Are housing costs really rising?
Last week's ONS figures pointed to something very important about the developing “cost of living crisis” – but the message is not quite what it seemed at first sight.
The figures were interpreted as showing that UK households were now spending 27% of disposable income on the essentials of food, transport, housing and utilities, up from 23% before the recession began. All of this increase comes from spending on housing, which now accounts for 21% of all household disposable income.
The trouble with this interpretation is for owner occupiers, the ONS figure is actually an imputed figure, based on estimates of what the home’s market rent would be. The ONS does this in order to estimate the economic value of our ‘consumption’ of housing. Increases in the value of housing consumption as recorded by the ONS therefore reflect rises in the cost of renting but not the cost of housing in general. Given what happened to interest rates after 2008, this makes sense.
Another way of measuring housing costs, using the DWP’s Households Below Average Income (HBAI) dataset, shows the differences in housing costs by tenure quite clearly. In HBAI, housing costs are rents, service charges, ground rents, building insurance and mortgage interest repayments. It does not include the repayment of mortgage capital, as that is not a cost, but the purchase of an asset. By dividing this through by post tax income, we can get a view of who is spending what on housing costs.
In itself, this isn’t perfect. Housing benefit is included in the income, but in many cases it reduces the cost of rental to zero. Removing the relevant rent from the cost instead of including housing benefit as income has some interesting implications for where the costs of these rent rises have been falling - something we will explore in our next blog. Moreover, owning a home does bring costs of maintenance which are not captured here, though they will covered in the cost or renting, as any sensible landlord would bear this in mind when setting the rent. Still, we’re mainly interested in how housing costs have changed over time, and the costs of maintenance are unlikely to have changed much.
The graph below looks at the proportion of post tax income spent on housing costs, broken down by tenure. What we see, then, is that costs for mortgage holders have not risen at all. In fact, between 2006/07 and 2011/12 they fell, from 14% to 10% of post-tax income (includes all benefit income, including housing benefit). This makes sense – interest rates fell to record lows after the financial crash and have largely remained there since.
But rents are a different story. Renters already spent a greater proportion of their income on housing than owners did, and this proportion rose between 2007 and 2012. Private renters now spend 29% of their income on housing. For social renters, whose income and housing costs are on average lower, this figure is 25%.
By clicking the tabs at the top of the graph you can look at some other breakdowns. We see that housing costs as a proportion of income have risen for the poorest fifth (who are mainly renters), stayed broadly the same for those on middle incomes and fallen for those on higher incomes. They have risen for under 25s and fallen slightly for those just under retirement age. Region by region, there has not been much change, but London stands out for its much higher level – housing in the capital accounts for 17% of post tax income on average. Those in the private rented sector can expect to pay much more.
Although this analysis is quite superficial, it still tells us something about the “cost of living crisis”. It is not felt uniformly across the board – those paying a mortgage are paying less now than five years ago. The rise in housing costs is felt mainly by renters, particularly private renters, both in terms of rising weekly costs and the increasing impossibility of affording their own home. This is a group that is mainly poor or young, or both.This is, though, only part of the story of rising costs. There is also a rising number of people in the private sector claiming housing benefit. The next blog will look at this more closely – how much of this rising cost is met by the rising housing benefit bill?