There’s a hole in my bucket

By Slow Dad - October 19, 2016

It costs between £20,000 and £30,000 (excluding housing costs) for a family to comfortably exist in Britain today. Why then does everyone struggle?

Higher earners have the same problems as low earners

I recently attended a reunion of former work colleagues.

The group are white collar workers earning between 3 and 6 times the national average wage. No traders, research analysts, six figure bonuses, or supercar drivers here.

A common complaint amongst the group was that no matter how high their incomes, they never seemed to have any money.

There's a hole in my bucket.

no matter how high their incomes, they never seemed to have any money
The group grudgingly acknowledged their lot in life could certainly be worse, however as that didn’t magically resolve the problem we investigated the potential causes.

A few had predictable foibles: a time-share in Majorca, a sports betting hobby, private school fees, or the long financial tail of divorce.

There was a consensus that the annual cost of living was less than £30,000 (excluding housing). Apart from some buying of expensive crap they didn’t need, the group earned the sort of incomes that shouldn’t leave them feeling cash poor.

The Office of National Statistics estimated in 2013 it cost an average £26,899.60 per household to live (excluding mortgage costs).

The Retirement Investing Today blog author estimates he could live in the UK on £21,000 per year (excluding housing costs).

My family’s own non-discretionary spending (excluding housing costs) over the last 2 years are consistent with RIT’s estimate.

Those three unrelated estimates validate the cost of living estimate of between £20,000 and £30,000 (excluding housing costs) for a family to comfortably exist in Britain.

Housing, everyone's second highest expense

So we turned our attention to everyone’s highest expense after taxes: housing costs.

everyone’s highest expense after taxes: housing costs
Housing is the second highest expense after taxes.

We agreed a 4 bedroom house was a reasonable proxy for our collective accommodations, most had live in partners and kids.

The home owners had all fixed their mortgages, though terms and rates varied considerably. We agreed a 5 year fixed rate 75% loan to value principle plus interest mortgage was representative.

We agreed Bank tube station was a reasonable proxy for our work locations.
London underground
Next we agreed some comparison criteria:
• Market house prices
• Market rents
• Monthly mortgage payments
• Commuting times.

We ignored commuting costs, because attempting to settle on a common proxy nearly started a fight.

The comparison results are summarised below.

After much drinking and debate the group concluded:
• London is an eye-wateringly expensive place to live.
• Renting is cheaper than buying in larger metropolitan areas.
• Buy is cheaper than renting in smaller commuter villages (and curiously East London).
• Well located London owners have “earned” more from unrealised capital gains than wages over the last 5 years.
• Growth rate disparities make selling in London to buy elsewhere a one-way trip.
• “Living away” for the working week is brutal on relationships, perceived housing cost savings don’t offset the cost of a divorce.
• The Price / Commuting Minute metric potentially highlights over or under priced locations.
• The spectre of interest rate rises does not bode well for many.

So what?

My personal approach is to rent where you want to live, while owning the best located self-funding buy-to-let properties you can afford. That way you don’t miss out on capital growth, while still enjoying your lifestyle of choice.

Source data:

  • Location: Each of the group's home post codes was rolled up to its postal town in order to achieve a reasonable sample size for the market price and market rents in the area.
  • Market Property Price: The average asking price for a 4 bedroom house for each postal town was sourced from Zoopla's area stats page.
  • Commute Minutes: Google map's public transport directions page supplied the commute times from each postal town to Bank tube station with a desired arrival time of 08:30 on a Friday morning. Where Google's timings anticipated delays due to strike action National rail times were used instead, because they pretended all would be fine.
  • Price per Commute Minute: Market Property Price divided by Commute Minutes. Cells shaded red appear comparatively expensive, those shaded green more favourably priced.
  • Commute Indexed Property Price: calculated by
    Market Property Price / Indexed Commute Minutes, which is driven off the longest commuting time.
  • Mortgage Fixed Term Payment: Calculated using figures taken from HSBC's website.
  • Market Monthly Rental: The average asking rent for a 4 bedroom house for each postal town was sourced from Zoopla's area stats page.
  • Cheaper to Rent or Buy: Market Monthly Rental minus Mortgage Fixed Term Payment. Red shaded cells highlight where it is cheaper to rent, green shaded highlight where it is cheaper to buy.
  • Gross Rental Yield: Market Monthly Rental multiplied by 12 months divided by Market Property Price. It is worth noting that none of the locations appear to offer particularly attractive gross yields, but those shaded in red are particularly low while those shaded green are less bad.

