Extreme Housing Pressure. A report for the Fifty Thousand Homes campaign

Transcription

1 Extreme Housing Pressure A report for the Fifty Thousand Homes campaign March 2016

2 2 Disclaimer Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor the report s authors will be liable for any loss or damages incurred through the use of the report. Authorship and acknowledgements This report has been produced by Cebr, an independent economics and business research consultancy established in The views expressed herein are those of the authors only and are based upon independent research by them. London, February 2016

3 3 Contents Foreword Error! Bookmark not defined. Executive Summary 5 1 Introduction 6 2 London s key sectors Overview of the London economy Up and coming sectors 10 3 Rental affordability Extreme rental affordability issues 16 4 Years to buy 19 5 The cost of commuting 25 6 Conclusions 31

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5 5 Executive Summary This report for London First examines the impact of the cost of housing in London on the different sectors that make up the capital s economy. The key findings of the report are as follows: In the 12-months to the end of September 2015, the median monthly rent across London stood at 1,400 more than twice the median across the rest of England. A typical room in a flatshare in the capital costs more than the median monthly rent on a two-bedroom property in the North West, East Midlands, Yorkshire & Humber and the North East. A typical London worker in many of the sectors of the capital s economy would struggle to afford a one-bedroom flat in Inner London based on median rents. A typical one-bed flat in Inner London would account for more than 50% of the median monthly net income for workers in most of the up and coming sectors across the London economy including computer programming, advertising and market research. Typical young workers (22-29) in all but one sector will be reliant on shared accommodation by Based on current trends in earnings and rental prices, the typical rent on a studio flat will represent more than 60% of net incomes in all sectors and occupations apart from financial services by The time taken workers to save for a deposit has increased over the past decade. For workers in 2015, the estimated age at which enough will be saved for a typical 10% deposit ranges from just under 30 for a typical worker in financial services to a little over 38 for the typical worker in the retail and accommodation sectors of the economy. By 2025, it is estimated to take individuals across each of London s up and coming sectors over a decade to save 10% for a deposit on a first-time home in the capital. Currently, the workers in only nine of the 27 sectors analysed could expect to put together an adequate deposit for a London home in under a decade based on median earnings through their careers. Given that it is becoming increasingly difficult for workers to find affordable accommodation in central London, many are forced to move further away. This implies a higher cost of commuting to work. An annual travelcard for travel within central London (zones 1 and 2) costs 1,296 in Travelcards for zones that are further away are far more expensive. At the most extreme end an annual travelcard for zones 1-9 and Shenfield costs 4,012 in For workers commuting from zones 4, 5 and 6 the annual cost of commuting in 2016 was up to 1,068 or 82.4% more than for those living nearer to their place of work. For those living in Zones 7-9 (a set of stations outside of greater London that are serviced by the London Underground and Overground) the difference in commuting cost is even greater. For those workers living in the Home Counties in a one bedroom property nearly 40% of their total accommodation and commute spending goes towards commuting. The comparable figures for Inner and Outer London are 7.3% and 13.7% respectively.

6 6 1 Introduction In recent years, London s property market has outpaced most other areas of the United Kingdom. Against the backdrop of a rising population and strong demand from domestic and overseas investors, the price of housing in the capital, both for those renting and those looking to buy, has risen sharply in recent decades. Despite some falls in prices in the aftermath of the global financial crisis in 2008 and 2009, house prices in London have almost doubled over the past decade, rising by 96% between October 2005 and October This leaves the typical cost of a London home over half a million pounds ( 531,000) according to data produced by the Office for National Statistics (ONS). With the typical home in London costing over 500,000, first-time buyers in the capital are facing pretty hefty costs to get themselves onto the property ladder. The average price of a first-time home purchase in London stood at 416,000 in October 2015, more than 90% above the UK average of 218,000. Even with a fairly low deposit of 10%, this would require buyers to have saved over 40,000 for a deposit. Once other considerations such as Stamp Duty are taken into account, a first-time buyer in London is likely to have saved over 50,000 in order to purchase their first home or relied on support from the bank of Mum and Dad. As a result of this and other mortgage eligibility requirements, it is unsurprising that the average first-time mortgage borrowers in London had a recorded income of 82,000 in Q While many buyers of these buyers are not individuals, this figure still represents more than 2.5 times the median annual earnings in the capital. Figure 1 Average price of first home (LHS) and 10-year house price growth (RHS) by region 500, , , , , , , , ,000 50, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Average property price for a First-Time Buyer (Q3 2015) 10-year growth in average house price (Oct Oct 2015) Source: ONS, Cebr Analysis The difficulty of getting on the property ladder faced by workers in London is not helped by the rising costs involved in renting a property in the capital. Average rents in the London have risen by 20% over

7 7 the past five years, well above the rate of earnings growth for workers in the capital, making living in the saving for a deposit to buy a home more of a challenge. As house prices and rents continue to grow faster than wages in many of London s key industries, attracting and retaining staff could become increasingly more difficult for businesses in the capital and risks undermining the success of these industries in London. This report for London First assess the impact of the housing crisis on workers in London s key sectors. We will consider the rental affordability of accommodation for young workers in each of these sectors, forecasting the year at which a typical worker in each sector and occupation would face extreme affordability issues to rent given property types in Inner and Outer London. Further, we will assess the time it will take workers in each of these industries to save up for a deposit and be able to purchase a home with a mortgage, calculating the age at which a typical worker in each sector and occupation can expect to have saved for a modest 10% deposit for a typical first home in London. The report also considers the costs of accommodation in the Home Counties alongside the additional costs and stresses that would be faced by individuals looking to work in the capital and live in the surrounding counties.

