London housing prices have dropped for the first time in eight years in 2017, largely due to the negative impacts of Brexit. Prior to this, the sustained increase in housing prices coupled with stagnant wages meant that housing in London had become increasingly unaffordable to many urbanites. First-time buyers especially are finding it increasingly difficult to climb the housing ladder, needing to take out an increasingly larger multiple of their income as mortgage as seen from The Economist research below.
In this exploratory data analysis, I am investigating whether there is a certain borough or time in a year where it is especially preferable to purchase a house in 2016 for first-time buyers. I approach this question in three parts:
- Affordable locations – What are the affordable locations in London that are still available to first-time buyers?
- Optimal buying time – Is there a month in the year where low-cost housing transactions are more likely to occur?
- Value for money – Which boroughs are overpriced in terms of housing price to salary ratio?
Housing transaction dataset: HM Land Registry – Price Paid Data, 2016
The housing dataset contains information on all residential transactions registered with HM Land Registry in London in 2016. The variables of interest are the price of house sold, date of transactions and the postcode of the house sold. The postcode data provides the location data needed to create maps for location analysis. The pricing data and date of purchase data are used to answer the first two parts of the research question: where are the affordable housing located and when these transactions tend to occur.
There is one main limitation to the dataset that, if given, could have provided a richer analysis for these research questions: it lacks characteristic variables. The dataset provides the final price of the housing transaction but does not give enough details about the property itself. For instance, a £500k budget could buy a two-bed apartment in Croydon, while the same amount could probably only buy a studio in the City. The lack of details about the property transacted makes it difficult to make like-for-like comparisons. Hence, I am conducting this analysis only at an aggregated borough level and not at transactional level. I must also highlight that the file contains no recorded data for the Borough of Westminster. This data being however available on HM Land Registry Price Paid search engine, I conclude that Westminster data has either been removed during preliminary data cleaning of the file, or is usually provided as a separate database.
Census Data: London Datastore – London Borough Profiles
The last section of this report looks at value for money. To support my analysis, I used data from the 2011 Census and more precisely the median salary data aggregated at the borough level.
1. What are the affordable locations in London that are still available to first-time buyers?
Location, location, location is the mantra for realtors. The map below plots the distribution of median housing prices transacted for each borough in 2016.
As expected, the closer to the city centre, the higher the median prices of houses sold. Another observation is that West London is also predominantly more expensive than the East. The reason I plotted median distribution of prices rather than a simple average is due to the variability of data. The frequency of houses sold differs between boroughs and one high value sale in the City with a low frequency of sales could distort the mean hugely. Median price distributions might be a more meaningful way of examining housing prices. For example, the highest average price fetched is in the City of London, valuing at £5.2m. The borough with the highest median price however, is in Kensington and Chelsea at £1.2m. The distortion to the City of London average is primarily due to two very expensive properties valued at £84m.
From the above map, I can infer that the most affordable boroughs for first-time buyer would probably be in East or the South, in Sutton and Croydon. However, it would also be interesting to see the frequencies of these affordable home sales to confirm that one would have the largest probability of finding a suitable first home. The map below plots the number of transactions of houses priced at less than £500k.
This plot confirms the hunch that affordable housing is more concentrated in the outskirts of London, with Croydon having the most number of transactions under £500k.
2. Is there a month in the year where low-cost housing transactions are more likely to occur?
For a first-time buyer making purchase decisions, timing is also of utmost importance. For each borough, transactions below £500k (defined as affordable homes) are filtered out by month. We can then look at monthly affordable home sales as a proportion of total affordable home sales for the year.
For 2016, I notice an interesting trend whereby a significant proportion of affordable homes were purchased in the month of March in 2016. Seasonality peaks were not significant in other periods of the year. This interesting observation is in-line with the policy changes brought about in March 2016 when stamp duty was set to increase from 5% to 8%, impacting significantly first-time home buyers. This spurred a wave of people trying to purchase affordable homes ahead of the policy implementation the following month. This policy change however, limits my ability to draw conclusions about seasonality. I could overcome this limitation in a future study by simply cross-checking with additional datasets spanning across many years. It would be interesting to see if the data displays any form of seasonality whereby more affordable homes would be transacted in a certain period of the year.