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  1. Interesting table there!

    Would it not be worth normalising the commute per minute scale so you can factor in how long each commute is and compare across the spectrum? At the moment it seems all you can do is group the commutes into similar groupings and then find the lowest cost/minute in that group.

    Say if you took 124 minutes as 1, and then divide 124 by the commute minutes by the rest of them (e.g. Isle of Dogs would be 124 / 13 = 9.5...) and then divide the price of the house by that number, you would get a kind of inverse of commute cost/minute and also factored so each minute is actually considered in your final figure and you can compare easily across the spectrum.

    This means that Bognor would be about 415K still but IOD would be around 96K which is much better because it is a far less of a commute which makes more sense in my head.

    Of course it depends on how much you are willing to pay for each minute back of your time and what you consider a reasonable commute. I can see why you've highlighted Walthamstow as cheaper because ~30 minutes is still a reasonable commute by anyones standards and would you really pay an extra 300K just to cut that down to 15 minutes, probably not. But on my suggested metric it would be like:
    Walthamstow: £168K
    IOD: £96K

    This is obviously weighting it heavily towards a shorter commute time but maybe you could add another variable in there which lessens the weighting of the commute time to suit your own personal preference somehow.

    Anyway sorry for the ramblings there and thanks again for the interesting post :)

  2. Thanks FIREstarter for the intriguing suggestion.

    I’ve added the Commute Indexed Property Price, calculated by:
    Market Property Price / Indexed Commute Minutes, which is driven off the longest commuting time.

    As expected this metric makes the commuter belt towns and villages look expensive, though High Wycombe and Chelmsford look less expensive than I would have expected.

    Chiswick and Maida Vale look even more overpriced.

    The slightly surprising outcome was Balham, Hammersmith and Merton were comparably less expensive by this measure than I would have expected.

    For mine the take away from this table is live somewhere close to work or live somewhere amazing. Each of us only gets one shot at life. Unless our home really provides the happy, then subjecting ourselves to epic commutes sardined onto overloaded commuter trains or stuck in traffic would appear to be wasting it.

  3. Great turn around time, thanks for putting that in!

    It's interesting to see both metrics and how they compare. Why anyone would pay 800K for Hove to commute 81 minutes to work is beyond me. Yes Hove is undoubtedly a nice place to live but jeez 81 minutes! 800K! My house cost ~250K and my door to door commute is about 90 minutes but I think that is a fair trade.

    "For mine the take away from this table is live somewhere close to work or live somewhere amazing." - Yea that seems like a fair point. Depends on how much you earn though eh ;)
    I've gone with "live somewhere nice enough to make me happy and suck up the long commute in order to reduce costs and escape the rat race earlier than most" which again is a fair trade off I think. Obviously I could work hard to increase earnings but at 35 and with my mindset I just can't be bothered to do that, it would make me far more unhappy and the bigger house/nicer area would not offset that

    Housing/commutes is definitely an each to their own type of thing ay!

  4. Congrats Firestarter for finding the happy/house cost/commute balance. I suspect many folks would find an acceptable compromise contrary to chasing FIRE.

    I realise you intended it tongue-in-cheek, but I challenge the assertion that the “live close to work or live amazing” decision is only for the minted. Consider the not too distant days of working-holiday visas, many a backpacker managed to live it up in London for extended periods of time while not earning a whole lot.

    I think it is more a question of lifestyle choices than income.

    The backpacker might be willing to share a 3 bedroom council flat in Raynes Park with 14 house mates, paying £75 a week rent to sleep Harry Potter style on a mattress under the stairs. They have a 55 minute commute.

    Your ~£250,000 house (assuming you own, have a 1.99%pa fixed rate mortgage at 75%LTV) costs about £200 a week, plus building insurance and maintenance costs. You have a 90 minute commute.

    For an additional £125 and 6 hours per week over what the backpacker is paying, you’ve chosen to live in a type of accommodation and location that makes you happy.

