnings to house prices has been on a steadily upward path since the late 90s, apart from a small dip following the financial crisis of 2008. In 1997 the median house cost 4 times the median salary. That ratio has since more than doubled across the country, and nearly trebled in London.

house to earnings timeline

In some parts of London the figures are even more eye-watering.  A median price home in Wandsworth costs 17 times the median earnings of someone living in the borough. In Westminster it is 22 times and in Kensington and Chelsea the median house price is 38 times salary.

house to earnings map

The data for the rest of the country helps explain why so many people choose to move out of London. In the South East generally the ratio is 9 times earnings. That’s lower than all but the 3 London boroughs on the eastern edge of the city, Havering, Barking and Dagenham and Bexley. In the North East of England a home is just under 5 times annual salary, a ratio not seen in London since the late 90s.

house to earnings national

These ratios mean that buying a property will remain out of reach for many in the capital. The much talked about ‘generation rent’ looks like it’s here to stay.

Source data

See also

What would you do with £1.6 million in cash? Buy a house, of course

The jobs success and housing failure causing a crisis for the capital

Why the London property market is heading back to the 1970s

 

 

What would you do with £1.6 million in cash? Buy a house, of course

nice brick georgian-1-2Cash-rich property buyers are paying an average of £1.6 million for houses in the 3 most central London boroughs, according to an analysis of Land Registry figures by the Council of Mortgage Lenders.

In these 3 boroughs – Kensington and Chelsea, Westminster and City of London – half of all home purchases are in cash rather than mortgages.

On average, higher prices are being paid in cash than with a mortgage for homes in London. But the CML says that is due to the distorting effect of very high prices being paid in cash for a small number of homes in these central areas.  Central London has been the prime area for foreign investors and Kensington and Chelsea tops the table for houses bought as second homes, as reported here.

cash purchase map-2

And this is a tale of 2 Londons as away for the centre cash plays a far less significant role in the property market with around three quarters of homes being bought with a mortgage.

The level of reliance on mortgages is greater in London than any other region of the country. According to CML calculations, in the South West of England 40% of homes are being bought with cash.

cash house purchase uk

Last year the number of cash purchases in England and Wales overtook the level before the financial crisis but the CML says that the number of mortgage-funded purchases is still below the level of 2007.

This may be down to demographics that are sharply on show in London, where increasingly it is older people who can afford to buy a home. Older people have traditionally been more likely to be cash buyers, selling one home to purchase another outright, and data from the Land Registry show that most cash purchases are made by those over 55.

As previously reported by Urbs, the proportion of those who own their own home has fallen for all age groups in London except the over 55s.

The Office for National Statistics forecasts that there will be 1 million more people aged 55-64 in the next 5 years, so the proportion of houses bought for cash is likely to keep rising.

Source data

See also

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

Where are all the young people? The in-out flow of 20-something Londoners

Volume of house sales recovering but still well below pre-crisis levels

Researchers predict London on verge of property price bubble

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Photo by JaneArt (CC BY-SA 3.00)

The London housing market may be entering an “exuberant” phase. This sounds rather exciting until you realise it means that the capital is on the verge of another property price bubble.

Academics at Lancaster University say that the continuing surge in house prices will mean a property bubble by 2017. The last time this happened was at the end of 2007 and it was followed by a price crash when the bubble burst.

Prices in London grew by 11% in the last 12 months. With growth of 2.75% each quarter prices are heading towards what the researchers from the Management School at Lancaster University have called “exuberance’. A bubble of overpriced property will develop if this continues for 18 months.

In their UK Housing Observatory report they say that this could have a ripple effect across the country.   And when the bubble bursts those who bought with big mortgages may be left in negative equity with the value of the loan higher than the value of the property.


See also

London house prices more than 100% higher than rest of UK

House price rises fuel affordability crisis for Londoners

More “affordable” homes but the rents prove unaffordable for many


The team at Lancaster uses a statistical analysis to draw up a ratio between property price and disposable income, which they say is now reaching a critical level. They use property price data from the Nationwide and the cost of living survey by the Office for National Statistics.

They say that tracking the ratio can give an early warning to policy makers.

UK Housing Market Observatory

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

Keys-2The under 40s in London will be locked out of the housing market as renting becomes the long-term norm. This is the gloomy forecast by economists at accountancy firm PwC, who say that changes in the housing market mean that those aged 20-39 will become “generation rent.”

Private rental has increased from 10% of the housing market to 20% between 2001 and 2014. According to the English Housing Survey, as reported here by Urbs, a quarter of all private rental properties are in London. PwC forecasts that a further 1.8 million people will join the private rented sector by 2025. And private rental will be the housing solution for more than half 20-39 year olds.

In its UK Economic Outlook for July PwC says that a number of factors are changing the nature of housing tenure in the UK:

  • Affordability – the growth in house prices has declined, especially in London, but has  outpaced the growth in pay. The earnings to house price ratio is at its highest in London, passing the previous record in 2007. A tightening in mortgage lending means that saving for a deposit is beyond many first time buyers
  • Housing Supply – house building in the UK has been insufficient to meet demand for decades but this problem has intensified in the past five years. There is a shortage in both the private sector and in social housing.
  • Demographic change – the share of the housing market of people who own their home outright will rise by around 2 million by 2025.  This is due to an increase in the UK population of over 60s who have been able to pay off their mortgage.
% share of households by tenure 1981-2014
housing tenure

Source: PwC analysis of English Housing Survey, DCLG

PwC also warns that kicking away the property ladder from the under 40s will have a long-term impact on wealth. It says that house purchases have driven wealth for lower and middle classes and an inability to enter the housing market may limit social mobility.

For many in London long-term rental is already a reality. PwC says that private rental is common in other European countries but there is a higher quality of property and security of tenure beyond a year. This is yet to happen in the UK private rental market.

See also

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

How “Millennials” are driving an urban renaissance

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

 

Landlords reclaim record number of rented homes

To Let copyMore Londoners than ever are losing their rented home through landlord repossessions. Data analysis by Urbs shows that in the last 3 years the rate of landlord repossessions has risen sharply. And the data shows that this is a particular problem for London, as the rate for England as a whole has seen only a gradual rise.

In the third quarter of 2014 (the most recent data available) there were 4,137 rented home repossessions in London. That’s rate of 2.45 per thousand, and double the rate for England as a whole.

Renting has become more popular as high property prices make buying a home unaffordable for many people. That problem is most acute in the capital, particularly for younger Londoners.

Rising prices have also seen the end of the negative equity trap, which used to lead to large number of mortgage repossessions in London. These have fallen from their peak in the third quarter of 2006 of 1,181 homes to just 218 last summer. That is back to the level for repossessions last seen in 2003.

The picture of home repossessions across the capital shows a clear divide between richer and poorer boroughs. Southwark, Croydon and Newham have nearly three times the number of the more affluent Sutton, Kingston and Richmond.

Landlord repossessions 2 map

Repossession figures are based on county court action rather than actual incidents. Some homes are repossessed without court action and some court actions do not lead ultimately to repossession.

Source data