Empty Homes Part 2 Light
This is the light version of the article for the technical version click here
50 Second Summary
This post looks at the big smoke and tries to get to grips with the city's dizzying house prices and also the idea that property is being bought as an investment object with no real desire to live in it. Although we do not yet have all the data for London, there appears to be evidence of housing being used as a commodity in central London. We use the Borough of Kensington and Chelsea as a case study, for which we estimate there is about £21 billion worth of low-use property. The statistical tests indicate that the more expensive an area the more low-use property it has, that thResultsere is a statistically significant 4% difference between the price of low-use homes and the average house price and that luxury homes are 15% more likely to be low-use than would be expected. Overall the suggestion is that, for Kensington and Chelsea at least, property is being used as an investment object and not as a place to live.
What's the problem?
Empty homes are a big discussion topic when it comes to housing, with many councils offering support for those wishing to bring derelict property back into use, with several hundred thousand empty homes in the country. This article however doesn't look at empty property due to being derelict or in areas of low desirability, it tries to re-frame the discussion slightly questioning whether we are asking the right questions. The concept of low use homes encompasses second homes so as to take a broader view of housing use. If a house is in a nice area and is used every couple of months for a long weekend is it empty? No technically its not, but is it in full occupation? No it isn't either, as such the low-use definition is helpful because it allows the inclusion of underused properties at all levels of the housing market.
Whilst there is a lot of talk and emotion about empty homes and foreign use of "buy-to-leave" it is difficult to really get data on how serious the problem is. Using the methods described in the previous blog post, this article will look briefly at London as a whole. However the main focus will be on Kensington and Chelsea which at over 10,000 low-use homes has comfortably the most of all the boroughs we have received data for. This blog post asks several questions,
- Is there a relationship between price and low use homes?
- Are there patterns in the buying of low-use homes?
- What does it mean for the housing market?
Defining a low-use home
This case study of Kensington and Chelsea requires a clear definition of what counts as a low-use home. We are using the discounts applied by the borough of which the following are included.
- Empty and Unfurnished: This is property that has been left empty for up to 2 years. Total in borough 1035.
- Empty Works: Property undergoing significant renovation and is currently not fit to live in. Total in borough 34.
- Job related : For jobs where the accommodation is provided and you perform your duties on the property, typically caretakers/ pub landlords etc. Total in borough 1.
- Levy: Properties that have been left empty for more than 2 years, also called long term empty. Total in borough 656.
- Moorings: A boat mooring that is unused. Total in borough 1.
- Second Homes: A second home, there are no minimum living requirements attached to this class. Total in borough 8551.
The price class of a home
In this analysis we have broken up the market in to 5 price strata based on this definition by Savills, They describe 5 classes in the market: Lower Mainstream, Mid Mainstream, Upper Mainstream, Prime and Super Prime. The document linked is from 2012 so prices have moved around a bit since then (mostly up), what's more they give the prices in terms of £ per square ft. For simplicity we will use the average values as the cutoff which results in the class definitions shown below.
For reference the types of people Savills says live in each of the classes are as follows: Lower and Mid are young professionals, Upper are Downsizers, Prime is typically CEOs and senior bankers, Super Prime are the "International Super-Rich" (genuinely their description).
What did we find?
Currently we have received usable data from 22 of London's 33 boroughs, It seems clear that the areas of highest low-use are in central London north of the river. It also seems to be the case areas that are more "desirable" (definitely not a technical term) are more likely to be low-use. A good example of increased low-use in desirable areas is Lambeth which doesn't have much low-use. However many of the areas in Lambeth of highest low use are in new developments along the river such as the buildings behind the old GLA building and the St Georges development. This development is interesting as the St George Wharf Tower, currently locked in a three way battle with the Shard and the BT Tower for the title of London's "Eye of Mordor", was featured in a Guardian article in 2016 for being under occupied. The 22 boroughs that have submitted data have 66,000 low-use homes, 43% more than the 46,000 homes scheduled to be built in London in 2017. This doesn't mean that low-use homes are causing a housing crisis but it does give a handle on how many there are and what they mean.
Low-use homes in Kensington and Chelsea: A case study
The Royal Borough of Kensington and Chelsea (RBKC) has a royal amount of low-use homes. 10278 out of a total of 89280 are classed as low-use, totalling just over 11% of all housing stock. As can be seen in the map large proportions of RBKC have over 10% low-use with Brompton and Hans Town, the area around Hyde Park and Knightsbridge, has some LSOA with over 30 percent low-use homes. The north of RBKC is near the prison Wormwood Scrubs and has larger numbers of council houses and lower property prices, it also has lower numbers of low-use homes. This initial look at the data is similar to what appeared to be happening in Lambeth and London as a whole, which is that the areas that could be called desirable are more likely to have low-use homes than other areas. It should be noted that the waterfront at RBKC is not more low-use than other areas, so there are clearly no hard and fast rules.