8 8 2 London s key sectors Of all the regions of the UK, London has comfortably the largest economy. In 2014, London s GVA 1 stood at over 364 billion 50% more than the next biggest region in GVA terms, the South East. Further, this gap continued to widen over the 10 years to 2014, with economic growth in the capital of just under 65% in nominal terms considerably outpacing all other regions of the UK. In this section we will assess both the largest sectors within London s economy in terms of output and employment. We will also examine up and coming industries in London, analysing the growth in the number of businesses, output and employment within these fast-growing sectors. 2.1 Overview of the London economy Figure 2 Sectoral breakdown of London by GVA, 2014 Financial and insurance activities (18.9%) Real estate activities (12.6%) Professional, scientific and technical activities (11.2%) Information and communication (10.3%) Wholesale and retail trade; repair of motor vehicles (7.5%) Administrative and support service activities (5.5%) Education (4.7%) Construction (4.7%) Human health and social work activities (4.6%) Transportation and storage (4.6%) Public administration and defence; compulsory social security (3.5%) Accommodation and food service activities (3.0%) Manufacturing (2.6%) Other service activities (2.2%) Arts, entertainment and recreation (2.0%) Electricity, gas, steam and air-conditioning supply (1.1%) Water supply; sewerage and waste management (0.4%) Activities of households (0.4%) Source: ONS, Cebr analysis 1 Gross Value Added -

9 9 Given London s role as a global financial centre, it is unsurprising that financial and insurance activities is the largest component of the capital s economy in GVA terms as shown in Figure 2. The sector was directly responsible for almost a fifth (18.9%) of the total GVA in London in 2014 and more recent data for 2015 suggest that the 18,885 businesses in the sector across the capital are responsible for the employment of 400,000 people. Figure 3 Sectoral breakdown of London by employment, 2014 Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles Professional, Scientific and Technical Activities Administrative and Support Service Activities Information and Communication Accommodation and Food Service Activities Financial and Insurance Activities Construction Human Health and Social Work Activities Transportation and Storage Manufacturing Arts, Entertainment and Recreation Source: BIS, Cebr analysis The service sector dominates the economic landscape of London. Following the financial and insurance industries, the real estate sector and professional, scientific & technical activities (which includes industries such as accounting, consulting and legal services) are the next largest sectors of the London economy in GVA terms and both sectors are important employers across the capital in fact more people are employed in professional, scientific & technical activities than in finance & insurance. With services making up the majority of the economic activity across London, the share of the capital s output arising from the manufacturing sector stands well below the share seen across the UK as a whole

10 10 at just 2.6%. Of the manufacturing that is present in the capital, the largest in terms of GVA is the production of food, tobacco and beverages. Still, the sector is an important employer, with 183,000 people working in the sector across the capital. 2.2 Up and coming sectors While the financial sector remains the largest contributor to the capital s economy, its contribution to growth has diminished since the financial crisis of In 2007, before the financial crisis took hold, financial and insurance activities made up 19.5% of the capital s outlook. Since then the share has declined to 18.9% in 2014, dropping as low as 17.5% in In GVA terms, real estate has been the most rapidly growing sector in recent years. Compared with 8.3% in 2008, the sector accounted for 12.6% of London s GVA in This growth has lifted it above both the business professional, scientific & technical activities and information & communication sectors which have held relatively steady as a share of overall GVA in London over the same period. However, while those two sectors have held relatively steady in terms of share of output, industries within both of them have seen significant growth in employment and business counts in recent years. Figure 4 Employment in London s Flat-White economy 270, , , , , , , , , , Source: ONS, Cebr analysis A notable area of growth in the London economy in recent years has come from industries such as software development, creative media, advertising and market research. Termed the Flat-White Economy, employment in these industries across the capital has bloomed since the financial crisis. While still only employing around 60% the number of workers employed in financial services in 2014, the number of people employed within the Flat-White economy rose by 40% between This compares with a 24.2% rise in employment within the financial services sector, highlighting the growing importance of these other industries to the London economy and, as shown in Table 1, many of the individual sectors of the Flat White Economy found themselves within the fastest growing industries for employment in London between

