Affordability differences by area for working households buying their homes

This report includes a new local analysis of the difficulties that working households faced in becoming home owners throughout England in 2002. The report analyses the capacity of working households aged 20 to 39 to purchase at the lower end of the housing market.

The primary analyses are based on a consistent measure of house prices for 4/5-room dwellings in each area, against local household earned incomes computed from local Census, Labour Force Survey and New Earnings Survey data. A further set of analyses measure the capacity of identified key workers to purchase at the lower end of the housing market in each area. Detailed schedules show the house prices, household incomes and affordability measures for every local authority area.

The analysis is the first to make use of newly available local New Earnings Survey data based on place of residence, rather than place of work. This captures the impact of commuting, which is particularly important for London and the South East. However, the new analyses show that affordability issues for working households are more acute in the South West than the South East. This has important implications for government policy on the distribution of funding for new affordable housing.

The access analysis

The access analysis essentially relies on the same data sources as the ratios analysis. However, it uses lower quartile house price figures rather than the mean prices used in the ratios analysis.

It provides a measure of the numbers and proportions of households that would be unable to purchase a four/five-room dwelling at the lowest price quartile. This provides a consistent relative measure of the difficulty in accessing home ownership in every local authority area in England.

The analysis assumes a maximum mortgage of three times household income for the working households with one representative in the 20-39 age bracket. This is based on long-standing lender conventions. A case could be made for assuming a slightly higher mortgage to income lender ratio, given the decline in interest rates. However, the 3 to 1 assumption is still significantly higher than the average for first-time buyers in 2001, which was just 2.3 to 1.

It should be recognised that a further proportion of working households would be able to purchase dwellings with prices below the lower quartile level for four/five-room dwellings. In many cases these would be smaller properties. Additionally, some households will be able to purchase where they can use significant savings to supplement their mortgage. The access calculations assume a deposit of only five per cent, roundly based on the lower quartile figure for deposits by first-time buyers.

If the analysis does not then provide an absolute measure of working households unable to purchase in any circumstances, it does provide a consistent measure of the relative difficulty of accessing even the lower end of the housing market. Table 2 shows the top forty authorities ranked by the proportion of working households unable to purchase. While many of the high-ranking authorities in the ratios analysis also have high ranking in the access analysis, there are some marked differences. These reflect variations in the distribution of house prices and incomes within each area.

* Note: The sample sizes for these authorities are particularly small, and the results should therefore be treated with caution.

Implications of ratios and access analyses

These findings contrast with the assertion in the government's recent sustainable communities report (Sustainable communities: Building for the future) that affordability issues are more acute in the South East than the South West. However, the analyses in that report were based on Land Registry house price data, which reflect the much smaller proportion of small dwellings in the South East compared to London and the South West.

The sustainable communities analysis was also based on regional earnings data based on the place of work. This therefore fails to take account of the impact of the predominantly high earners who commute into London from the South East. Place of work earnings figures exaggerate the average earned incomes of individuals residing in London, while at the same time substantially underestimating the earned incomes of individuals living in the South East and the East.

The use of newly available earnings data based on the place of residence (used in this study), rather than the conventional place of work based data, thus has a significant impact on the resulting regional ratios of house prices to earnings.

It follows from these new analyses that there is a strong case for reviewing the Office of the Deputy Prime Minister's sustainable communities policy to focus a significant measure of growth in the provision of new affordable housing on London and the 'wider south east', leaving investment in the rest of England, including the South West, to mark time with inflation.

The key worker analysis

This analysis focuses on the ability of identified key workers in the public sector to access the local home ownership market. As with the 'access' analysis above, this is defined in terms of whether or not their incomes are sufficient to purchase a four/five-room dwelling at lower quartile prices. The analysis also shows the extent to which key workers' incomes fall short of, or exceed, the level required for such a purchase.

Four key worker cases are analysed: nurse, police officer, social worker and teacher. In each case, a point on the salary scale has been selected to correspond with a key worker who has been in post for three to four years and may be sufficiently settled to consider house purchase. The basic salaries have been supplemented, as appropriate, with London and South East weighting allowances, or other equivalent supplements, for those localities where they apply (based on the rates in October 2002).

Basic salaries are £18,870 for a nurse, £19,776 for a social worker, £22,992 for a police officer and £23,835 for a teacher. Inner London weightings and related salary supplements range from £2,751 for a social worker to £6,165 for a policeman. Supplements for selected areas outside London range from £462 to £2,000.

The forty areas where, on this basis, key workers' incomes fall furthest below the level required to purchase a four/five-room dwelling at local lower quartile prices are shown in Table 3. These are ranked on the basis of a composite index, which is a simple unweighted average of the four selected cases.

The results show that the most acute affordability issues for key workers are in London, notwithstanding the provision of London weighting and related payments. London accounts for the first eight authorities with the greatest shortfall against the incomes required to purchase at lower quartile prices. The next four authorities are in the South East.

Overall, twelve of the top-ranked authorities are in London, twenty-two are in the South East, four are in the Eastern Region, and just one is in the South West. The results here are in marked contrast to those for the wider population of working households, where the affordability issues have been seen to be greater in the South West than in the South East.

The critical factor is that there is very little difference in the salaries of key workers outside London, for instance between the South East and the South West. The 'fringe' area supplements to national scale rates paid outside London are relatively modest as a proportion of total salaries, and are not sufficient to offset the differences in house prices between different areas.

It should also be noted that in the forty-six authorities with the greatest shortfalls, the average incomes of our selected key workers do not even reach half (fifty per cent) of the level required to purchase a four/five-room dwelling at local lower quartile prices. It follows that, in those areas, even a dual earner key worker couple would still not have a sufficient income to purchase.

About the project

The study was undertaken by Professor Steve Wilcox of the Centre for Housing Policy at the University of York. It draws on house price data from Halifax Plc, and on data from the Government's Family Expenditure Survey, Census, Labour Force Survey and New Earnings Survey, to compute local household incomes. Earlier work in developing the methodology, and exploring the issues around the availability and limitations of different data sets that could be potentially used in the analysis, was funded by the Association of London Government.