    Just for fun, let’s attempt to quantify the true cost of that decision.

    A 90 minute commute each way has you away from home for 11 hours each day, assuming an 8 hour working day.

    That is 15 hours a week of time lost to commuting, increasing your typical 40 hour working week by more than a third.

    Annually that works out to 681 hours commuting per year (assuming 5 weeks holiday and 8 bank holidays). That is the equivalent of an additional 17 working weeks per year, time you can’t get back. I hope you get to work from home regularly!

    Let’s pretend you would be interested in productively utilising that time currently spent commuting. We’ll attempt to place a value upon it.

    Your annual commute was 274 hours longer than the backpacker.

    The ONS reports in August 2016 the average UK weekly earnings was £474 (ignoring tax), or £11.85 an hour. Let’s assume for a second that this is what your time is worth, though I suspect in reality it would be worth far more.

    Applying the ONS average hourly wage to that additional commuting time reveals you are potentially forgoing £3,246 (13% the average annual wage) in potential earnings, assuming you were working in a job that paid hourly during that period instead of sat on a train commuting.

    Of course after a 40 hour work week most of us would much prefer not to work even more, we would rather be in the pub with our mates or taking the kids to the park or walking the dog. In this case the financial cost of the long commute is only the additional transport costs, though the opportunity cost of the time spent commuting appears far higher.

    To come out ahead the potential additional cost of housing located closer to work would need to work out less than the £3,246 per year (£62 per week). That would appear to be readily attainable, a 4 bedroom house could be rented within a 30 minute commute for less than £800 per month.

    For what it is worth my preferred approach is to buy cash flow positive investments, for example well located buy-to-let property, and use the resulting income generated to subsidise my own housing costs. That allows me to improve my quality of life via a shorter commute, while my investments hopefully enjoy some capital growth.

  5. Got to say you've lost me a bit here on what exactly we're arguing about :)

    Can you clear up a few points for me if you would be so kind:

    "That would appear to be readily attainable, a 4 bedroom house could be rented within a 30 minute commute for less than £800 per month." - Eh? The cheapest rental in your table is £901/month and that was with a 123 minute commute?

    On the whole "amazing" thing well I suppose it depends on what your definition of amazing is. I don't count my house as amazing, it is good enough for me but I don't think anyone would ever come round and go "wow this is amazing" where as they might well do that at the 800K house in Hove by the sea. Of course you can live close to work pretty much regardless of income but your phrase of “live close to work or live amazing” makes it sound like an easy choice, obviously you can't live somewhere amazing if you are the backpacker* so the takeaway from the table for them is just, "oh shit, I can't afford any of this stuff, I better work out my own solution" :)

    *OK OK - I Guess you can. You can go and live on the foothills of the Andes on practically nothing but I don't think that was what we are talking about here, we are talking about people with jobs in London, I think?

    Apart from that the quantification of the commute is a very good idea and one that I have been over many many times believe me. I very much dislike my commute time and would like to get it down to around 60 minutes but it ain't gonna happen and I've made my peace with it now. The silver lining of this particular cloud is that I get to do a some blogging stuff on the train so it's not dead time. If my commute was say 20 minutes I know for a fact I would just spend longer in bed (not the worst idea for health etc...) but it would be properly non productive whereas with my commute I am forced to get up (and go to bed earlier so as not to kill myself) and do actually get some shit done.

    Still I am hoping in a year or two I won't have to worry about that any more and the only commute I will have to do is from my bed to my desk... hah!

  6. Thanks Firestarter.

    I guess what I’m saying is while we’ve looked at the quantative cost of housing per commuting minute, we have ignored the qualitative measure of what each minute lost to commuting is costing us.

    If we think about all the other things we could be doing with the time, how much are they worth to us?

    Evenings camped out on the couch for a Netflix binge with beer and Pringles aren’t worth much. However having the option to take the kids to the park after school might be worth plenty. Alternatively having the time available to devote to longer term personal projects like write a novel (or writing a great FIRE blog!) or studying for a Masters in an interesting subject might be worth a great deal.

    The question therefore is how much is that time lost to commuting actually worth? I picked the ONS average hourly wage, which values that time at £11.85 an hour. For city workers their employer would be costing their time using a blended day rate in the region of £550-600, making their time worth approximately £70 an hour.

