Mythbuster No 2 – Finance and Housing Affordability in Jersey

Jersey’s Value to Britain report published in 2013 by Capital Economics revealed that small communities typically can only sustain one or two major industries.

Since the 1980’s, Finance has been the largest financial contributor to the economy in Jersey, despite only making up around a quarter of employment. This is achieved through high revenue per worker limiting the impact of the industry on population, as it takes fewer workers than other industries to produce higher output. In fact the recent States of Jersey interim population report has revealed that Jersey’s population has grown mainly due to birth rates and low skilled immigration.

Having laid to rest the myth that finance is the cause of high population, in this piece we examine the contention that finance is responsible for house prices being unaffordable in Jersey. The chart shows house price trends over the last decade.

Jersey House Price Index


Wage levels are a factor in demand, but so too is population growth, the availability of houses and apartments, the supply and affordability of mortgages, and general inflation levels.

A growing population is most likely to put pressure on house prices if supply is not adjusted to reflect increasing demand, resulting in higher prices.

It is interesting to set Jersey house prices in context:-

Jersey 2013 Average House Prices vs Guernsey and the UK

So on an affordability measure based on average wages and house prices, Jersey is more affordable than Guernsey and London and only around 10% less affordable than the South East. This comparison does not allow for the generally lower rates of tax in Jersey than in the UK, which of course helps affordability with greater take home pay from which to make mortgage payments.

What would the position be if Finance was not available to provide high value jobs – would there be cheaper and more affordable houses?

The experience of the Scilly Isles would indicate that in fact houses would probably not be any cheaper and affordability for locals (most finance workers in Jersey are entitled) could be significantly worse.

The Scilly Isles is 85% dependent on tourism and a 2008 Eurostat study reinforced the challenges of high house prices and a low income dependency arising from traditional industries.

“Low earnings are compounded by the high the cost of living and of operating a business on a remote and peripheral archipelago, largely due to the cost of transport to and from the mainland.  The lack of decent affordable homes is also an issue. Research undertaken by the National Housing Federation indicates that the average price of a home on the Isles of Scilly is £405,429; a figure over 29 times higher than the average local income.”

The Isle of Wight, population about 130,000, fares a bit better with an average house price of £200k, but with median gross pay at just over £16,000 and unemployment at 4% (about twice the rate in Jersey) only manages an affordability ratio of 12.5, scoring worse than Jersey.

It seems Islands without a high value industry generally struggle with low wages, low employment diversification, high costs of transport and the associated impact on retail prices, leading to affordability issues with housing.

The reality is small remote Islands tend to be more expensive in terms of cost of living, housing, transport and telecommunications, with higher food and retail prices.

In Jersey population growth and a lack of supply are the principal reasons for house price growth. Some hark back to a golden age of lower population and lower prices. If that rose tinted view of the world ever existed it is most unlikely the clock can be turned back because one fundamental dynamic has changed forever.
 

Life Expectation 1911 - 2010

In 1950 the average life expectancy for a male adult was 66, in 2010 that figure had risen to 78.

The cost of rising state pensions is largely unfunded and dependent on drawing out from the contributions of those currently in paying in. If more people draw out for longer, in the above case on average 12 years longer, the strain on the funding is enormous.

Population growth may have impacted on house prices, but it has also allowed the States of Jersey to continue to pay excellent pensions to ever larger numbers of retiring local people. Over 65s are set to double in numbers in the next few decades and over 80’s will triple.

Measured and controlled population growth, with careful and sensitive housing development, will allow Jersey to continue to prosper without significantly undermining its ability to pay retirement pensions and to provide acceptable public services.

The answer to Mythbuster No 2?

Finance and its trickle down effect through the wider economy is what enables affordable housing in Jersey.

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