11 11 Table 1 Employment growth in London by sector (Flat White Economy Sectors in bold) Sector Percentage change in employment ( ) Extraction of crude petroleum and natural gas 120.4% Manufacture of electrical equipment 90.3% Information service activities 80.7% Programming and broadcasting activities 79.7% Creative, arts and entertainment activities 66.7% Office administrative, office support and other business support activities 60.9% Water transport 55.7% Computer programming, consultancy and related activities 40.6% Travel agency, tour operator and other reservation service and related activities 36.5% Manufacture of food products 35.8% Repair of computers and personal and household goods 35.5% Activities of head offices; management consultancy activities 34.0% Waste collection, treatment and disposal activities; materials recovery 33.4% Manufacture of wearing apparel 29.2% Advertising and market research 27.6% Motion picture, video and television programme production, sound recording and music publishing activities 25.6% Accommodation 25.4% Other professional, scientific and technical activities 23.2% Source: ONS, Cebr analysis

12 12 3 Rental affordability While London s housing crisis has far reaching impacts, it disproportionately hits both those in lower paying sectors of the economy and younger workers who are still to benefit from the salary increases and promotions that come with time and experience. In the 12-months to the end of September 2015, the median monthly rent across London stood at 1,400 more than twice the median across the rest of England. This price differential can be seen across the property spectrum, with the typical room in a flatshare in the capital costing more than the median monthly rent on a two-bedroom property in the North West, East Midlands, Yorkshire & Humber and the North East. Figure 5 Median monthly rent by region, 12-months to 30 September ,800 1,600 1,400 1,200 1, Room in flat/house share Two Bedroom property One Bedroom property Three Bedroom property Source: Valuation Office Agency, Cebr analysis Using data on median rents across London collected by the Valuation Office Agency (VOA) and earnings data from the Office for National Statistics (ONS) Annual Survey of Hours and Earnings (ASHE), this section will assess the affordability of rental property in London for workers in different age groups and sectors. Across the age categories, average earnings peak between However, median earnings levels for the whole of the age category are only up slightly from the median seen in the age group in sharp contrast to the differential between those in their 20s and those in their 30s. This has an impact on the affordability of rental property across the age categories, shown in Figure 6. As shown, a onebedroom flat in Inner London would create affordability issues for single workers earning the typical salary for each of the age categories in London, with rent accounting for over 50% of net earnings. In fact, for an individual on a typical London salary, renting a room as part of a flat-share is the only way to keep house costs to around affordable levels (35% of net income according to the Mayor).

13 13 Figure 6 Median monthly rent as a share of median net income for workers in London, by age group (12-months to September 2015) % 20% 40% 60% 80% 100% 120% One-bed (Outer London) One-bed (Inner London) Studio (Outer London) Studio (Inner London) Room (Outer London) Room (Inner London) Source: Valuation Office Agency, ONS, Cebr analysis Split between a couple, the cost of renting a one-bedroom flat drops below 50% of net income based on median earnings for most age-groups. However, a couple in their 20s would still be required to pay over 51% of their earnings in order to rent a typical one-bedroom flat in Inner London making it practically unaffordable. Further, even as a couple, a typical one-bedroom flat in Inner London would still account for more than 40% of combined earnings in each age-group, highlighting the high-cost of renting in London. Rental affordability also varies considerably across the different sectors of the economy, reflecting the higher median salaries found in some industries and professions. Compared to the typical London salary, some sectors have a notably higher median salary and, as a result, find that renting in London is more affordable. This can be seen in Figure 6, with a one-bedroom flat in Inner London affordable to single workers in sectors such as finance, insurance, consultancy and professions such as doctors and other medical practitioners. However, the graph also highlights that the typical London worker in many of the sectors would struggle to afford a one-bedroom flat in Inner London based on median rents.

14 14 Figure 7 Median monthly rent as a share of median net income for workers in London, by sector (12- months to September 2015) Financial services Medical Practitioner Insurance, reinsurance and pension funding Information service activities Head office and management consultancy Electricity, Gas, Steam & Air.Con Supply Legal and accounting activities Computer programming and consultancy Telecommunications Publishing activities Architectural and engineering activities Advertising and market research Scientific research and development Public Administration and Defence Teaching and Educational Professional Programming and broadcasting activities Transportation and Storage Nurse Construction Real Estate Activities Manufacturing Water collection, treatment and supply Trade and repair of motor vehicles Admin and Support Service Activities Arts, Entertainment and Recreation Retail trade Accomodation & Food Service Activities One-bed (Outer London) One-bed (Inner London) Source: Valuation Office Agency, ONS, Cebr analysis The rent on a typical one-bed flat in Inner London would account for more than 50% of the median monthly net income all but six of the sectors shown above. This includes some of the capital s larger sectors in GVA terms such as construction and real estate activities. Further, it includes most of the up and coming sectors across the London economy including computer programming, advertising and market research. This would make it difficult for individual workers in these sectors to find affordable rental accommodation in Inner London without reverting to sharing a property with others. This is particularly, true for younger workers in these sectors, who typically earn less than the overall median salary for the sector. Workers in the accommodation, food service and retail sectors are particularly

