Are houses affordable for everyone?

Following on from my post on Generation Rent, I will look at if housing really has become less affordable?

I have looked at how disposable income has changed over time. Disposable income is simply income from all sources(salaries, pensions, benefits, etc) less direct taxes on income(National Insurance, Income tax and Council Tax). I have then split this into five categories(which are called quintiles). The first quintile is the poorest 20% of housesholds, the second quintile the next 20%, etc.

For 2011/12 the data looks like: -

 

	Total Income(salaries, investments)	Total cash benefits	Gross income	Disposable income	No households in the population ('000s)
Lowest 20%	5,436	7,419	12,855	11,548	5,282
2nd 20%	11,813	8,448	20,260	17,997	5,291
3rd 20%	22,946	7,187	30,132	25,352	5,287
4th 20%	38,906	4,388	43,294	34,407	5,285
Highest earning 20%	78,283	2,453	80,736	60,831	5,291
Average	31,477	5,979	37,456	30,027	26,436

The highest 20% earn about 15 times more than the lowest 20% from income and salaries. This gap is equalised by benefits. The lowest 20% gain most of their income from benefits, but even the highest 20% still derive quite a lot of money from benefits. The total of cash benefits and income from investments and salaries is called Gross Income. Direct Taxes further reduce the disposable income households have available, and these fall most heavily on the highest earning households. The gap between the lowest and height incomes fall to five and a half times. Government is a potential force in redistributing incomes.

There has been a lot of inflation between 1977 and today and so I have adjusted for inflation to give the real change in income.

There are a couple of things to note:

• Real household  incomes have been flat since 2000. Actually the poorest people seem to have done slightly better. 
• The top 20% have seen there income rise the fastest and have pulled away from the rest. 

You the growth of income for those at the top most dramatically in the chart below. It measures the increase in real income since 1977. For the bottom 80% of households income has increase by 50-70%, whilst those at the top have seen their income more than double. For all groups the 2000s have not been great.

 

Is society becoming less equal?

This does not necessarily mean society has become less equal. Firstly we do not have much details on the make up of these households, so it may be the case that a pensioner who lives alone in a house they own might be better off than a family of seven with a large mortgage.

Second it is not clear how much movement there is between the different bands. Over time people may move between income bands. If we assume that everyone moves randomly to a new band every year we would find that across their lifetime everyone would have a similar income, although in any given year income differences might be quite large. It is very difficult to track individuals income over time, and I am not aware of any robust surveys of this information.

Thirdly it may be argued that inequality of income is not a bad thing. This might be because rewarding the top 20% encourages them to be more productive and this benefits everyone - this is called Trickle-down economics. The other argument is that the top earners simply deserve more.

Housing Affordability

My final chart takes the ratio of disposable income to an average house prices. One way of thinking about this is how many years it would take to buy a house if a household decided to devote all of their income after taxes to purchasing somewhere. Obviously this is unrealistic as people have to buy food, clothes, etc.

House prices have risen more rapidly than disposable income. But for the top 20% this is not so bad a story as their income has risen at a similar rate. It is probably individuals in this group who are able to not only buy their own homes, but also acquire buy-to-let properties and holiday homes.This is a far from homogenous group and will consist of the likes of Alan Sugar and Richard Branson as well as headteachers and doctors.

For the bottom 20% of households an average house appears out of reach, but this as probably always been the case.

Those in the middle are likely to be the groups that aspire to purchase a house. For these groups house become less affordable. Mortgage affordability is calculated on more complex metrics than household income, but it seems that most people will struggle to borrow more than  four times their disposable family income. This would mean that houses are out of reach or close to being out of reach for the bottom 40% of the population and this has been the case since the early 2000s.

Many would argue that this might mean we should expect house prices to fall so that they become affordable again. There are a few reasons to be cautious with this conclusion.

• For high earners houses are affordable and they may seek to acquire houses to rent
• Individuals may be able to access sources of funds other than income - such as inheritance
• Government policies may be adopted to keep prices high
• Interest rates have fallen so individuals are able to borrow more to service a mortgage

The answer to my initial question was that houses have become less affordable for those not in the highest earning 20% of houses holds. This squeeze is driven by low poor income growth(from 2000) and house prices increases from the mid 1990s-2007.

There is likely to be a group within the middle of the income distribution who would have been able to buy in the 1990s, but are no unable to do so. These are likely to be people on middling household incomes of £20k-£40k, probably graduates and experienced non-graduates who see themselves as aspirational.


Sources: I have used Nationwide house price data, RPI price index data and ONS household income