The Bank of England has squeezed disposable income by inflating housing costs

One of the features of that last 3 years or so in the UK has been the way that house prices have accelerated and left wage growth especially real wage growth way behind. The official view is that affordability is fine because mortgage rates have fallen although of course that is something of a trap as if the tactic of raising house prices is to continue then mortgage rates will have to continue to fall. That is not so easy from what are often particularly in the case of fixed-rate mortgages all time lows for rates. Also the idea that affordability is good is undermined by the fact that some much official “Help” is required via Help To Buy and other schemes. The truth is of course that first time buyers are very likely to be humming the words of John Lennon.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

A Different Perspective

The Resolution Foundation has taken a look at some longer time patterns at they pose another challenge to the its okay crew.

The analysis, which forms part of the Foundation’s forthcoming housing audit, finds that the share of income spent on housing costs was stable for most of the 1990s and early 2000s at around 17 per cent. However, a wedge opened up in the mid-2000s as rising housing costs outstripped income growth. By the eve of the financial crash, the average working age household spent around a fifth of their income on housing.

A 3% income share may not seem much but if one considers where that 3% has to come from then it gets much more difficult for many if not most budgets. Actually the impact of the credit crunch or rather the Bank of England Bank Rate cuts handed it back for a while.

This housing affordability wedge then shrank in the wake of the crash as interest rates were cut to record lows and house prices fell. For many households this fall helped soften the post-crash living standards squeeze by reducing mortgage costs.

Ah house prices fell! What a chill that will send around officialdom and the Bank of England as departmental memos fly around to explain what a house price fall is. In true Question of Sport form you are all probably wondering what happened next?

However with rising housing costs once again outstripping income growth, the Foundation warns that housing risks being a major brake on the UK’s living standards recovery.

The Foundation notes that the extra share of income being spent on housing over the last 20 years – up from 17 per cent in 1995 to 21 per cent in 2015 – is equivalent to a 10p rise in the basic rate of tax (or £1,500 per year) for a typical dual-earning couple with a child.

So we see that in percentage of income terms we are now pretty much back to the 2008 peak which makes you think. It is eye-catching to note that this is equivalent to a 10 pence rise in the basic tax rate. This was 25% back then if we ignore the lower rate of 20% on £3000k or so of income) so we have been given a basic income tax rate  5% lower but house buyers have found twice as much taken away. Oh Well as Fleetwood Mac put it. Of course the personal allowance has changed but even so the theme is clear here.

The Squeezed Middle

Is looking rather squeezed to say the least.

The analysis shows that households on low and middle incomes have been most affected by housing costs growing faster than incomes. Among these households, the share of income spent on housing has increased by almost a half over the last 20 years, from 18 per cent to 26 per cent. A far smaller increase took place for higher income households (up from 14 to 18 per cent) and the poorest households (up from 21 to 25 per cent).

We can perhaps gain a little solace from the fact that at least the poorest have not been hardest hit. But of course that ignores what 25% of their income actually gets them as we mull the pictures of rooms that seem more like cupboards that have done the rounds.

Regional Inequality

Maybe it’s because I’m a Londoner that these figures resonate but Scots have been hit by a shift here as well. The emphasis is mine.

Londoners currently spend around 28 per cent of the income on housing costs, up a third since the mid-1990s (21 per cent). Recent increases in housing costs have caused typical London households to experience the biggest post-crash fall in disposable incomes anywhere in the UK.

Scotland has seen the second sharpest increase (up from 12 per cent to 18 per cent), followed closely by the North West (up from 15 per cent to 20 per cent).

So the recovery has yet to reach disposable incomes in London? it is something of an antidote to all the “hoorah for house price rises” headlines that the media so love, after all they will be liked by one of the main advertising sectors.

Some Are Even Worse Off

Averages of course give us only some idea of the distribution and can by got by different routs and roads so this helps to nail the picture on the wall.

The Foundation warns that these increases have pushed too many households into spending a perilously high share of their income on housing. Its analysis shows that around 3.3 million households spend at least a third of their income on housing costs – up from 1.6 million in the mid-1990s.

I note that the Resolution Foundation then hammer out a beat that has been familiar to readers of my work for some time to say the least.

The analysis published today shows that private renters spend a greater share of their income on housing (30 per cent) than mortgage owners (23 per cent) or social renters (20 per cent).

Whilst one needs to be careful about generics and stereotypes this is more of a problem for younger people than older ones as we mull the concept of a generational war.


There is much to consider here and let me open with the fact that this has been a deliberate policy driven by the Bank of England. In the summer of 2012 its Funding for Lending Scheme gave banks a subsidy ostensibly for small business lending but the real impact was via an initial impact of a 0.9% fall in mortgage rates. It’s own research suggests a total impact of 2% on mortgage rates. Whilst this did make houses more affordable for a while the subsequent surge in house prices first eroded and then according to the Resolution Foundation eliminated that on the road to making housing costs higher.

I would like to look at disposable income which is being squeezed according to this analysis by a consequence of Bank of England policy. If we go back to 2010/11 then real wages slumped in response to the Bank of England overlooking a rise in consumer inflation to over 5% per annum. Please remember that when the many “experts” tell you that such moves provided a strong stimulus as whilst it did up in the economic models to be found in Ivory Towers if we come back below the clouds it faded away.  If we put house prices in our inflation measures then some of the growth would disappear.

