How do house prices affect SMEs?
At a glance
- Housing costs that are too high, or too low, can affect smaller businesses. Brokers need to understand this to help tailor insurance solutions to their customers
- Centre for Cities, in collaboration with Zurich, has produced reports to help brokers, focussing on housing and where UK SMEs are thriving
- The success of SMEs, and the cities where they are based, is becoming increasingly interlinked
For brokers looking to help SMEs fulfil their ambitions – and be on hand with the insurance tools to manage any new and existing risks – an understanding of how housing markets affect businesses in UK cities is essential.
The housing system not only generates employment growth – through estate agents, mortgage brokers and construction – but rising or falling house prices can also affect the amount of money that people and businesses can spend and borrow, and also the wages that are required to hire staff.
At present, both the Organisation for Economic Co-operation and Development (OECD) and International Monetary Fund, say that house prices in the UK are too high in relation to wages. And the problem is only likely to get worse, in the short term at least.
Top 10 UK areas with the highest proportion of SMEs expanding in 2014
Despite record employment levels, inflation is still twice as high as average wage growth, of around 0.5%, as wage growth has stayed stubbornly low since the financial crisis.
Meanwhile, house prices across the UK have now surpassed their 2007 pre-financial crisis peak. Although the market is now beginning to cool, even in London, which has driven most of the current revival, prices are still likely to rise nationally by around 10% in 2014.
How cities can help businesses
Cities, too, have a role to play in allowing businesses to prosper, by delivering a range of quality housing that is affordable and in the right place.
In the UK, the more successful cities offer SMEs many opportunities, but high house prices can present challenges for individuals who wish to live there, such as limiting disposable income or quality of housing. And high house prices can drive up wages, as employers are forced to offset the cost to their employees.
In its latest report, the Centre for Cities, in collaboration with Zurich, examines how the housing market relates to UK business success. It has found that unaffordable housing in successful cities can actually restrict businesses from hiring the labour they need – as they struggle to attract the quality and number of workers required. In addition, small businesses especially can be squeezed out of in-demand and expensive offices, as space is at a premium in these cities.
Furthermore, in its comprehensive Small Business Outlook 2014 report – also supported by Zurich – Centre for Cities highlights some of the places in the UK where SMEs are performing best, or expanding quickly, by adopting ‘high-growth’ strategies – such as Warrington, Oxford and Aberdeen.
This information can be used by brokers to understand how the external business environment impacts on SMEs’ performance, and provide valuable tips to pass on to small businesses.
Impact on business
Of course, not all cities in the UK have seen big rises in house prices, and these, according to Centre for Cities, tend to be less economically successful. In these cities, there is often an over-supply of homes, leading to vacant houses and falling house prices. This impacts on businesses, as individuals have less capacity to borrow for consumption, and both individuals and businesses have less collateral to borrow against and to invest.
Housing, then, does matter in terms of allowing businesses to attract workers and the investments they make, especially for smaller enterprises – of which there are now almost five million, roughly 99% of all businesses in the UK – who provide the lifeblood to each city economy across the country.
Cities need to get the housing costs right if they are to help local businesses grow. Their own success and those of SMEs is increasingly interlinked, and understanding these local nuances can help brokers tailor their insurance solutions to the needs of their SME customers across the UK.