Tuesday, 2 October 2012

Affordable Housing

From time to time, people talk about the need for "affordable housing" - most recently by Shadow Chancellor, Ed Balls, at the Labour Conference. But what do we mean by 'affordable housing'?

The first thing to look at is the cost of housing. Taking data from Lloyds Banking Group's website, it is very clear to see that average house prices have risen, fairly steadily, but does this, by itself mean houses are not affordable? The answer to this is clearly no - assuming wages have risen at a similar rate!

Rather helpfully, the Lloyds Banking Group website also has data about the ratio of average house prices to average salaries.
A close study of this chart indicates a long-term ratio of 4 - i.e. a person on an average salary going for a 100% mortgage would need to be able to obtain one that was equal to 4 times their salary. To me, this still seems a little high because, when I first looked to buy a house, the going rate for a mortgage was 2.5 times the higher wage plus 1 times the lower, or 3 times a single wage. This point aside, the chart still shows that - despite the economic collapse in 2008, current house prices are nearly 4.5 times an average salary. So, does this mean that, if mortgage lenders offered mortgages at 5 times a person's salary, everybody would be able to afford to buy a house?

The simple answer is no, because the ratio given above is based on average salary and, in April 2009, this was £35,638, rising to £35,830 in April 2010. HM Revenue & Customs helpfully publish tables showing who pays what taxes. One of these shows the number of people paying tax at various levels, in the tax year 2009-10, which is summarised in the table to the left.

This shows that up to 27,846,000 people earned below £30,000 so, even if they could get a mortgage at five times their salary, they could not afford an average house. It is also worth remembering that, when people talk about affordable housing, they often refer to certain 'essential workers' who need to be able to live all over the country. These include:
Given that, in August 2012, the Lloyds Banking Group reckoned an average house cost £160,256, that means these two groups would require a mortgage that was a staggering 7.5 times their salary! This is, clearly, not affordable.

But what if these individuals went for something smaller?Well, the long-term ratio for house prices to earnings was 4 so, for a moment, let's assume that most mortgage lenders will offer an individual a mortgage at four times their salary. That means that, if our essential workers are to be able to afford to buy a property, then they need to look for homes that cost less than £82,000 - only just over half the average house price. A quick search on Google shows that there are properties available in this price range, but in a limited range of locations and generally only as part of a part-buy/part-rent scheme.

But, even at this level of housing, 15,596,000 people still wouldn't be able to afford to buy their own home. So what about the lowest paid people? DirectGov gives the current minimum wage for an adult as £6.19. Assuming a person works 48 hours per week (the current maximum under the Working Time Directive) this works out at an annual salary of £15,450. Maintaining our assumption that everybody can obtain a mortgage at four times their salary, that means these hard-working individual are looking for properties that cost less than £62,000. Google again shows that such properties are available, but with even less choice of location than the teachers and nurses, and all in part-time/part-buy schemes.

However, looking at the minimum wage does enable consideration of a final problem, and that is to do with the increase in house prices. As stated at the outset, increasing house prices do not necessarily mean that houses are not affordable. But, by dividing average houses prices by 10,000, they can be compared with the hourly rate for the minimum wage since 1983:
This indicates a major problem with the various promises of 'affordable housing'. Even if the current problems are resolved, by ensuring everybody can obtain a mortgage equal to four times their annual salary, and properties are available for as little as £62,000, it will only mean that houses are affordable while house prices rise by no more than inflation. At the moment this is the case - according to the Office for National Statistics house prices rose by 2.3% in the year to June 2012 which is roughly the same as average wage rises and a little less than inflation which, in August 2012, was 2.5%. However, in the UK, it has been usual to regard buying a house as an investment - and the rise in average prices in the late 1990s and early 2000s shows why people have taken this attitude. So, we generally expect house prices to rise by more than inflation.... and the minute that happens, affordable house start to be priced out of reach of the lowest paid people.

If we really want affordable housing, we have to accept that the price of houses rises only at the rate of wages, and that the massive increases of the decade before the economic crises were unrealistic, unsustainable and - most importantly - undesirable.

More on Daylight Saving

Since my original blog about how there is no such thing as daylight saving, a friend had kindly highlighted this short video on the same topic. Written from a North American point of view, it makes many points that are valid here in the UK - such as the confusion caused by different countries moving their clocks at different times in the year.