City sickness?

Originally published on CityMetric on 19 January 2015

The Centre for Cities’ City Outlook 2015, out today, tells a story of continuing success for the capital. Since the mid-1990s, the capital’s population and economy have been growing in tandem, and the city quickly regained the economic ground lost in the early 2000s and in the last recession.

Over the past ten years, in fact, London’s population has grown by 1.1m. The number of private sector jobs in the city have risen by 650,000, and the number of businesses by 115,000. The growth in population is greater in absolute terms, but the economic indicators are rising more quickly. London’s economy is growing faster than its population.

The sector that grew fastest, accounting for one third of London’s net new jobs over the past decade, was “professional, scientific & technical activities” – a sector which includes professions such as law, engineering, architectural design and accountancy, as well as management consultancy, advertising, and research & development. London’s economy is increasingly dominated by knowledge-intensive, highly-skilled businesses.

Growth in these sectors is the holy grail of economic development, and something to be celebrated – but it presents challenges, too. Firstly, like other UK cities, London has stubbornly persistent levels of unemployment – the claimant count increased by 40,000 (around 25 per cent) over the decade, despite the growth in job numbers. The jobs being created are not in the sectors that are easily accessible to people with low skills levels. At the same time, entrepreneurs in London’s growth sectors are complaining that finding people with the right specialist and generic skills is one of the biggest problems they face in seeking to grow their businesses.

London also faces a growing affordability crisis, particularly in housing costs. Demand for new housing has outstripped supply by a factor of three: in the decade when London’s population grew by more than a million, its housing stock grew by less than 300,000. Combined with the popularity of property – even unoccupied property – as an asset for investment, this has fuelled spiralling house prices, with the average house costing more than 30 times the average wage in super-prime central London boroughs.

This affordability crisis is pushing many Londoners on modest incomes, including people in entry-level jobs in London’s growth sectors, out of the inner city to places where property costs may be cheaper. But high transport costs still inflict a heavy toll. The Centre for London’s report Hollow Promise called these people, earning less than average but above the benefits threshold, ENDIeS: people who are employed but with no disposal income or savings.

There is also evidence that some are moving even further afield than London’s suburbs: commuting from outside London grew by about ten per cent between 2001 and 2011, and recent reports showed that young Londoners are moving away from the capital in record numbers. In 2012-13, indeed, there was a net outflow of 22,000 30-something workers. This is leading to resurgent populations and job markets; but is also putting pressure on housing in other southern cities like Oxford, Cambridge and Brighton. These are seeing London-esque gaps between house prices and earnings, in part as a result of local wages lagging behind the house prices that London commuters can pay.

Taken together, housing affordability and skills are two of the capital’s biggest challenges, as reflected in business group London First’s recent London 2036: an agenda for jobs and growth report. Unless we build more housing and other infrastructure, and invest in our skills base, London’s long-term position as one of the pre-eminent world cities could be threatened.

Does this matter? For better or worse, London’s success over the last decade has been built on its appeal as the destination for skilled workers, from the UK and beyond. This has resulted in a skewed economy, for sure. The distribution of resources, talent and infrastructure has been meant a north/south (or, more accurately, an SE/rest of UK) divide.

But a more balanced economy could also be a less prosperous one. Talent has been concentrated in London, a pre-eminent global city; the alternative is not that we have multiple global cities, but that we have none, and that a big chunk of the business coming into the UK disappears.

Knowledge intensive businesses are not sentimental or nationalistic; with the right infrastructure in place, they can easily sell their services across borders. What they depend on above all is a highly skilled workforce; they will operate from whichever cities can offer them this workforce at competitive rates.

London offers not only the critical mass of high-skilled workers, but the infrastructure and the cultural energy which attracts the biggest, and most lucrative, international employers. Over the last ten years it has become increasingly important to the country’s economy. But if London continues to become unaffordable to everyone but the richest and the luckiest, it will lose the skills that have supported its growth, and growth across the UK.

Some firms may follow the talent to Birmingham or Bristol, and many would welcome that type of rebalancing within the UK economy. But a large number of firms would move to Berlin or Barcelona – and we will all lose out.

The UK’s regions may have lost out from internal migration, but they shouldn’t necessarily welcome the tide turning against the capital. Economically, at least, the affordability crisis in London could become a big problem for all of us.