Housing Who is feeling the fullest force of the housing crisis? 30 November 2016 by Lindsay Judge Lindsay Judge We’ve written recently about how rising housing costs are acting as a headwind, holding back improvements in living standards for many households in the UK today. But who is feeling the fullest force of the housing crisis? Which types of households are most likely to be living in unaffordable housing today and how has this changed over the last 20 years? Defining housing affordability is an art as much as a science, with what is viewed as ‘unaffordable’ likely to vary from individual to individual. Here, however, we follow convention and regard the cut-off to be when a household spends more than a third of its after tax income on housing. Housing is widely regarded as too expensive after this point, leading to unacceptable compromises on other expenditures and setting off a warning bell about long-term sustainability. Over the last two decades an increasing number have found themselves in this situation. In 2014-15, around 19 per cent of working age households had housing costs that exceeded this affordability threshold, up from 12 per cent in 1994-95. As a result, more than 3.5 million working age households are living in unaffordable housing in the UK today. Moreover, the increasing pressure that housing costs are placing on incomes is far from evenly felt. It is low to middle income households – those who most closely fit the profile of Theresa May’s ‘just managing’ families – who have experienced the starkest increase in unaffordability over the last two decades. As Chart 1 shows, the proportion of households in this group spending an undesirable amount on housing has almost doubled over this period, with more than one in four now in the danger zone. As a result, working families on modest incomes increasingly resemble the poorest households when it comes to housing affordability. What explains this striking finding? A combination of sluggish income growth and rising housing costs over the last two decades has served to push many low to middle income households over the affordability brink. (Others, of course, may have kept their housing costs below the threshold by compromising on quality or by continuing to live with parents). In contrast, those at the bottom and the top of the income distribution have had a little more protection. Housing Benefit acts as a buffer, absorbing at least some of the housing cost increase that has hit many benefit reliant households over time. Higher income households who own their homes have seen costs mitigated by the very low interest rates of recent years. Other factors increase the risk of low to middle income households paying over the odds for housing. Of those living in the private rented sector, 45 per cent spend more than a third of their incomes on housing; close to 30 percent headed by a 25-34 year old pay an undesirable amount for their home; and a whopping 55 per cent living in London are in unaffordable housing. To be young and renting in the capital is a truly challenging combination for those on modest incomes. So far, so predictable perhaps, but there are other, less intuitive groups who are also at high risk of living in unaffordable housing. When we look at low to middle income households who spend more than a third of their income on housing by family type as we do in Chart 2, a surprising picture emerges. While couples with and without children have recorded similar increases in unaffordability over the last 20 years, the experiences of single-headed households are radically different. By 2014-15, 43 per cent of single adults without children on low to middle incomes spent an unaffordable amount on housing (up from 28 per cent in 1994-95), compared to 21 per cent of single parents (up from 17 per cent in 1994-95). It makes sense that single headed households on average have a higher housing cost to income ratio than couples given the economies of scale that a two-adult household can achieve. But why do single parents on low to middle incomes have such startlingly different rates of housing affordability to their childless peers? Some of the answer lies in the improvement in incomes that single parents have experienced over the last two decades, with increased employment rates and benefits such as Child Tax Credit providing a real boost. But for the other part of the explanation we have to look at the housing costs side of the equation. When we look at the data we see that a growing percentage of single parents have been housed in the social rented sector in recent years. In contrast, social rented options have contracted for single people without children at the same time that home ownership has become less attainable for those with one modest income. As a result, there has been a 14 percentage point increase in the proportion of childless single low to middle income households living in the private rented sector over this time. With the highest housing cost to income ratio of any tenure group, this compositional shift into private renting has clearly had an effect. But should we be concerned? Isn’t this growing band of childless households comprised mainly of young people, stretched financially in the PRS perhaps but also enjoying the flexibility it offers at their stage of life? In fact, the data suggests otherwise. When we look at the age profile of childless low to middle income households who spend more than a third of their income on housing we see the biggest increase has occurred in the 45-54 year old bracket. Age-restricted policies such as starter homes offer no solace to these older households who have a closing window of opportunity to increase their incomes or reduce their housing costs. All in all, many households on modest incomes are falling through the policy cracks. When the average household income of those accessing the Help To Buy equity loan scheme is £43,500 a year compared to the £23,872 a year of the average low to middle income household, housing policy is clearly not reaching the parts it needs to if Theresa May’s ambition of helping ‘just managing’ families is to be realised. The recent £5 billion pledge by government to give fresh impetus to house building is of course welcome. But old or young, single or coupled, with or without children, it is clear that much more needs to be done if the housing headwind that is holding down the living standards of low to middle income households is to abate.