_Why housing affordability is a critical issue to global city economies
Three years ago in the The Knight Frank Wealth Report, I commented that access to high-quality, truly affordable housing was set to become one of the dominant global political themes.
The Economist magazine had at that time noted that 60 million rich-world households spent more than 30% of their income on housing; and in the emerging world, 200 million households lived in slums.
With rapid urbanisation, these numbers were only set to grow. And with global house prices rising by 6% more than incomes over the three intervening years, the issue has become further entrenched.
The issue of affordability is not limited to one or two cities globally. While Hong Kong, San Francisco and London might spring to mind as the cities at the sharp end, the issue of how to ensure workers can access housing is relevant to almost all successful urban centres.
In many cases it is economic success itself that worsens the situation, attracting workers and pushing up the cost of accommodation as demand outpaces the ability of cities to provide new housing.
Above: San Francisco: A city at the sharp end of the affordability issue
What does affordability mean?
There is no single definition of housing affordability. City authorities around the world have independently grappled with this issue and have come to different conclusions on how the problem should be defined let alone tackled.
The most common definitions look at the relationship between house prices and rents against income. The Demographia International Housing Affordability Survey, for example, defines ‘affordable’ locations as those where house prices are no more than three times average household incomes. The UK charity Shelter believes that affordability entails spending 35% or less of your net household income on accommodation.
Setting the bar at these levels reveals the scale of the problem. With the average household income, according to Oxford Economics, in London standing at £69,585 (US$ 87,600), and the average prices of property standing at £477,734 (US$602,000), house price to income ratios are more likely to be at 7 than anything approaching the bar set by Demographia.
Even if housing is apparently affordable based on the agreed official metrics, the quality of that housing may fall below the appropriate standard. For European and North American centres where mass urbanisation occurred much earlier than other parts of the world, ensuring older housing is fit for use is an ongoing challenge.
Flexible work-force
While lack of access to affordable housing is felt most acutely by individuals and families, there are significant wider implications. The reduction in the mobility of labour impacts on economic growth. As companies become ever more footloose, the ability of cities to attract workers, especially top tier talent, becomes ever more important.
Restricted movement can limit the opportunity to relocate to more productive areas, the cumulative effect of which is two-fold. On one hand is the missed opportunity from unfilled positions or not attracting the most suitable candidates leading to lost output.
On the other, businesses may need to compensate top talent by paying higher wages in order to offset the higher costs of living. Talent and creativity determine the ability to increase productivity and innovation, whilst sustaining growth.
The daunting reality for city leaders is this: businesses are more mobile than people, when they can’t attract the right talent, or it costs them too much to do so, they may move to lower cost areas. Facebook Vice President of Communications and Policy Officer, Elliot Schrage told investors in 2018 that “If we can’t solve the housing and transportation issues, Silicon Valley won’t be Silicon Valley,” he continued that “these companies, like ours, will expand elsewhere.”
Examples of where this may already be having an effect is in nearby Seattle with Amazon announcing its chosen locations for a second headquarters (HQ2) as Long Island City, New York and Crystal City, Virginia, instead of expanding in Seattle.
The original headquarters has generated roughly US$38 billion in economic activity for Seattle between 2010 and 2016. However, Amazon has outgrown the city, claiming it is unable to recruit the level of staff required, in part due to high living costs. HQ2 is estimated to include a US$5 billion investment and provide employment for 50,000 people.
If cities desire to compete on the global economic stage, then the affordability of housing needs to become a priority for both the public and the private sector.
Economic implications
The size of the win from tackling housing affordability is significant. Research in 2015 by the University of California, Berkeley and National Bureau of Economic Research estimated that if all barriers to urban growth in the United States’s housing supply was lifted, it would raise the country’s GDP by 13.5%, or up to US$2 trillion.
In the UK, Shelter found that every £100 million (US$126 million) invested in affordable housing results in £210 million (US$265 million) of economic output into the economy and sustains 1,270 jobs.
Above: Amazon is expanding away from its home in Seattle due to the inability to recruit the level of staff required
Opportunities for investors in this area are enormous. Innovations in housing design, funding, land assembly and construction are developing rapidly. And this is an area where the flow of ideas and experience is moving both ways, between private and public sectors and developed and emerging economies. As challenges and opportunities come, they don’t get much bigger, or more important.
The Knight Frank Affordable Housing team works on behalf of developers, Local Authorities, Registered Providers and private landowners in all aspects of Affordable Housing.