15 15 impacted by London s housing crisis. Median net earnings in both sectors are lower than the typical monthly rent for a one-bedroom flat in Inner London, meaning it would be extremely difficult for even a couple that work in those sectors to afford to share a one-bedroom flat in Inner London. Rental affordability differs within both Inner and Outer London, with some local authorities providing cheaper alternatives to the average property in the wider area. For instance, the average private monthly rent on a one bedroom flat in Lewisham is more than 30% lower than the average for Inner London as a whole. Figure 8 Median monthly rent as a share of median net income for workers in London, by Local Authority (12-months to September 2015) Kensington and Chelsea City of London Westminster Camden Islington Wandsworth Tower Hamlets Hammersmith and Fulham Hackney Southwark Lambeth Richmond upon Thames Haringey Ealing Merton Brent Hounslow Barnet Kingston upon Thames Lewisham Newham Waltham Forest Harrow Greenwich Enfield Hillingdon Bromley Sutton Redbridge Croydon Havering Bexley Barking and Dagenham 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Valuation Office Agency, ONS, Cebr analysis

16 16 Figure 8 shows the extent that the affordability of a one bedroom flat differs across London for a worker on the typical salary. At the top-end, average rents in boroughs such as Westminster and Kensington and Chelsea reflect more than 90% of the typical monthly net incomes in London. Given that income tax and national insurance contributions would typically represent over 20% of gross earnings, a one bedroom flat in these boroughs is clearly out of reach for the typical worker in the capital. However, it is not just these boroughs where workers would suffer from affordability issues, a one bedroom flat reflects over 50% of median earnings in 19 of the boroughs and all above 30%. 3.1 Extreme rental affordability issues Housing is a vital part of local infrastructure for businesses, necessary to provide accommodation to the workforce. However, as shown above, many workers in London have already seen rents slide above levels classified as affordable and workers in certain sectors and occupations would find it practically impossible to afford to rent a one-bedroom flat in Inner London, with rents representing over 60% of the typical worker s net income. Still, there currently exists a range of somewhat more affordable options in the form of studio flats and rooms in flatshares. These options are increasingly being turned to by workers in many sectors of the London economy but, with rents rising rapidly across all property types, these are becoming increasingly less affordable. Using forecasts for earnings and London rental prices, we have examined each of the sectors of the London economy and calculated the point at which rents on a given property type would be extremely unaffordable, defined as representing 60% or more of an individual s or couple s net income. As shown in Figure 9, by 2040, young workers in the majority of sectors in London will be reliant on flatshares to provide them accommodation in the capital if current trends in earnings and rental prices persist. While a studio in Inner London will still fall under 60% of net income for workers in financial services in 2040, workers in many of the capital s up and coming sectors will have to rely on flatshares in order to live in Inner London as early as Further, by the end of the forecast horizon, even a studio in Outer London is likely to be out of reach of workers in sectors such as computer programming/consultancy, advertising and market research. It s not just younger workers that will face challenges in the coming decades if current trends persist. As shown in Figure 10, a couple of typical workers aged in all but two sectors/occupations could not afford to rent a three bedroom flat in Inner London. As a result, it is likely that many will be forced to turn to the boroughs of Outer London or even the Home Counties in order to start a family.

17 Figure 9 Forecasted year for which typical worker aged would come under extreme housing pressure (rents comprising 60% or more of net income) Room in a house/flatshare (Inner London) 17 Room in a house/flatshare (Outer London) Studio (Inner London) Studio (Outer London) 1 bed flat/house (Inner London) 1 bed flat/house (Outer London) Manufacturing Already unaffordable 2026 Already unaffordable Already unaffordable Electricity, Gas, Steam & Air.Con Supply Water collection, treatment and supply Already unaffordable 2022 Already unaffordable Already unaffordable Construction Already unaffordable 2023 Trade and repair of motor vehicles Already unaffordable 2022 Already unaffordable Already unaffordable Retail trade Already unaffordable Already unaffordable Already unaffordable Already unaffordable Transportation and Storage Already unaffordable 2021 Accomodation & Food Service Activities Already unaffordable Already unaffordable Already unaffordable Already unaffordable Publishing activities Already unaffordable 2028 Programming and broadcasting activities Already unaffordable 2024 Telecommunications Already unaffordable 2022 Computer programming and consultancy Already unaffordable 2025 Information service activities Already unaffordable 2028 Financial services Insurance, reinsurance and pension funding Real Estate Activities Already unaffordable 2020 Legal and accounting activities Head office and management consultancy Architectural and engineering activities Already unaffordable 2024 Scientific research and development Already unaffordable 2019 Advertising and market research Already unaffordable 2026 Admin and Support Service Activities Already unaffordable 2023 Already unaffordable Already unaffordable Public Administration and Defence Already unaffordable 2018 Arts, Entertainment and Recreation Already unaffordable 2016 Already unaffordable Already unaffordable Medical Practitioner Nurse Already unaffordable 2016 Teaching and Educational Professional Already unaffordable 2018 Notes: -' represents sectors in which the associated form of housing is not under extreme housing pressure by 2040

