Bricks and Mortals

High house prices can have a major impact on the economic performance of cities, choking off consumer spending, driving up wages and extending commuting time. So, what can emerging economies learn from the mistakes and remedial strategies of the West? We shall take a whistle-stop tour of the globe to find out, as part of our ongoing ‘Housing for Inclusive Cities’ project, where we are quantifying the problem, pinpointing solutions and launching initiatives on the ground.

Moroccan spices, French mountain cheese and mounds of mouth-watering artisan bread: we’re sniffing the air in the buzzy market fronting King’s Cross Station in London. Strolling outside the station building, we discover a gleaming mixed-use realm: sixty-seven acres of squares, offices, bars, restaurants and 1900 brand-new homes—all wrought from a post-industrial wasteland of gasholders and goods yards. So far, so magnificent! Unless of course, you actually want to live here.

At the time of writing, we can take our pick from a £1.45m two-bedroom flat overlooking the canal, a modest one-bedroom flat for £728,000 and, if we’re feeling flush, a three-bedroom penthouse in the magnificently restored St. Pancras station building for a cool £6.25m. All this in a city where the median household income is £39,100.[1]

If we look across the globe, we see this pattern being repeated in major cities from Beijing to Sydney, Dubai to New York: houses increasingly out of the reach of average earners. In fact, in our analysis of fifteen key global cities [2] ,  we discovered only one metropolis, Boston, that offered truly affordable housing—defined as eating up less than 30 per cent of typical net earnings.

The remaining fourteen cities in our study all breached the affordability barrier, with Singapore and Sydney draining just over 30 per cent of typical net earnings, and housing in Abu Dhabi and Hong Kong eating up more than 60 per cent.

So, what’s going on here, and does it really matter? Do higher housing costs really make a difference to the economic success of cities?

Urban prosperity drives population growth as jobseekers migrate to cities for work. But housing stocks often fail to keep up with the demand, so workers are faced with higher accommodation costs or longer trips from home to work.

In emerging economies, rapid urbanisation is accelerating the process. From 1995–2015, Beijing exploded from around 8m to 20m citizens, Shanghai more than doubled to around 24m, and the populations of Mexico City and São Paulo mushroomed to over 20m. [3]

It’s no coincidence that these four cities are home to congested roads, overburdened public transport systems and some of the longest commutes in the world. So, the answer is, yes, it does make a difference, and yes, we should care. How we do something about it is another matter.

In our 2016 report, Housing for Inclusive Cities: The Economic Impacts of High Housing Costs [4] ,  we explore the economic impact of high accommodation costs and the attempts of various cities around the world to tackle the problem. We discovered that the stakes are particularly high for developing countries, with rapid population growth dramatically pushing up accommodation costs [5] and potentially storing up problems to stymie economic success.

Let us start with the impact of high-cost housing. According to our analysis, there are three key knock-on effects: increased wage bills for employers, longer commutes as staff are forced to live farther away from work in lower-cost accommodation, and ‘unrealized’ spending. Our research discovered that employers are paying out millions in housing-related ‘wage premiums’—essentially topping up salaries to help the staff bridge the housing affordability gap. It also found that, in 2015, Hong Kong employers may have paid out an additional US$15bn in such premiums, and São Paulo businesses nearly US$4bn. Singapore and Mexico City occupied the middle of our fourteen-city range, shelling out just over US$2bn each.

But do urban employers have to offer these higher wages in order to attract the right staff? Let’s zip east of London to the Queen Elizabeth Olympic Park to see what one company is doing in an innovative attempt to address the problem. London’s former Olympic Village, where world-class athletes dreamed of glory during the 2012 Games, is now a smart enclave of flats and townhouses. Here, quite a few residents are trainees on Deloitte’s graduate training programme. These lucky employees snapped up Deloitte’s offer of high-quality, affordable housing as part of their employment package, the company having identified that finding reasonably priced accommodation was a major headache for young joiners.

Spinning across the globe, we settle on Chicago to find a similarly innovative measure. Here, the University of Chicago has created an employer-assisted housing (EAH) scheme, offering interest-free loans and fund-matching to lower earners. The scheme is regenerating neighbourhoods around the university, as well as helping attract and retain staff. It’s a neat solution that circumvents hefty wage premiums and has the well-being of employees at heart: the staff does not have to endure lengthy commutes that sap both the will and the mind.

This brings us to the impact of high housing costs on commuting times. If you’re a typical worker in Mexico City—the metropolis that topped our commuting league— your round trip to the office will eat up nearly two hours of your day. Land a job in Beijing or Shanghai and your journey to and from work will top one hour and forty minutes, while a post in sunny São Paulo would see you hit road or rail for more than ninety minutes.

Travel-to-work time in the West is on the rise too, with the commuting distances of Londoners increasing by 8 per cent between 2001 and 2011 [6],  and the staff living ever-longer distances from work in American metropolitan areas.[7]

The economic impact of this mass migration is staggering. The daily tramp of workers to the workplace causes traffic congestion and strains public transport. In 2014, traffic congestion alone cost the US economy an estimated US$160bn, largely in wasted time and fuel.[8]

And then there are the softer impacts on health, well-being and staff loyalty. Those who take more than an hour to get to work are significantly more likely to resign because of the slog involved in getting there.[9]   On average, commuters are less satisfied with life than people working mostly from home.[10]   Increased blood pressure, weight problems and greater absenteeism are all associated with long commuting hours.[11]

The third key impact of high housing costs in our study is unrealised spending. In cities across the globe, citizens are spending money on accommodation that they would readily divert to goods and services if their housing costs were lower.

