London homeowners are nearly £3,500 worse off each year on average in terms of disposable income compared to 2010 – according to new research from global real estate adviser Cushman & Wakefield.
Published today, the firm’s inaugural Affordability Watch
report reveals the average disposable income buffer enjoyed by childless property owners in the capital has fallen from £21,014 in 2010 to £17,713 today.
It gets worse when homeowners with children in London are analysed: the rising cost of childcare means that their disposable income has dropped into negative territory and they are now overspending by £10,767.
Conversely, renters in London are in a financially better position. Childless rental households benefit from a disposable income buffer of over £25,000; 43% higher than their owner-occupier compatriots. They have also seen their disposable income drop less than owner-occupiers, falling by 4% or £1,128.
However, when London renters with children are looked at, the high cost of childcare wipes out the disposable income buffer enjoyed by childless renters. They now find themselves overspending by £3,150 per year.
Affordability of housing is an increasingly important topic following the introduction of the Mortgage Market Review (MMR) in April 2014. Lenders are now required to examine underlying spending patterns to ascertain that mortgage repayments are affordable both now and as interest rates rise.
This erosion in Londoners’ disposable income over the last five years can be attributed to spiralling housing costs, which have pushed up mortgage payments by 32% (£4,900), together with a 10% (£1,000) rise in essential spending, states the report. Wages have only increased by 6% over the same period.
Traditionally affordability has been measured looking at the relationship between income and house prices. This, however, fails to provide a rounded picture of affordability and fails to capture whether a household will be able to weather future interest rate rises based on current lifestyle choices. To gain a fuller understanding, and importantly how financially stretched households are, a look at the level of net income remaining after buying essentials is necessary.
To accurately determine the size of any disposable income buffer, a definition of what to include as essential spending needs to be determined. The decision of what to include in the basket of essential goods has a fundamental impact on the analysis carried out and any conclusions that can be drawn.
One thing to bear in mind is the changing nature of what is considered to be essential. An excellent example of this over the past 10 years is the internet. In 2005 very few would have considered having internet connectivity at home as being an essential, instead it was considered a luxury item. Fast forward to 2014, and the vast majority of the population would consider the internet as an absolute essential.
For the purpose of this analysis, the following items have been included in the definition of essential spending:
· Mortgage or rent
· Service charge and ground rent (for London owner-occupier households only)
· Utilities: electricity, gas and water
· Internet (from 2011 onwards)
· Food and non-alcoholic drinks
Cushman & Wakefield believes the above are the only truly essential items and all others could be sacrificed if absolutely necessary. Over the past 10 years, the cost of this basket of essential goods (excluding rent and mortgage payments) has risen by 24% for the UK and 21% for London. Comparing this growth to wage inflation and to the surprise of many – and counter to much of commonly held wisdom – wages have grown at a similar rate.
In summary, 2014 saw the financial position for all households assessed worsen. This has been caused by wage inflation being outstripped by both rising rents and mortgage payments. The underlying trend for both the UK and London remained, with renters having greater disposable income rather than buyers in London and vice versa for the wider UK.
The main hurdle for first time buyers, especially in London, remains raising sufficient capital for a deposit. Due to another strong year of capital appreciation in London, first time buyers now face an extra three years saving before being in a position to buy a property than in 2011.
The Help to Buy ISA does little to help solve to primary problem facing affordability across the UK, the severe shortage of supply. Without any attempts to fix this problem any attempts to further stimulate demand will only serve to increase prices.
Cushman & Wakefield’s head of UK residential, Jack Simmons, said: “The significant erosion of Londoners’ disposable income over the last five years really does highlight the spike in housing costs and essential spending they have had to endure, amidst meagre wage inflation.
“House price and rental inflation are expected to continue, especially in London where structural undersupply shows no sign of abating, which will place added strain on finances. This is particularly true for those households in need of childcare, the cost of which is anticipated to continue to rise during the next 12 months. This could lead to a decline in the number of families in London as they are simply priced out of the capital and forced to relocate.
“However, the year ahead holds a number of reasons to be positive for household finances, in London and the UK. Wage growth is expected to outstrip inflation, making many people better off, while the fall in oil prices is likely to have knock-on effects on the cost of energy, reducing the cost of essential spending.”