    A more complete measure of the relative location costs might be:

    Housing cost + commute cost (tickets, car parking, etc) + cost of commuting time (i.e. hourly value of the commuter’s time * length of commute)

    Only the individual doing the commute can put a fair value on their time, as only they know what else they would honestly be doing with it. Sure they could be curing cancer or writing the next New York Times bestseller, but if they would really just be having a lie in or watching Game of Thrones then they aren't actually missing out on much while commuting.

    In this context “amazing” is something for the individual to assess. I don’t mean living in a Disney castle or a Frank Lloyd Wright designed masterpiece that will make passers-by green with envy. I mean it makes the individual happy for whatever reason. Maybe it is around the corner from their extended family (depends on the family!). Maybe it lets the individual wake up to a magnificent view of the ocean or river or woodlands or whatever. Maybe it provides them with a nice cycling commute along the canals to work. Amazing would be whatever floated the individual’s boat.

    The backpacker in my example traded accommodation standards and a “nice” area for the ability to (briefly) experience life in an exciting city on the other side of the world. Few would consciously seek to live in an unsafe overcrowded flatshare, however if that afforded them the option of travelling around Europe every couple of weekends then maybe it would tick the “amazing” box for them.

    There is seldom a smile to be seen amongst all the “grey men” sleep walking their way onto the 6:36 Brighton to London Bridge train on a Monday morning, no matter how picturesque the view at home. Same is true for the teeming hordes battling their way out of Bank station from the Waterloo and City line around 8:30 each weekday morning, no matter how substantial their salary. Therefore if commuting is something that must be endured rather than enjoyed then it should be kept to a minimum.

    Of course some people actually love their commutes. A friend of mine rides the ferry across Sydney harbour to work every morning. A former colleague loved his daily commute from Rickmansworth because it gave him a welcome respite from his demanding wife and obnoxious teenage kids.

    To summarise: How long that commute actually needs to be, and what it actually cost us, is entirely up to the individual to determine. However when making that decision the individual shouldn't discount the opportunity cost of any lost time spent commuting, as not all costs are financial ones.

  7. Thanks for clarifying. Agree with everything you've said here, spot on!

    Love the Rickmansworth commute story haha. Although would prefer the Sydney Harbour one myself!

  8. Excellent post and original analysis.

    Not much to add, though three thoughts strike me.
    1) 45 mins is apparently the threshold acceptable commute time. Above 45 mins average commute, chance of divorce rises non-linearly. Or something to that effect.
    2) London's amazing transport infrastructure is such a key ingredient of London's economic magnetism. The fact that you can include on your list places on the south coast, and Cambridge, and Windsor, reflects what incredible transport infrastructure we have. The other large cities I know best don't get close on this metric.
    3) Travel time is only one measure of commute-ability. Another big variable is the range of locations which can be reached in similar travel times. Some out-of-town locations, e.g. St. Albans/Bromley/Windsor, do very well for getting to particular places but are much less good if the office moves a couple of miles in the wrong direction. If your career boxes you into the square mile then fine but if your work may move around different points of London's compass then be careful before committing to a particular commute route.

    All in all though a great piece and I agree with your conclusion.

  9. Thanks for the kind words Fire V London.

    45 minutes is certainly my sweet spot, not sure how authoritative that makes it. Much more and you're wasting vast portions of your life on a commute, much less and you're endlessly stuck on a treadmill trying to pay the landlord or lender.

    Public transport in London is most certainly a magnificent thing. I can say that wholeheartedly, having grown up in a town where there wasn't any to speak of, and worked for a time in a city where vast areas were virtually unserviced by it. The savings on car ownership and parking alone make it worth celebrating.

    Travel time is certainly one measure, but it needs to be traded off against earnings. All roads seem to lead to the square mile, but for many folks in the also ran/peon ranks I believe they'd be much better serviced by choosing lifestyle over pound signs.

    Anybody choosing their living location based on their current office location is playing with fire, particularly with the current trend towards shifting middle and backoffice jobs out towards commuter towns. Good luck getting to Crawley from Beaconsfield or Croydon from Aylesbury.