18 Figure 10 Forecasted year for which a couple of typical workers aged would come under extreme housing pressure (rents comprising 60% or more of net income) 1 bed flat/house (Inner London) 2 bed flat/house (Inner London) 2 bed flat/house (Outer London) 3 bed flat/house (Inner) 3 bed flat/house (Outer) Manufacturing Electricity, Gas, Steam & Air.Con Supply Water collection, treatment and supply Already unaffordable 2030 Construction Trade and repair of motor vehicles Already unaffordable 2031 Retail trade Already unaffordable 2022 Transportation and Storage Accomodation & Food Service Activities 2025 Already unaffordable 2028 Already unaffordable 2020 Publishing activities Programming and broadcasting activities Telecommunications Computer programming and consultancy Information service activities Financial services Insurance, reinsurance and pension funding Real Estate Activities Legal and accounting activities Head office and management consultancy Architectural and engineering activities Scientific research and development Advertising and market research Admin and Support Service Activities Already unaffordable 2032 Public Administration and Defence Arts, Entertainment and Recreation Already unaffordable 2028 Medical Practitioner Nurse Teaching and Educational Professional Notes: -' represents sectors in which the associated form of housing is not under extreme housing pressure by 2040

19 19 4 Years to buy While workers in London earn, on average, more than those in other regions of the UK, the housing crisis in London has placed considerable pressure on those looking to get on the capital s property ladder. The combination of property prices growing faster than wages and the increasingly expensive cost of renting has meant that home ownership in the capital has become less prevalent across younger age groups. The growing difficulties being faced by workers looking to get onto the London housing ladder are summarised in Figure 11, which shows the number of years it would take a worker in the capital to save for a 10% deposit based on the average property price, average salary and typical savings ratio across London. It s worth noting that while buyers are able to secure mortgages with a 10% deposit, the products on offer do not typically offer the most competitive rates. Loan to value ratios of over 80% typically require mortgage insurance and higher pricing adjustments. Figure 11 Years required to save for a 10% deposit Inner London (Median Earnings) Outer London (Median Earnings) Inner London (Mean Earnings) Outer London (Mean Earnings) Source: Land Registry, ONS, Cebr analysis Over the past ten years, the time taken to save for a deposit has increased in each category assessed. This has been particularly apparent in Inner London, where the time taken to save for a deposit has increased around 70% to 15 years based on the median earnings in the capital and just under 12 years based on the average salary. Outer London provides a more achievable option for workers looking to get onto the capital s housing market. However, the time taken to save for a deposit in Outer London has still increased by over 25% in the past decade and it will currently take over nine years for someone earning the typical salary in London to save enough for a 10% deposit. Using data for median earnings by sector and age group, we have extended the analysis to assess the age at which workers in the capital can expect to be have saved for a deposit on a London home, based on the average price paid by first-time buyers in recent years, a 10% deposit and an individual beginning to earn and save for a home from the age of 22 (24 for medical practitioners due to qualification

20 20 requirements). According to data from Halifax, the average age of a first time buyer across the UK has increased from 28 years old in 1995 to 31 in Figure 12 Estimated age to save a 10% deposit, London, by sector Manufacturing Water collection, treatment and supply Trade and repair of motor vehicles Transportation and Storage Publishing activities Telecommunications Information service activities Electricity, Gas, Steam & Air.Con Supply Construction Retail trade Accomodation & Food Service Activities Programming and broadcasting activities Computer programming, consultancy and related activities Source: ONS, Cebr analysis As can be seen in Figure 12 and Figure 13, the age that a worker beginning their career can expect to be in a position to afford a deposit has increased across every sector of the economy over the past decade as house prices in London have outpaced the rates of earnings growth. For workers in 2015, the estimated age at which enough will be saved for a typical deposit ranges from just under 30 for a typical worker in financial services to a little over 38 for a worker in the retail and accommodation sectors of the economy. Compared with 2005, these ages have risen from between in financial services and between in the retail and accommodation industries. Currently, it would take a worker progressing through their career in one of London s up and coming sectors could expect to have save a 10% deposit

