Understanding the Cost of Living in London

It's no secret that living in London is expensive - for many prohibitively so. In this article, we review some of the economics of the cost of living and what cost of living pay working families need to secure in order to bring up two children in central London (zones 1-3). And whilst for many it will strike a rather depressing chord - the squeezed middle income families who are increasingly being pushed further and further out due to the combined costs of punitive childcare fees and exorbitant property costs - our message to you is: have hope. There is light at the end of the tunnel and we'll explain why after we give you snapshot of what the costs look like in London, against other countries and the national average....

Childcare - the highest in the land

It is the largest cost that working families have to bear in London, even more so than housing. Research from Pregnant then Screwed, an campaign group for working mother's rights to childcare, suggest that 26% of families are spending over 75% of their net disposable income on childcare driven, in large part, because of childcare fee inflation (a staggering 6% YoY, according to the Standard), which is, in itself, driven by increasing demand and a reduction of supply (according to Coram, which undertakes annual benchmarking on childcare fees, is some 11% reduction in the supply of places). It's simple economics - available places (supply) goes down, demand increases and the difference between the two is the value or premium you're willing to pay to secure it...

But but but....let's take a look against others in the OECD where the UK is only beaten by New Zealand and Switzerland as a percentage of take home pay, but is in stark contrast to our European neighbours where 5% of net household income is the norm...not 26% (for one child) and over 50% for two. So parents, particularly in London, are in a bind - dwindling availability of nursery and childcare places is resulting with increasing fees, a botched implementation of additional 15-30 hours funding for 2 year olds where the amount of funding doesn't equate to the cost of care in central London (and as a result many providers stating they're not going to provide the places)...and you can see why many budding parents are deciding to just not have children (ONS Census data - lowest birth rate since 2002); and those that do, have to move out to places that have cheaper childcare.

London property - why so high?

Rental prices in London can be exorbitant - with an average 4 bed family home in central london now costing anywhere between £5000-7000 a month out of one's post tax salary, driven, in large part because of the punitive levels of interest new home buyers are looking to have to pay on an already inflated and priced up property market. I mean, the choices appear to be to pay £7000 a month on an interest only mortgage to buy that £1.1m house in zone 3, or pay the same to rent...both basically meaning you'll never own your own home in any event. On top of that, add food and utilities inflation and you soon arrive at a point where the couple have to be working in Hedge Funds or Private Equity to make it work. And even then it's tough

Potential Consequences

For many of us who grew up in London in the 1980s, we might remember what urban decay looks like. It might seem like a distant memory now and for most an utterly implausible reality - central london with vacant houses and a depletion in the social fabric that makes central London the vibrant destination that it is today. But history repeats itself, perhaps not entirely for the same reasons (back then it was post war urban planning policy to actively push families to Letchworth garden city rather than central London) but potentially with the same consequences. London without young families becomes a desert of the disaffected. And with over 90 primary schools facing imminent closure across London, all the warning signs are there for councils and businesses to act now, and act fast. So what can we do?

Affordable Childcare

We can't do that much about housing - I wish we could. Clearly there is a need to build big, build fast and build in a way that inspires people to actually want to live in the community (e.g. maybe less soulless urban sprawl but well considered residential districts that retain character, charm and a little street level vitality that isn't just Zizzis and Pizza express...no offence to either meant!). That is unfortunately in the hands of landowners, property developers and the politicians, so I'm not hopeful

But we can do something about childcare to make it work for local working families - and let's remember that is the biggest cost that working families have to bear. So consider: families will be able to have those funds redirected to mortgage payments if we can figure out a way of making it work...

But how?

Some Light

The truth is there is a way of making childcare more or less cost neutral to the working family. But it requires active participation from businesses. The workplace nursery scheme, allows employers to pay childcare fees from the gross / pre-tax salary of their staff teams, effectively creating a PAYE rebate that can cut the cost of care in half from the outset. And if you factor in the 15-30 hours funding on top, then it increases to an 80% reduction in fees. But I'll go one more. If it's true (as research from Remit consulting suggests) that our commercial / office environment in the City is only 50% utilised, progressive employers can directly contract nurseries to provide their teams with a dedicated childcare provision that is zero cost (based on the rental alleviation, tax incentives and other measures). And the best part? The companies themselves can write down 100% of the operating costs of the childcare facility against their corporation tax. So everyone wins. 

Business to Business and corporate childcare solutions are the mainstay in the USA. It's how Bright Horizons built its business. Perhaps now it's time for the UK to, once again, follow the US....