London decouples: a story of affordability in four graphs

London housing is expensive; very expensive. That is hardly a shock, but it is also not really the point. Price is a one-dimensional metric. What matters is that London is also hard to afford. Consider this graph, which plots Nationwide’s First Time Buyer Affordability Measure since the early 1980s. Put simply: how much of our income does housing gobble up?

mortgage-payments-as-a-of-take-home-pay

One line rather stands out and – apart from a one-off peak in Northern Ireland – London is consistently harder to afford than elsewhere and it looks like it is getting worse.

To simplify things a little let’s plot London against the Nationwide’s UK affordability measure.

nationwide-affordability-measures-uk-vs-london

It is hardly surprising that for the entire run of the data, it costs a higher proportion of our earnings to buy a property in London than elsewhere. But two things are worthy of note:

  • first, from the graph itself, it is evident that the difference between the series varies over time;
  • second, the last few years have seen spectacular price growth in London in a way that feels exceptional.

 

Is it exceptional, though?

Let’s look at London affordability as a percentage of UK affordability. The ratio does indeed vary over time and, what’s more, in 1987 – the year after the City of London “Big Bang” deregulation and its consequent property boom – London was even less affordable, comparatively, than it is today.

But there is a subtlety in the data that is easy to overlook. This is that London is included in the UK figure. It is, after all, a UK figure.

london-affordability-as-a-percentage-of-uk-affordability

Now, it is reasonable to conjecture that the only effect of removing London from the UK average would be to move the graph up a few notches. There is a simple way to find out: add another plot to the line and see them together. The results are striking, and unexpected.

london-as-a-percentage-of-uk-and-as-a-percentage-of-uk-excluding-london

For more than 20 years, since 1983, removing London from the UK average has almost no impact on the relationship seen when London is included. If London goes up, the UK moves with it in apparent lock-step: whether London is included in the UK average or not, makes no odds – whatever drives London also drives the UK.

 

But late in 2007 this changed. With London excluded from the rest of UK, it is evident that it was becoming less affordable at a greater rate than the rest of the UK. Either the factors driving both London and the UK are now weighted differently, or there are other factors driving London that do not impact the rest of the UK to the same extent.

 

This matters because, as expensive as London already is, it is still a place where “ordinary people” need to live. Just as Dick Whittington found, its streets are not paved with gold, no matter how much its prices make it seem to be.

 

What does this mean?

  • For policy makers it suggests that the scale of their housing challenge is getting ever more demanding;
  • For agents and investors it depends on where you are:
  • On the one hand, those involved in Prime London can say that, for the first time, London has its own rhythm and that UK-wide indicators must be handled with care;
  • And for those outside London? Many perfectly acceptable locations, not previously thought of as affordable, begin to look unexpectedly competitive!