21 21 for a typical first-home in London by around the age of 32, though most would have been able to save an equivalent deposit before 30 a decade ago. The pressure on workers in the capital is apparent when considering that the typical workers in only nine of the 27 sectors analysed could expect to put together an adequate deposit for a London home in under a decade. Further, most workers would find it difficult to purchase a property in London based on just a 10% deposit due to loan-to-income ratios. Based on limits from the Bank of England, mortgage lenders are not able to lend more than 15% of their total new residential mortgages at loan-to-income ratios of 4.5 times or above. Based on median earnings in each of the sectors, single buyers under the age of 30 would find it extremely difficult to secure a mortgage on the average first-time home in London with a 10% deposit. Further, couples in just two sectors/occupations, those working in the financial sector and medical practioners, would fall under the 4.5 loan-to-income ratio with a 10% deposit. With ratios above 5, couples in each of the up and coming sectors would find it difficult to secure a mortgage before the age of 30 without an additional boost to their deposit. Figure 13 Estimated age to save a 10% deposit, London, by sector Financial services Real Estate Activities Head office and management consultancy activities Scientific research and development Admin and Support Service Activities Arts, Entertainment and Recreation Nurse Insurance, reinsurance and pension funding Legal and accounting activities Architectural and engineering activities Advertising and market research Public Administration and Defence Medical Practitioner Teaching and Educational Professional Source: ONS, Cebr analysis

22 22 Given the continued imbalance between the demand for and supply of new homes in London, we expect house prices in the capital to continue to rise at rates above the levels of wage growth across the economy. This will put further pressure on workers in each of the sectors shown in Figure 12 and Figure 13. By 2025, we expect the estimated age of first house purchase to have risen above 30 for each sector, with a number that are already in the 30s sliding above 40. The median earnings in just two occupations, those working in financial services and medical practitioners, would be able to save a typical deposit in under a decade of beginning to work by With the time taken to save for a deposit on the average first-time house purchase continuing to rise, workers are increasingly getting onto the property ladder at later stages of their life. This has been across the UK as a whole, as shown in Figure 14. Figure 14 Percentage of each age group that are home owners, UK 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% / /12 Source: English Housing Survey, Cebr analysis However, home ownership rates in London are notably lower than they are across the rest of England. As a result, the shares shown in Figure 14 are likely to be lower for London, particularly among the lower age groups. An additional challenge facing buyers in the capital is that, as the age one can expect to be able to purchase a home increases, the process of purchasing one s first home becomes entwined with other life stages, such as starting a family. As the time between getting a foot on the property ladder and starting a family narrows, it is likely that prospective first-time buyers increasingly shift their preferences to properties with two or more bedroom and, in some cases, to certain types of properties e.g. a house with a garden as opposed to purpose-built flats. The issue for buyers is that these properties, particularly in London, come at an even more pronounced premium the average semi-detached house in London cost over 60% more than the average purpose-built flat in 2014.

23 23 Figure 15 Estimated age to save a 10% deposit, South East, by sector Manufacturing Water collection, treatment and supply Trade and repair of motor vehicles & motorcycles Transportation and Storage Publishing activities Telecommunications Electricity, Gas, Steam & Air.Con Supply Construction Retail trade Accomodation & Food Service Activities Programming and broadcasting activities Computer programming, consultancy and related activities Information service activities Source: ONS, Cebr analysis In terms of property, the Home Counties offer London workers a cheaper alternative to the housing options in the capital. As shown in Figure 15 and Figure 16, individuals in most sectors could expect to save for a deposit on the average first-time property in the South East before the age of 30. Additionally, detached, semi-detached and terraced houses are substantially more affordable when compared with the same property types in London the average terraced property in the South East was less than half the price of the average London terrace in 2014.

24 24 Figure 16 Estimated age to save a 10% deposit, South East, by sector Financial services Real Estate Activities Head office and management consultancy activities Scientific research and development Admin and Support Service Activities Arts, Entertainment and Recreation Nurse Insurance, reinsurance and pension funding Legal and accounting activities Architectural and engineering activities Advertising and market research Public Administration and Defence Medical Practitioner Teaching and Educational Professional Source: ONS, Cebr analysis However, property prices in the South East of England are also rising at fairly rapid rates and workers in London are themselves likely to find it more difficult to purchase in the South East over the coming decade. In addition to this, transportation costs into London from the surrounding counties, analysed in the next section, make combining living in the South East and commuting into London somewhat more expensive than purely considering those costs associated with housing. As a result, as prices in both London and the surrounding counties rise, people may begin to look to live and work outside of the region particularly when considering making a move to more expensive, family-style homes.

25 25 5 The cost of commuting Given that it is becoming increasingly difficult for workers, especially those in lower paid sectors, to find affordable accommodation in central London, those that do not want to compromise on the size and quality of housing any further are forced to move further away. Living a greater distance away from one s place of employment entails numerous costs both direct and indirect. The most obvious and substantial of the direct commuting costs are the travel fees. As the majority of long-distance commuters into London rely on the tube and rail network to reach work, at the start of this section we consider the annual cost of commuting into London using an annual travelcard. The cost of the annual travelcard depends on the travel zones that the passenger passes during the journey. London and surrounding areas are divided into 9 travel zones based on the distance away from central London. There are also several commuter towns, such as Sevenoaks, in the vicinity of London that are a popular choice for London s workers that do not wish to or cannot afford to live in the capital. These towns are not covered by the 9 travel zones and require a separate rail ticket. Figure 17 London travel fare zones Source: Miles Faster website An annual travelcard for travel within central London (zones 1 and 2) costs 1,296 in Travelcards for zones that are further away are far more expensive. At the most extreme end an annual travelcard for zones 1-9 and Shenfield costs 4,012 in 2016.