According to our estimates, the money ‘trapped’ in the housing market runs to billions—substantial portions of around US$3bn in Beijing and São Paulo, US$6bn in Hong Kong, and US$2bn in Mexico City since 2010.

Unleashing this spending would in turn boost business revenues and create more jobs.

Assuming that businesses were to channel all additional revenue into employment, we estimate that Beijing could generate more than 400,000 new jobs, Mexico City more than 200,000, São Paulo more than 143,000, and Hong Kong nearly 148,000.

This brings us to the upside.
According to our analysis, our fifteen key cities could collectively create 1.3m new jobs and unleash US$30bn of additional spending power between them if they were able to keep accommodation costs within affordable limits. Beyond benefiting employees and their families, the provision of affordable housing would generate higher tax receipts which, in turn, would bolster government coffers.

So, how are we going to get there? No single city has the answer, but many are making strides in the right direction. Let us spin the globe once more and settle on Hong Kong, whose thriving financial and service sectors help generate a higher GDP per capita than the US. The downside of this economic success? It is one of the most densely populated cities in the world [12] ,  and house prices rose by more than 250 per cent between April 2004 and 2015.[13]

In 2010, the government introduced a raft of measures: 15 per cent stamp duty tax for foreign buyers, larger down payments for properties valued at less than US$900,000, and punitive taxes if a property was ‘flipped’ within three years of purchase. The aim was to stem the influx of foreign investment in property and to try to make speculative investment less attractive. As a result, prices rose only 2.4 per cent between April 2013 and April 2014.[14]

Government measures in Beijing and Shanghai have been even more swingeing: since 2006, foreigners living in the country for less than a year have been banned from buying property, and no foreigner can purchase more than one.

Heading south to Singapore, we discover a successful outcome of state intervention. In the early 1960s, more than half a million people were living in squatter settlements or ramshackle ‘shophouses’.[15]   The state set up its Housing and Development Board and built thousands of homes a year, and now more than 90 per cent of Singaporeans own their own homes. However, temporary residents do not have access to the scheme and so are at the mercy of the private sector and higher prices.

Flying farther south, we find the antipodeans concocting two possible solutions. With demand outstripping supply, Sydney has just released around 7700 hectares around the city to create space for 35,000 new homes—a controversial option for many cities where the ‘green belt’ is regarded as a vital urban buffer. Meanwhile, the Australian government has stepped in to reduce foreign capital inflows. All foreign non-residents and temporary residents seeking to buy a property now have to pay fees relating to the property value and are generally allowed to buy only newly built homes and off-plan properties that add to housing stocks.

Heading back to the northern hemisphere, we see that ‘smart growth’ strategies are vying to alleviate high-cost housing crises. Instead of wrapping extra layers around an increasingly congested urban hub, you build high-density, self-sustaining, small-footprint neighbourhoods on brownfield sites. It is perhaps no surprise that Boston, the only ‘affordable’ city in our study, is leading the pack, creating mixed-use zones replete with affordable housing stocks.

Compact design is a key element of the smart growth formula, and we finish our world tour where we started, in London, where ‘micro homes’ could be throwing a lifeline to ordinary Londoners. These ‘pocket homes’ are selling for at least 20 per cent below market prices due to their tiny footprints, but many are still out of the reach of even average income earners.

Our world tour has shown that high house prices and rents have a direct impact on the performance of business in global cities and on the well-being of the people who work in them. If the capitals of developing countries heed these lessons—their public-sector policymakers working side by side with private-sector developers and landlords to create affordable housing—they are well placed to match and even outstrip the economic successes of the West.

[2] Boston, Chicago, New York City, Mexico City, San Francisco, São Paulo, Beijing, Hong Kong, Shanghai, Singapore, London, Paris, Abu Dhabi, Dubai, Sydney.
[3] United Nation Populations Division, World Urbanization Prospects 2014.
[4] The research examined fifteen cities spanning the Americas (Boston, Chicago, New York City, Mexico City, San Francisco, São Paulo); Asia (Beijing, Hong Kong, Shanghai, Singapore); Europe (London, Paris); the Middle East (Abu Dhabi, Dubai), and Oceania (Sydney).
[5] Housing costs rose 33.8 per cent in São Paulo from 2009–14 and 44.2 per cent in Mexico City.
[6] Based on ONS census data.
[7] Kneebone, E. and Holmes, N. 2015. ‘The Growing Distance between People and Jobs in Metropolitan America’.
[8] Source data from traffic information provider, INRIX.
[9] Regus. 2009. ‘Too Long … I’m Gone’.
[10] Office for National Statistics. 2014. ‘Commuting and Personal Well-being’.
[11] Hoenher et al. 2013. Commuting Distance, Cardiorespiratory Fitness, and Metabolic Risk.
[12] 7.2m people live on 1,104 sq. km (426 sq. miles).
[13] Hong Kong Rating and Valuation Department.
[14] House price growth rose again to 12 per cent during October 2014- October 2015, but analysts predict a decline in prices over the two–three years due to more properties coming on stream, higher interest rates in the US, and an increase in transaction costs.

Gary Sharkey