by Piers Williamson

London has become an increasingly international city over recent decades. It is one of the most expensive capitals in the world to live. But affordability, diversity and choice of tenure in housing lie at the heart of whether we can sustain London as the thriving mixed community that we know today. The danger is that the cost of owned housing drives ordinary working people and communities further and further from the urban boundaries of London itself, changing the character of the capital and making it a less sustainable working and living environment.

This piece looks at a number of the current factors impacting sustainability. Most importantly, it examines the relevance (and difficulty) at the margin of owning a housing stake and the implications for the sustainability of the London economy through the continued political desire to increase home-ownership in the Capital.

HM Treasury has historically set great store by the wealth generation arising from the ownership of a housing asset. Successive governments have advocated home-ownership as the route to underpin wealth creation. The largest single change in home ownership in recent years came with the right-to-buy campaign. Owner occupation peaked in 2003 at just over 70% and is now declining slightly(1). The demographic characteristics of the decile of population on the margins of the rental/home-ownership decision mean that it is unlikely that a significantly greater proportion of this decile are capable of sustaining the financial stability required for a mortgage for an extended period. Instead it is important that we provide a non-punitive, simple and broadly accepted path for these people in and out of home ownership at the margin, providing a means to asset ownership on the upside and a safe path back into rental on the downside of the cycle. At the same time we need to put to rest the political ideology that renting property makes one a second-class citizen.

Today we still live with the expectations and financial structures of older generations. Jobs (and forms of employment/training) are no longer for life, attitudes to debt are markedly different in the ‘Y’ generation, yet mortgages are necessarily very long term obligations. David Willetts, in his recent influential book ‘the Pinch’(3) recognises the prominence of the nuclear family in British society. He notes that it is every generation for itself, yet for London, operating within the Green Belt, there is a scarce supply of housing combined with a global demand for housing in the most up-market areas, has helped to sustain a continued asset valuation bubble – even through the worst recession since the 1930s.

This raises the twin problems of the nature of wealth creation in the Capital and mobility of labour and their implications for sustainability. For first time buyers, only a very small minority can afford to buy a flat in Greater London today. Average debt for a student leaving university nationally in 2010 is £15.8k, with the expectation of current students that this will rise to £23.5k by the time they leave university(4). At the same time the median deposit needed for a first time buyer in London in Q1 2010 is: £55k(5), yet the median gross annual salary for residents in London in 2009 (ASHE latest data) is: £26,910(6). Put simply an average deposit for an average person in London would take over two years of saving, with absolutely no other spending on anything.

Median age for a first time buyer in the capital is now 31(5), although perhaps surprisingly this has not increased significantly in the last 4 years. However, the proportion of first time buyers who resort to parental assistance (the so called ‘Bank of Mum and Dad’) to subsidise their deposit is now (nationally) 85%(5): nearly nine out of ten cases. Home ownership is a serious block to domestic job mobility in and out of the capital. Fuelling this lack of affordability, houses and flats in London remain desirable (partly thanks to the recent 25% devaluation of Sterling). London is consequently becoming more polarised with quality of life a growing issue as a result of increased working and commuting hours.

Social polarisation in inner London is potentially set to be exacerbated with the capping of local housing allowance, forcing housing benefit cases out of Inner London Boroughs. Ordinary working people are being forced by affordability further and further out of London. One simply has to look at pressures on transport interchanges in outer London in the rush hours together with demands for commuter parking to see evidence of increasing commuting distances.

What to do

To date there has been significant investment in the provision of low cost home ownership (‘LCHO’) properties nationally, but particularly in London. Research, including that undertaken for the GLA(7) indicates that the very people who would benefit from this type of housing find the proliferation and complexity of these hybrid mortgage products confusing. With the advent of the credit crunch and subsequent scarcity of suitable mortgages, much of the pipeline of LCHO properties have been converted into rent-to-buy (so called ‘try before you buy’) properties. This may be a fortuitous development.

Whilst Housing Associations (‘HAs’) (who tend to be the largest suppliers of LCHO properties) report continued lower level sales of LCHO properties in London and there is also some evidence of niche Building Society provision of shared ownership mortgages; the growth in completed- but-unsold, stock is forcing HAs to think more creatively about intermediate rental products. As a regulated and financially robust sector developing stock to high standards and subject to external oversight, HAs make better landlords than buy-to-let amateurs (where traditional concerns have been turned on their head and it is now tenants who often have more concern as to the financial standing of their landlord). However, Local Authorities are often behind the curve and despite the continuing shortage of appropriate mortgage finance, continue to focus on both the provision of further LCHO products and are also overly prescriptive in providing planning consent based on rental/sale limited to those who fit tightly defined job definitions of key workers.

A recent report from the charity Shelter(8) highlights a national total (of which a significant proportion will be SE based) of 866,000 “forgotten” households who rent, but are neither in receipt of means-tested benefit, nor can afford the cheapest shared-ownership product.

As we move into the brave new world of localism, if inner London Boroughs are to sustain some of London’s diversity and mixed communities, they need to shift their sights to consider the provision of adequate rental stock, not just for traditional housing-need cases, but for the “forgotten” lower paid workers as well as families highlighted in the Shelter report. A small number of HAs are starting to put forward proposals for the provision of time-limited rent-to-buy stock to fill this market need, but more joined-up thinking is necessary to marry up local political and economic development priorities with potential supply of new rental stock. Time-limited rent-to-buy is an evolutionary rather than revolutionary product. It confers an ownership option to the tenant without obligation and importantly it provides a bridge between the current, dysfunctional mortgage lending market and (hopefully) more stable medium term market conditions.

Looking forward, the question of future housing supply will also be complicated by the probable curtailment of Government grant to subsidise the building of HA housing. However, grant levels for this type of intermediate rent to buy product could be contained at the same levels as LCHO products.

The technical expertise exists to design and deliver housing products that fulfil these requirements, at the same time there needs to be an acknowledgement at a local level that growing housing affordability issues are undermining sustainability in the Capital.

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(1). Source: CLG online Live Tables on Housing: Table 801
(2). http://push.co.uk/Push-releases-figures-for-2009-student-debt-survey/
(3). The Pinch ‘how the baby boomers took their children’s future-and why they should give it back’: David Willetts. 2010
(4). http://push.co.uk/Push-releases-figures-for-2009-student-debt-survey/
(5).Source: Council of Mortgage Lenders statistical data
(6). Source: ONS: Annual Survey of Hours & Earnings (ASHE)
(7).Source: Accessing Intermediate Housing an Ipsos MORI report on behalf of the GLA.
June 2009
(8): The forgotten households: is intermediate housing meeting affordable housing needs: Shelter July 2010

Photo credits, thanks to:
- hey mr glen from flickr.com (CCL)
- L-plate big cheese from flickr.com (CCL)

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