26 26 Table 2 Cost of an annual travelcard, by zone, 2016 Travel zones Cost of annual travelcard Zones 1-2 1,296 Zones 1-3 1,520 Zones 1-4 1,860 Zones 1-5 2,208 Zones 1-6 2,364 Zones 1-7 2,568 Zones 1-8 3,036 Zones 1-9 3,368 Zones Watford Junction 3,380 Zones Shenfield 4,012 Commuting from the home counties 2 Source: Transport for London, National Rail, Cebr analysis 4,670 For those living far away from central London, the price of an annual travelcard is drastically higher than for those living in zones 1 and 2. This is shown in Table 3. Table 3 Additional cost of commuting for workers living outside of Zones 1 and 2, 2016 Zone of residence % more spent on commuting than if living in Zones 1 and 2 more spent on commuting than if living in Zones 1 and 2 Zone % 224 Zone % 564 Zone % 912 Zone % 1,068 Zone % 1,272 Zone % 1,740 Zone % 2,072 Watford Junction 160.8% 2,084 Shenfield 209.6% 2,716 Commuting from the home counties 260.3% 3,374 Source: Transport for London 2 The home counties are the ones that border or surround London. They include Berkshire, Buckinghamshire, Essex, Hertfordshire, Kent, Surrey and Sussex.

27 ,296 1,921 1,520 2,253 1,860 2,208 2,758 2,364 2,568 3,273 3,036 3,505 3,368 3,380 3,807 4,501 4,993 5, For workers commuting from zones 4, 5 and 6 the annual cost of commuting in 2016 was up to 1,068 or 82.4% more than for those living nearer to their place of work. For those living in Zones 7-9 (a set of stations outside of greater London that are serviced by the London Underground and Overground) the difference in commuting cost is even greater. Those living near Zone 9 stations have to pay 2,072 more than people commuting only within Zones 1 and 2. An annual travel ticket from Shenfield in Essex to central London costs 4,012 - more than three times the cost of commuting for workers living in central London. Should the cost of housing continue to increase at rates above wage increases, it will become necessary for more inner London workers to live outside of inner London and endure longer commutes to work. Rising travel costs will also offset gains from lower housing costs; annual travelcard price forecasts for the next 10 years are shown in Figure 18. Figure 18 Price of an annual travelcard, by travel zone, 2016 and Travel zones Zones 1-2 Zones 1-3 Zones 1-4 Zones 1-5 Zones 1-6 Zones 1-7 Zones 1-8 Zones 1-9 Zones Watford Junction Source: Transport for London and Cebr analysis Our projections for future travelcard ticket prices are based on our expectations for the Retail Price Index (RPI). Transport for London assumes its rates will rise in line with RPI inflation in the benchmark month of July the previous year plus 1%. For example, in 2017 travelcard prices will rise by July 2016 s RPI plus 1%. This is the same assumption that Transport for London (TfL) uses in its planning. When we consider the cost of housing and commuting together across Inner London, Outer London and the Home Counties we see that those that live further away from central London spend far less on accommodation, but far more on commuting. This is true for both those that are living alone or with a partner in a 1 bedroom property as well as for those in family homes (a 3 bedroom property). This is shown in Figure 19 and Figure 20.

28 28 Figure 19 Average annual spend on rent (1 bedroom property) and commuting, ,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Inner London Outer London Home counties Average spent on commuting annually Average spent on rent annually Figure 20 - Average annual spend on rent (3 bedroom property) and commuting, ,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Inner London Outer London Home counties Average spent on commuting annually Average spent on rent annually Source: Valuation Office Agency, TfL, Cebr analysis