3. Which boroughs are overpriced in terms of housing price to salary ratio?
As many other European capitals, London boroughs is gentrifying quickly. Gentrification is a complex social and economic process that would require several essays to be described, which is not the purpose of this article. In a nutshell, it is the process whereby a neighbourhood is transformed by the influx of more affluent residents. The neighbourhood undergoes a facelift to suit more middle-class taste (cheap eateries, pound shops, or hard discount supermarkets being replaced by more expensive restaurants and shops, for instance). One of the strong negative side-effects of this phenomenon is that, de facto, the increase in housing prices and living cost pushes the poorer locals out of their own neighbourhoods. London examples would be areas like Hackney where a severely deprived neighbourhood has been supplanted with cool and trendy bars popular among youth and creative professions. As a result, these places now demand a “cool” premium on top of their normal prices, thereby dampening future price growth for these investments. The simple scatterplot below looks at the relationship between median salary and the housing prices:
The regression and scatterplot shows that there is a very clear positive relation between median income and the median house sales prices. The higher the salary earned, the more expensive the residence. The grey bounds of the regression line show the standard error of the regression. Points above the regression line and above the bounds means that these boroughs are commanding higher median house sales prices than they should be. Hackney, Hammersmith and Fulham, and Camden are some of these boroughs. These are also the boroughs that are undergoing the most gentrification. The boroughs below the curve are boroughs that command less median house prices than they otherwise should be. These are areas such as Croydon and Sutton that attract young professionals working in the city, with higher pay but attracted by low rent and housing prices. These are usually new and developing boroughs with less entertainment venues and poorer access to good public infrastructure.
Indeed, the gentrification process seems to crowd around zone 2 of London and especially evident in East London. In Hackney, the median housing price is already more than 12 times the salary of the median person living in the area. This highlights the consequences of gentrification and the low affordability of London housing. Depending on people’s views on gentrification, investing in properties in these areas could also potentially boost returns in the short run as more and more affluent professionals migrate to these boroughs.
Discussion and conclusion
This exploration of London house prices has revealed three main insights. First, a very large number of Greater London boroughs remain unaffordable for first-time buyers with a budget below £500k. Second, the data revealed that policies can significantly affect the time of purchase. However, due to the lack of time dimensions of this dataset (data from 2016 only), I couldn’t identify any significant seasonality pattern in housing prices. To explore this further, I will need to use time series data to explore how things have evolved historically. For example, I could investigate how affordable locations have changed over the years. A possible question for further exploration would be if first-time buyers have been able to afford houses in zone 1 & 2 of London historically? Finally, I found that gentrification affects mostly central London, and can be a double edge sword to housing prices.
HM Land Registry (2017). Price Paid Data, 2016 YTD, Metadata [online]. Available at: https://www.gov.uk/government/collections/price-paid-data
HM Land Registry search engine (2017) [online]. Available at: http://landregistry.data.gov.uk/app/ppd/ [Accessed 2 Jan. 2018].
London Datastore (2017), London Borough Profiles, [online]. Available at: https://data.london.gov.uk/dataset/london-borough-profiles [Accessed 21 Dec. 2017].
Monaghan, A. (2018). “Cost of living squeeze dents UK house price growth”, The Guardian, 4 January 2018 [online]. Available at: https://www.theguardian.com/business/2018/jan/04/cost-of-living-squeeze-dents-uk-house-price-growth [Accessed 5 Jan. 2018].
Rudgard, O. (2018). “Housing market panic as buyers rush to beat stamp duty change”, The Telegraph, 30 March 2016 [online] Available at: http://www.telegraph.co.uk/personal-banking/mortgages/housing-market-panic-as-buyers-rush-to-beat-stamp-duty-change/ [Accessed 28 Dec. 2017].
Watt, P. (2013). ‘It’s not for us’ Regeneration, the 2012 Olympics and the gentrification of East London. City, 17(1), 99-118.
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