Who can afford a nicer house than their parental home?

Nigel Williams, 23 January 2014

Staying with parents

Increasing numbers of adults are living with their parents. The reason is obvious: it costs too much to move out. Building more houses might help but only if the market works to make those houses available to the people with the need. London Assembly member Tom Copley (Labour) has found 36 per cent of Right to Buy council houses in London are now being rented privately.

The Property Gap

Housing benefit claims for these properties were higher than through the social rented sector. Qualifying for each level of subsidy brings a step-change in affordability. In Redbridge and Merton, the two boroughs where the difference was smallest, average housing benefit claims in August 2013 were £34 per week higher. The weekly private rent in the lowest-priced London borough, Barking and Dagenham, is almost double the Council rent in Wandsworth, which was the most expensive. Policies designed to broaden home ownership or to make housing affordable are confronted by this gap. A reduction in prices enough to bring a property within the range of a first-time buyer makes it even more affordable to someone buying the place as an investment.

Reducing the Housing Benefit Bill

Housing Benefit represents a big chunk of the welfare bill, paid out of a recognition that shelter is a basic human necessity. There is more scope for reducing it by targeting the owners than the tenants. DWP research has estimated that savings of £0.6 billion per year will arise from the ‘social sector size criteria policy’. That is the policy not to subsidise spare bedrooms with housing benefit. It is going too far to call reducing a subsidy a bedroom tax. The potential saving compares with an estimated £2.9 billion extra annual housing benefit expenditure as a result of real-terms private sector rent growth over ten years from 2000/2001. Reducing the eligible rent by changing the Local Housing Allowance is hoped to save £2 billion annually. How that saving is spread between landlords charging lower rents and tenants finding extra money will determine how many people the benefit continues to assist. As housing benefit is ‘passported’, it has added a large amount to the advantages of receiving benefit over earned income. The more houses cost, the harder it is to make work pay.

Downward Social Mobility

There are several ways to measure social mobility. Favourite methods of comparing status are occupation, income and levels of education. Housing offers another measure. It is less used but readily comprehensible, on a scale from outright ownership of substantial property in an attractive area to shared occupancy of smaller, poorly situated accommodation requiring state, social or local authority subsidy. On such a scale, the adults still living in the parental home are being offered a form of downward social mobility to which few would aspire. The houses available for their incomes are, on average, either smaller than those of their parents, or require a longer commute to work or, in the opposite of the ‘right to buy’ ambition, they must get some form of subsidised housing, receiving benefit or renting from a social or council landlord.

Income Multiples

Comparing incomes with house prices is not absolutely straightforward. On the one hand, historically low interest rates make the capital sums demanded more affordable; on the downside, less secure employment makes a long-term investment in a house purchase into a greater risk. Today’s first-time buyers are also contending with student loan repayments that did not trouble their parents. Still, the capital value of the property is the most important single item. When the parents or grandparents were buying, they might have reckoned on a deposit comparable to a years’ household income and three times that from a mortgage lender. They found their own ways of losing out – endowment mortgages, adding years to the mortgage term and payment protection insurance, for example – but if a house cost four times disposable household income it was affordable. Applying that standard today leaves many fewer people able to afford an average house.

 The graph shows average household incomes after benefits and taxes, split into ten groups from the poorest to the richest and multiplied by four to make them comparable to house prices. They have been adjusted for inflation using the increases to average household income over the period. Two house-price lines, one for average houses, one for first-time buyers adjusted for mix, cross over several of the income lines. The meaning is that people in that tenth of the income spread drop below the level at which house purchase is affordable. Even in the boom at the end of the 1980s, a household between the 60th and 70th percentiles could afford an average house. By 2011/12 they would have to stretch themselves even for an average first-time purchase and only the top 10 per cent had income comfortably above a quarter of an average house. If the parents were first-time buyers in 1994, they could budget for an average house if they were between 40 and 50 per cent up the household rankings. To buy a similar house, their offspring would need to overtake 30 per cent of the population. In terms of accommodation, that is a lot of income mobility just to stand still.