Why It Matters House Price Affordability
Summary
We have shared insights into the affordability of different residential property types in a given postcode, calculated as a ratio between average household income (in each borough and at the GLA level) and average property values in the postcode.
| Dataset | Explanation |
|---|---|
| Postcode House Price Affordability (Detached) | This tells you what multiple of this postcode’s median annual income is needed, to purchase a detached house in this postcode. |
| Harmonised Postcode House Price Affordability (Detached) | This is an indicative score that lets you know how far above or below the London-wide mean your average neighbourhood’s Postcode House Price Affordability (detached) is. We have rescaled the results to ease interpretation so that a score of above 50 represents the mean, a number closer to 100 represents less affordability, whereas scores closer to o represents a greater level of affordability. |
| Postcode House Price Affordability (Flat) | This tells you what multiple of this postcode’s median annual income is needed, to purchase a flat in this postcode. |
| Harmonised Postcode House Price Affordability (Flat) | This is an indicative score that lets you know how far above or below the London-wide mean your average neighbourhood’s Postcode House Price Affordability (flat) is. We have rescaled the results to ease interpretation so that a score of above 50 represents the mean, a number closer to 100 represents less affordability, whereas scores closer to o represents a greater level of affordability. |
| Postcode House Price Affordability (Semi-Detached) | This tells you what multiple of this postcode’s median annual income is needed, to purchase a semi-detached house in this postcode. |
| Harmonised Postcode House Price Affordability (Semi-Detached) | This is an indicative score that lets you know how far above or below the London-wide mean your average neighbourhood’s Postcode House Price Affordability (semi-detached) is. We have rescaled the results to ease interpretation so that a score of above 50 represents the mean, a number closer to 100 represents less affordability, whereas scores closer to o represents a greater level of affordability. |
| Postcode House Price Affordability (Terrace) | This tells you what multiple of this postcode’s median annual income is needed, to purchase a terrace house in this postcode. |
| Harmonised Postcode House Price Affordability (Terrace) | This is an indicative score that lets you know how far above or below the London-wide mean your average neighbourhood’s Postcode House Price Affordability (terrace) is. We have rescaled the results to ease interpretation so that a score of above 50 represents the mean, a number closer to 100 represents less affordability, whereas scores closer to O represents a greater level of affordability. |
| Postcode House Price Affordability (All Property Types) | This tells you what multiple of this postcode’s median annual income is needed, to purchase the average house in this postcode. |
| Harmonised Postcode House Price Affordability (All Property Types) | This is an indicative score that lets you know how far above or below the London-wide mean your average neighbourhood’s Postcode House Price Affordability (the average) is. We have rescaled the results to ease interpretation so that a score of above 50 represents the mean, a number closer to 100 represents less affordability, whereas scores closer to 0 represents a greater level of affordability. |
Why the metric matters from a commercial inhabitant’s perspective
Because housing markets are different in each neighbourhood area/postcode, house price affordability should be a consideration for all commercial inhabitants. For real estate developers and businesses dependent on a geographically local clientele, in particular, it is a key consideration. So far as real estate developers are concerned, a fundamental requirement of their profit motive compels them to sell their product, and so the affordability of their housing developments cannot outstrip what the market can bear in each neighbourhood area. By ensuring that their target clientele can afford the properties being sold, real estate developers can avoid lessening their return yields.
For land purchasers, and their purchasing of developable land, housing affordability is a highly relevant consideration as affordability trends can be used to estimate future areas likely to decline or be gentrified.
House price affordability will also be a metric of interest for employers who may experience upwards pressure on employee wages if the prices of properties in the areas close to the business are unaffordable for staff. If house purchase/rental prices are much higher than staff can afford, employees commonly respond by either seeking a higher wage to compensate for either staying in the area with high rents or to make up for the increase in time and money spent commuting to and from work.
Why the metric matters from a residential inhabitant’s perspective
Housing price affordability should be a consideration for residents as real estate usually represents the single largest investment in an individual’s portfolio. Furthermore, choosing the type of home and the option of renting or buying is a key decision of every individual/household.
As affordability essentially determines whether or not a household can purchase or rent property in a particular area, its knock-on effects are apparent on household budget planning, spending and saving habits, debt levels, expenditure on home improvements, lifestyle and personal.
Given the previously highlighted knock on effects real estate affordability can have on a household, understanding local affordability allows local residents to benchmark/compare themselves to their fellow neighbourhood inhabitants. As a result, residents can determine the extent to which they have overstretched or not in terms of their spending on housing. There is a strong body of research that affirms the fact that people feel most tied to communities when they are socially, and economically “in sync” with that community. So, for example, being in sync with a community would require residents of a neighbourhood to expect the majority of the community would enjoy a similar calibre of transport choices, holidays, food and educational attainment (amongst many other things). It is this primal effect of housing affordability on one’s ability to keep in sync” with their community that makes housing affordability a key concern for residential inhabitants.
In addition, affordability trends provide insight on areas likely to outpace local wages, making these areas hotspots for gentrification while more affordable areas are likely to see an influx- as those areas are likely to attract those within the lower income range and those looking for less expensive housing options.
General commentary
Housing affordability can be measured in different ways: The most common way compares house prices to regional, local or income, to generate a ratio of house prices to incomes or earnings. This method is easy to construct and is especially useful in making comparisons over a period of time and between areas. The downside however is that it does not reveal much information on differences between households, and increases in ratio over time do not necessarily indicate a worsening affordability. Alternative measures usually measure the proportion of income spent on housing. This method, though quite simple and easy to implement, is not perfect. There are usually concerns about the validity of the method over time, across markets and household types.
Affordable housing is desirable and potentially reduces the proportion of a household’s income needed to spend on housing. Yet, the downsides are that, it can also lead to higher densities in these neighbourhoods and lead to a socially undesirable position of living in too close a proximity to each other.
Unaffordable areas on the other hand, create unfair competition which drives prices higher, resulting in some residents being out-priced and the eventual gentrification of these areas. ‘Ghost towns’ are also created as more foreign nationals and investors buy these expensive homes mainly as stores of capital which appreciate in value due to their location.
Recently, there have been house-price declines, with expensive river side districts like Wandsworth and Westminster, being the hardest hit. Despite this, it’s still hard for buyers to stamp out a deposit to buy a home. Any sign of further price decreases will be welcome news to struggling first-time buyers and those within the lower income bracket.
Trivia
London is one of the world’s 3 most expensive cities to own a home, with many homes being unaffordable for the average person. Rising house prices now also stand at an average 7.6 times the average annual salary, more than double the figure for 20 years ago, according to official figures.
Stockwell Terrace, London (Photograph: Stephen Richards, geograph.org.uk)
History
House prices in the UK capital have risen by almost two-thirds over the past decade according to studies. Thus, for first-time buyers, the average house price is over five times average earnings. This is much higher than previous historical trends.
The new housing affordability figures in England and Wales between 1997 and 2016, issued by the Office for National Statistics, stated that the median price paid for a home rose by 259% over this period, while median individual annual earnings could only manage a 68% rise. The home ownership rate has also slumped to 63 percent, down from 73 percent a decade ago, due to soaring house prices relative to earnings and restrictions on mortgage borrowing imposed since the financial crisis.
Kensington and Chelsea are currently the least affordable area to buy a property in England and Wales. In 2018, the ratio of house prices to annual income in this area stood at about 38.5 times average annual salary; more than three times the figure in 1997, when it was 11.8 times the earnings. Of the 10 least affordable local authorities in the country, seven were in London.