29 29 For those workers living in the Home Counties in a one bedroom property nearly 40% of their total accommodation and commute spending goes towards commuting. The comparable figures for Inner and Outer London are 7.3% and 13.7% respectively. The higher cost of commuting is offset by lower housing costs which mean that the total cost of housing and commuting is still the lowest in the Home Counties and highest in Inner London. However, having to spend a greater amount of money on travel does eat into the savings made by living further away from central London. Furthermore, those workers that live in a 1 bedroom in the Home Counties will pay on average 56.6% less in rent, but 57.9% more in commuting costs than those living in Outer London. This means that out of the 4,469 savings realized annually by workers living in the Home Counties as opposed to in Outer London, 60.5% or 2,702 is eaten up by higher commuting costs. This means that for those that cannot afford to live in Outer London, often living in the Home Counties is not an option either. The burden of long and more expensive commutes is the heaviest for those that both live far away from their place of work in central London and work in lower paid jobs. For example, a nurse living in one of the Home Counties but working in central London, can on average expect to spend nearly a fifth (17.2%) of her pay on commuting costs. This compares to 5.1% for a nurse living in Inner London. Even those in up and coming industries in the private sector would see transport place a heavy burden on their finances. Workers in the programming and broadcasting sector, which includes sectors that make up part of London s Flat White Economy, can expect to spend 13.6% of their net salary commuting into the capital from the Home Counties. For those employed in industries with higher average salaries, commuting costs are a smaller financial burden, but still vary depending on place of residence. For example, a financial services worker living and working in Inner London spends an average of 2.0% of pay on commuting costs compared to 2.9% for a worker living in Outer London and 6.8% for one living in the Home Counties. It is important to keep in mind that higher commuting costs for those living in Outer London or the Home Counties are partially offset by the lower cost of living in those places. While affordability issues are a problem at the individual level, they can also create concerns on a broader economic level. For example, high growth industries that have emerged in London in recent years may find it more difficult to attract and retain top talent as a result of high housing costs and expensive commutes. For example, workers in the programing and broadcasting industry that commute to work from the Home Counties spend on average 13.6% of their net salary on commuting charges. Longer commutes also entail an indirect cost a cost to a worker s wellbeing and productivity. A 2014 study by the Office for National Statistics titled Commuting and Personal Well-being expands on earlier work by Stutzer and Frey (2008) and Robert, Hodgson and Dolan (2009). The ONS study finds that, holding all else equal commuters have lower life satisfaction, a lower sense that their daily activities are worthwhile, lower levels of happiness and higher anxiety on average than non- commuters. These negative effects are especially pronounced for commuters whose journey times take minutes. Diminished wellbeing among commuters can also translate into lower productivity at work. A study from Singapore Management University estimates that each hour of lost sleep means 8.4 minutes at work are wasted online 3 in a day a behaviour they refer to as presenteeism i.e. being at work but working below full capacity. Therefore, when a person employed in central London considers moving to outer London or one of the Home Counties, in addition to considering the cost of housing, it is also important to keep in mind both the direct and indirect costs of commuting. 3

30 30 Figure 21 Annual cost of commuting as a share of net salary, by place of residence and industry, % 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Inner London Outer London Home counties Source: Annual Survey of Hours and Earnings, TfL, Cebr analysis Putting aside the financial implications of longer and more expensive commutes, spending more time each day in transit has other negative implications as well. Time spent commuting takes away from both time available to work as well as that left over for leisure activities. A 2014 study carried out by the Office for National Statistics, titled Commuting and Personal Well-being, finds that holding all else equal, commuters have lower life satisfaction, a lower sense that their daily activities are worthwhile, lower levels of happiness and higher anxiety on average than non-commuters. This supports similar findings from studies in 2008 by Stutzer and Frey and 2009 by Robert, Hodgson and Dolan. Some of the negative impacts of commuting are offset by the benefits associated with the decision to live further away from one s place of employment. For example, jobs in central London are often better paid than those in the rest of the country while housing costs further away from central London tend to be lower. Therefore, some workers are happy to endure longer commutes for the sake of living in larger properties. However, if the costs of commuting continue to increase as we expect them to, the added benefits of living in Outer London or the Home Counties will diminish, putting a further strain on commuters.

31 31 6 Conclusions Despite higher wages available for workers in London, this report highlights the burden that the cost of housing in London places on renters across different sectors of the London economy and the challenges faced by workers hoping to save for a deposit and get themselves onto the property market. Based on the median earnings across London and the average property price, it would take an individual over nine years to save for a 10% deposit in Outer London and 15 years for a deposit on an Inner London property. Worryingly, the upward trend seen in these estimates over the past decade looks unlikely to cease in the next 10-years, with supply of new homes continuing to fall short of the levels required. Given our current forecasts for property prices and wage growth, we expect that by 2025, it will take an individual on the typical London salary 20 years to save for a deposit on the average property in Inner London. However, average salaries vary considerably across different sectors and occupations, placing some workers under particularly acute affordability issues. Looking specifically at the average price for a firsttime home in London, which is more than 20% below the market average, workers in a number of sectors, many of which see high rates of staff turnover, would struggle to save a 10% deposit before the age of 35. By 2025, we expect individuals working in a few of these sectors to struggle to put together such a deposit before the age of 40. Even then, individual workers, and even couples, in many of these sectors would require much greater savings in order to purchase a home due to restrictions on loan-toincome ratios. While surrounding towns in the South East offer more affordable property for workers in those sectors most pressured by the London housing market, the high cost of transport into the capital negates much of the savings to be found by commuting in from the Home Counties. Worryingly, the estimated age by which an individual could have saved a deposit looks set to rise above 35 in a range of more professional occupations over the next 10 years and loan-to-income ratios will also become more of a hurdle. Unless the housing challenges across the capital markedly improve in the coming years, employers including the government are going to face increasingly hefty costs in order to attract and retain talent in London across a range of important sectors and occupations.