Strategies to cope with high housing costs are running out of road for modest income families in many parts of Britain

The strategies available to help bring rent and mortgage costs within reach of modest income households – from sharing with other families to financial support from parents and moving into a lower quality property – often come at a high personal cost and look to be increasingly ineffective in many parts of the South of England, especially in London, according to a new report published today (Monday) by the independent think-tank the Resolution Foundation.

The Home Stretch finds that 2.2 million working households in Britain with below-median incomes are spending a third or more of their disposable income on housing, leaving an average of just £135 left over each week for other necessities. For modest income households looking to rent, they would have to spend at least a third of their disposable income to rent a low cost property in around one in five local authority areas. This proportion rises to over a third of local areas if the household wants to get onto the housing ladder with a mortgage. This does not include the challenge of saving for a deposit but only looks at the monthly costs of mortgage payments.

Previous Resolution Foundation research has shown that close to 1 million working households are spending over half of their disposable income on housing. The vast majority are on below-median incomes and more than a quarter live in London

The Home Stretch shows that the areas where housing squeezes family budgets are not evenly spread throughout Britain, and some regions fare relatively well, though there are hotspots in all parts of the country. Modest income households renting privately face an ‘affordability challenge’ in less than five per cent of local areas across the Midlands, Wales, Scotland and the North, including Aberdeen, Manchester and Blackpool.

In London, by contrast, modest income households have to spend at least a third of their disposable income on rent in all local authorities and at least half in 25 of the 33 local authorities. For those buying with a mortgage, challenging housing costs are an issue across all of London as well as at least half of all local areas in every region across the South of England and places such as Warwick, York, Herefordshire and Ceredigion in Wales. Rugby, Leeds and Salford, on the other hand, are much more affordable for modest income households wanting to buy.

Despite the strain that high housing costs cause, millions of people on modest incomes continue to live in high cost areas and are somehow coping. The Resolution Foundation report explores six ‘coping strategies’ – working more¹, increasing the term of a mortgage, getting help from friends and family, over-crowding², lowering standards and doubling up³. It looks at how effective each of these would be in bringing housing costs within reach of three typical families. The effectiveness of each coping strategy depends on family circumstance and varies by household type and geographical area.

For a single person with an average income of £14,300, sharing with another single person rather than living alone in a one-bed property would reduce the percentage of local authorities where rent consumes a third or more of disposable income from 66 per cent to 12 per cent, easing the affordability challenge in most of the country. But challenges remain in a few pockets of the East and South East of England and this strategy has very little impact in the capital. Accepting lower standards by living in the cheapest property in the area (as opposed to a relatively low cost one) would be the only way to bring a significant number of London local authorities within reach (though finding the cheapest property can only ever be an option for a small number of people).

For a single parent with a primary school age child with an average income of £19,000, the most effective coping strategies would be lowering standards and over-crowding (moving from a two to one-bed property). In this case, overcrowding reduces the percentage of local authorities where housing consumes at least a third of disposable income from 63 per cent to 33 per cent. The latter option comes at a huge personal and social cost to the parent and child, and is impractical for older children. Again, these strategies make relatively little difference in the capital.

For a household with two adults and two teenage children with an average combined income of £26,400, delaying retirement by ten years by re-mortgaging would be by far the most effective way to bring more local authority areas within reach. This strategy reduces the percentage of local authorities where housing consumes at least a third of disposable income from 53 per cent to 25 per cent. However, this will not be possible for many families given tighter mortgage lending criteria. Over-crowding is the second most effective method for reducing housing costs. Again, none of these strategies has a significant impact on housing affordability in London.

With house prices expected to increase faster than disposable incomes in the coming years and with interest rates eventually rising from their current historic low, the report warns that the housing affordability challenges now common in the South of England could spread further across the country unless action is taken.

The Home Stretch argues that while increasing housing supply is ultimately the only way to bring housing costs under control, any increase in supply must broaden its focus beyond building homes for sale and ensure that new supply matches housing need in local areas. This requires the following actions by local and national government:

• Local authorities to differentiate between demand for homes for sale and rented homes as part of strategic housing market assessments. Local plans to ensure the delivery of new supply includes a mix of tenures that genuinely matches the needs of local populations, including those on modest incomes.
• Public landowners to make strategic use of public land as an investment or on a long-term lease to support the development of purpose-built rented and part rent, part buy developments to better meet the needs of modest income families who are shut out of home ownership in much of the South of England.
• National government to extend current policies to support the development of a purpose-built rented market that can offer higher quality, more secure renting and to build on last week’s Autumn Statement announcement on shared ownership to support the expansion of the part rent, part buy market.

Laura Gardiner, Senior Research and Policy Analyst at Resolution Foundation said:

“The limits to the coping strategies we have modelled are reflected in the growing number of working families that struggle to afford basic household goods once the rent or mortgage has been paid. Britain’s modest income families are running out of options, and there is a practical limit to how many more hours can be worked, how many people can crowd into a single property, and how much more of the household budget can be spend on housing, without significant impacts on family life, especially that of children.

“It is vital that local authorities ensure that the increase in housing supply to which all political parties are committed meets the needs of those who face few options – particularly the one in five households that now rent. At the national level, a greater focus on purpose-built rented accommodation and part-rent, part buy options would provide greater choice for families for whom home ownership is increasingly a pipe dream.”

Notes

• The initial down payment cost of a mortgage is not included in our calculations, as we focus on monthly housing costs.

National level figures in housing affordability:

• The rising cost of living is forcing people to work for longer, with one in five workers expecting that they will never be able to fully retire according to a recent survey. Recent research from the Council of Mortgage Lenders found that across mortgage borrowers as a whole, the proportion of customers taking out loans with a repayment term of more than 25 years has more or less doubled over the past five years, from 16 per cent to 32 per cent in the third quarter of this year.
• The 2011 Census found that more than one million of the 23.4 million households in England and Wales overcrowd, covering nine per cent of households in the rented sector compared to just two per cent of households in owner-occupied housing. Research by DCLG has shown that although the number of non-decent homes has been falling in recent years, one third of private-rented properties in England still failed to meet the decent homes standard in 2012.
• The 2011 Census was the first in over a century that did not show a decline in average household size, with young adults remaining in their parents’ home and more people sharing. These trends have been connected specifically by Cass’s Mark Andrew to the cost of housing: a 10 per cent increase in housing costs has been found to reduce the household formation probability by two percentage points.

Contact

Natalie Cox, natalie.cox@resolutionfoundation.org, 0203 372 2955, 07983 550 337

Rob Holdsworth, rob.holdsworth@resolutionfoundation.org, 0203 372 2959, 07921 236 972