Research article

The Cost Of City Living

Rising day-to-day living costs are forcing many city residents to rent rather than buy property.

The cost of home ownership has grown significantly in our 12 cities since 2008. The average capital value of properties occupied by the Savills Executive Unit (SEU) has grown by 41% over the past seven years. Meanwhile, average household disposable incomes have grown by an average of 9% over the same period across the same cities.

It is no wonder then that in many of our world cities there is an increasing interest in housing affordability. In 2008 the average home occupied by staff members of the SEU and their households cost 5.9 times the average household disposable income of those cities. By June 2015 that figure had risen to 8.3 (see fig. 9).

Figure 9

FIGURE 9SEU mainstream capital values as a multiple of average household disposable income

Source: Oxford Economics

Rising capital costs for homes in world cities have pushed many households toward renting rather than owning. This has become cheaper relative to owning as yields have moved in, but our SEU mainstream rents have risen by an average of 25% since 2008 (see fig. 10). Although less than capital values on the same properties, this is still faster than household incomes, which grew by an average of 9% across the 12 cities.

Figure 10

FIGURE 10SEU mainstream rental growth

Source: Oxford Economics / Savills World Research

SEU staff and their households now pay 31% of the city average household income on rent, compared to 28% in 2008 (see fig. 11). In some cities, such as Shanghai and Mumbai, the proportion is higher because employees in the SEU earn more than the city average income.

Overall, the ratio helps to demonstrate how occupier demand relates to the supply of suitable housing units in a city. Where investment in residential property has been channelled into multi-family housing (primarily in US cities), it would appear that residents are paying a lower proportion of income on rents in markets that are better supplied (see fig.11).

Figure 11

FIGURE 11SEU mainstream rents as percentage of average household disposable income in the city

Source: Oxford Economics / Savills World Research

Generally speaking, those cities that are experiencing the highest jobs and population growth have seen the highest rent rises. This can therefore be seen as the real estate consequence of urbanism in action, although it is not forecast to continue at the same rate in all cities. Pressure on rents will ease in cities that are experiencing economic slowdown or population decline, but will be buoyed in others by a continuing or increasing preference by people to live in urban areas and/or in particular cities.

The extent to which cities can expand or regenerate land and create desirable urban residential neighbourhoods will determine the rate of future rent rises. Over the longer term, given the land constraints in most of our cities and their attraction for workers, residents and visitors, we expect city rent growth to be higher than in surrounding areas.

Prime time

Of our 12 cities the most expensive for mainstream residential property are Hong Kong, New York and London respectively (see fig. 12). They are all high-level centres of global investment generally, and real estate, both commercial and residential, is no exception.

Figure 12

FIGURE 12SEU mainstream capital values

Source: Savills World Research

This investment has been blamed in some cities for pushing up house prices for ordinary residents. Our data suggests that this is not the case, however, as both New York and Sydney have seen high price rises in recent years, despite restrictions on foreign ownership. Instead, the signs are that investment pushes up prime property values rather than mainstream values.

Mainstream properties generally have, on average, seen growth of 58% across the 12 cities since December 2008. Most of this growth has been associated with economic recovery in the second half of that period, with 33% occurring between December 2011 and June 2015.

Growth in prime markets has actually been lower across the 12 cities, growing by an average of 37% over the past seven years. The highest growth (19%) took place in the first half, before 2011, when buyers were more likely to invest capital rather than financing from income.

Mainstream property values are, on average, 19% of prime property values in our 12 cities (see fig. 12) and are most heavily discounted in internationally invested cities such as Hong Kong, Dubai, Paris and London. US cities have the smallest gap between prime and mainstream values, alongside locally invested cities such as Sydney and Tokyo.

It would appear that international investment is concentrated in prime markets and tends to push up prices in the most expensive echelons of the market. High levels of commercial real estate investment in US cities do result in international investment in multi-family housing, but this would appear to have had a moderating effect on rental growth rather than contributing to price growth in mainstream markets.

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