Why is household size growing?
In past blogs I’ve looked at different pieces of evidence on what’s happening in the UK housing market, which suggest that the housing crisis isn’t the result of a lack of houses. Rather, house prices have boomed over the past 20 years as the result of various financial forces — low global interest rates, overseas investor interest in the London property market, and mortgage market deregulation.
One objection to my argument is based on recent trends in the size of UK households. Despite government projections that households would shrink, creating a need for more housing, according to the ONS’s Labour Force Survey (LFS), they seem to have begun to grow, up from 2.36 people per household in 2010, to 2.39 last year. Surely, some have argued, this is evidence that household formation is being constrained by high housing costs, forcing people to live in larger households than they’d like.
In practice rising household sizes could be down to any of several things:
- Housing costs rising faster than average incomes, caused by a shortage of homes.
- Falling incomes for some groups — perhaps due to benefit cuts or weak wage growth for young people since the recession — constraining their ability to form new households.
- Changing choices or preferences in the population.
Only the first of these is a problem caused by a lack of housing. And with housing costs (as distinct from house prices) falling in real terms in recent years, it’s hard to see how this could be the cause. The second, as I’ve argued before, looks like a more plausible explanation, since we know that wages for young people have been hit hard over the past decade and benefits, including housing benefit, have come under pressure.
But what if population change and preferences are part of the story too?
Daniel Bentley produced an interesting chart recently showing a huge divergence in average household size by region since the late 1990s. While average size in most regions has remained reasonably stable, the chart shows that in London it has jumped from 2.43 to 2.70 per household by 2017 (my replication of his figures, based on the LFS). This is a pretty huge change, and since London has seen by far the biggest house price rises of anywhere in the country over the last 20 years, could this be proof that London housing costs are constraining household formation?
Not so fast. London may have stratospheric house prices and rising household sizes, but it also has very different population dynamics than elsewhere in the UK. It is a magnet for international migrants to the UK. Some 47% of heads of household in London were born outside the UK, compared to just 12% across the rest of the UK. The number of people in the UK who were born overseas has increased rapidly in recent years, and a very large proportion of them have settled in London.
Why does that matter? Well, only about a third of migrants plan to stay in the UK for more than four years, suggesting that many come to work and save. We might expect that systematically to affect their housing choices. So it could be that the growing number of migrants is changing the average household size, masking the underlying picture for the UK-born population.
For that reason it’s worth isolating trends in household size for the UK-born part of the population. This is what I’ve done using LFS data. The chart below shows the UK overall household size trend (blue) and, starting in 1997, the UK-born household size trend (red). It shows that, unlike the headline rate, household size among the UK-born population has continued to fall since the start of the century. Last year, while the average UK-born household contained 2.28 people, the average migrant-headed household contained 2.94 people.
Turning to London the picture is even more stark. There has indeed been a rapid increase in household size over the past 20 years (red line). But again this has been largely driven by a rise in the proportion of non-UK-born households, from 28% in 1997 to 47% today. The trend for UK-born Londoners has been far more muted, growing from 2.28 to 2.37 over the period, bringing it close to the national average.
So migration appears to have been a strong driver of average household size in recent years, increasingly pushing it above where it would otherwise have been, particularly in London. This is because migrants tend to be highly economical in their use of the housing stock.
Meanwhile the fact that UK-born households haven’t changed much in size, should offer some comfort that this isn’t a tale of housing crisis woe.