Map of Kensington and Chelsea by low-use
So we have seen some basic patterns within RBKC but what of it? To start with it's worth trying to quantify the value of the low-use homes. The figure below left shows a heat map of the value of low-use homes in each ward, the values are in millions. What we can see is that RBKC has an estimated total of about £21 billion of low use homes, Brompton and Hans Town has £5 billion alone.
Looking further at the relationship between low-use properties and price the figure below right shows the correlation between price and percentage low-use. As can be seen there is a positive correlation of 0.67 indicating that wards with higher prices also have more low-use homes. We should stress that this is a correlation and does not mean that low-use homes cause higher prices or vice-versa. There are two notable outliers in the data, one that has an extremely high price and a middling low-use and the other that has a very high low-use. Removing these two outliers actually increases the strength of the correlation to 0.78
So far we have seen that RBKC has a great variation in the amount of low-use homes in each area, that there is a large amount of money invested in those homes and that there appears to be a positive relationship between price and low-useness (it's not a word, I checked). What is now interesting to know is given that there appears to be this price/low-use link is the average price of a low-use home more than the average price of a home and if so is it statistically significant? In short yes it is. The average price of a home in RBKC based on 2016 sales was £2,000,000 whilst the average estimated price of a low-use home was about 4% more expensive at £2,100,000.
As a final test we calculated how many low-use homes we would expect to see in each price class and compared it to what we actually saw getting the percent difference (As an example we if we expect to see 10 mid priced low-use homes but see 15 then we have 50% more than expected). We found that there were 15% less than expect low-use homes at the cheaper end of the market and 15% more low use homes at the prime and super-prime end. What does this mean? Well it means that individuals are buying prime and super prime property without planning on using it as their main home at significantly greater rates than would be expected.
Their are around 66,000 low-use homes in London and their value is enormous, Kensington and Chelsea alone has £21 billion. Looking at these raw figures it seems clear that the conversation about building new homes and bringing derelict homes back into use needs to develop to take account of low-use at the upper end of the market. At the beginning of the blog we had three questions to try and answer. The first question was about finding the relationship between price and low-use, we found a positive correlation 0.67 between price and low-use. The second question was whether there are any patterns in the low-use homes, we found that low-use homes are 4% (about £100,000) more expensive than the average home in RBKC, and the difference was statistically significant. When we broke homes into price class we found that there were 15% more low-use homes at the luxury end of the market than expected.
The final question is what does it mean for the housing market? This question is harder to judge, it's unclear what is driving the high rates of luxury low-use homes, perhaps it's investment, perhaps it's prestige, or a mix of both. However it does seem that there is at least some degree of housing being used as a commodity. Given the patterns observed it doesn't seem unreasonable to believe that this would push up prices in prime and super-prime property forcing some of those who wish to purchase into a lower housing category resulting in a trickle down of rising prices. In addition the findings raise questions about the construction of new high-end housing developments. High-end property takes up more space but appears to have lower levels of occupation than housing at the other end, Although there may well be a demand for prime and super-prime property if occupation rates are lower it will not satisfy the demand for places to live.
Another question that is very important is, if the low-use homes are investment objects what happens if market conditions change and the investors try to liquidate their assets? Is it possible that a collapse of the luxury housing market acts as a lever for the market causing a collapse everywhere else? If so how much of the market as a low-use home is ok before it becomes vulnerable? with over 10% of homes being low-use RBKC would seem to be at risk if there was a shift in confidence and a desire to get out of the market. This question is definitely beyond the scope of this blog but given what has been observed it is perhaps a question we should be asking.
Low-Use and Democracy
In the general election, the electoral ward of Kensington flipped from Conservative to Labour for the first time. Although we are not suggesting that this change is due to low-use homes, many homes were low-use before, it is still worth thinking about the effects on local democracy. We have seen that the more expensive areas tend to have higher rates of low-use homes and that poorer areas have higher occupancy rates. In local elections second-home residents can in theory vote in the locations of all their homes as long as they can argue they have a "considerable degree of permanence", according to the electoral commission. However it is likely that owners of low-use homes are less likely to vote in local elections and almost certainly won't vote in a general election. In areas with many low-use homes what does that mean? In marginal constituencies during a general election it could conceivably tip the vote. Whilst in local elections councillors in low-use areas could be representing significantly less voters than councillors in areas with more poorer residents, or even representing the wishes of people who don't really live there. This area is all kinds of difficult to unpick and could be analysed and discussed for ever, but given the very high rates of low-use observed and the unpredictability of recent voting, it might be worth exploring further.
Not technical enough?
Do you think this is an embarrassment to rationality? do you want to know more about the method? Or perhaps you are interested in the coding side? check out the technical version of the blog here