The situation was worse around the time of the Lawson boom in the late 1980s when around a quarter of disposable income went on housing but there are two catches. Firstly interest-rates were in double figures and on their way to a 15% peak if I recall correctly with apologies to younger readers for such a mind bending number. Secondly what happened next?





14 thoughts on “The Bank of England has squeezed disposable income by inflating housing costs

  1. This isn’t just BOE policy; it’s government policy via such vehicles as HTB.

    Let’s face it house prices are emblematic and I think the government will do almost anything to keep them high. Pensions have been trashed and folk see their only financial security as being the bricks and mortar they live in. If house prices fell to any extent – and I think they should and will – the government will be in real trouble with the voters. It’s all money illusion of course but most cannot see this.

    High house prices are against almost everyone’s interests; FTBs find it difficult to get on the ladder; second movers find it’s too expensive to move up the ladder but this matters not against the grip of the conventional wisdom.

    The crash in the early 90s was a real around 30% composed IIRC of around 15% nominal falls and 15% wage inflation. However this time it seems a similar fall would impact on nominal prices more due to the inability of wages to grow. If this happens – as I believe it will – then folk will not be pleased.

    BTW I think that many of the HTB taxpayer loans will never be repaid and are lined up to be one of the next financial scandals.

    We are a Ponzi economy likely to suffer the same fate.

    • Hi Bob J

      True although I think that the blue touch paper was lit by the Funding for Lending Scheme which then also provided the fuel to fan the flames. It is intriguing is it not that something which is against the financial interests of the majority is reported as a good thing to use the style of 1066 and all that.

      Well I guess the HTB debt can go on the unpaid pile with many of the student loans so it won’t lack for company. On the subject of pensions the news from USS (the University scheme) resonates with me because I used to deal with it and it had a good reputation

    • The 15% wage inflation was balanced by price inflation. Both could happen in future – so don’t rule them out.

  2. The analysis is spot on but it so so simple to work out which is proof that either the politicians and Central Banksters are unbelievably stupid or it is a deliberate act to turn the population into debt slaves.
    I find them not guilty on the first count but guilty on the second
    Help to Buy why would you subsidise an over inflated market?A competent government would ban foreign ownership like Thailand.Require 10%deposit and allow boring for mortgage of no more than 3 times one wage earners salary.Then embark on huge social housing programme
    What happens if the biggest bond bubble in history bursts and these ‘criminals’lose control of interest rates and mortgages skyrocket which is what normally happens after suppression the equivalent of holding a ball under water
    The country is not being governed in the best interests of the country but to enrich a small percentage of the population.
    As Bob J says above pensions have been trashed …think about how much the economy benefits from those in receipt of final salary pension payments those will dwindle away over the next few decades.

    • Hi PrivateFraser

      I am not so sure there is a plan but rather like English rugby in the world cup as poor decision follows decision suddenly you are nowhere near where you wanted to be. Although someone somewhere has to suggest these things and I am reminded of Sir Frank in the Yes Minister series. As he/she presents the “hard or soft option” as The Pet Shop Boys put it they know what will be chosen invariably.

      Then of course it becomes a trap or a maze with no apparent way out.

      • Hi Shaun I commend your reasonableness on why we are where we are,as you will detect I have long since giving these people the benefit of the doubt.
        The problems and the solutions are clear but admittedly very painful due to the disastrous policies of the last 37 years.
        Egged on by the cheerleaders in the media.
        Some of whom are not the brightest heard a female presenter on Sky news yesterday morning ask a guest why was it more important to save steel workers jobs rather than those of those who are on the brink of losing theirs at BHS.(Good luck to both sets of employees)

  3. Hi Shaun,

    I have a question, so disposable income taken away in taxes get spent no stuff – most times on useful stuff, some times not so useful. Disposable income taken away because of rising housing costs – where does that money go?

    • Hi Dave and welcome to the comments section

      Some of the money goes to necessary areas such as maintenance,repairs and insurance. But of course the major payment for homeowners is mortgages which goes to the banking sector. It has lower mortgage rates but of course mortgage sizes are larger these days.

      If we move to rent then that goes to the landlord and he or she will be in a variety of positions. The lucky few will be able to pocket it although there will be bills to pay. But those with a mortgage will be again paying to a bank. So there is a common thread through this.

      • Thanks. Yes this is as I suspected, the banking sectors role should be to productively allocated credit but in reality it’s focus on assets and housing has benefited them more than the economy as a whole.

  4. The housing crisis can only be solved by increasing supply. That can only be done by granting more planning permissions, where the housing is wanted, mainly the South East . That entails encroaching on the much vaunted Greenbelt. The political will to do so is not present; indeed more land is being put into Greenbelt. This despite farming being unprofitable, and many landowners happy to sell if they could get more than agricultural value….and not have to pay so much in CGT (or of course, a decent return on capital could be obtained…..)
    Even if land was released, the large housebuilders won’t build without getting the huge profits they have become accustomed to.
    The reality is that the UK is an economy entirely dependent on housing and no government will change that.

    • Forget the big house building cartel. They merely front-run the land. A friend in Germany was able to buy a 900 square metre plot for 17,000 euro from a scheme through the local council. It was in the sticks & was “reserved for locals” – but everyone on the street could either self build or pay a builder. The result was a 200 square metre (2000 sq foot) detached house under 250,000 euro.

      Planning restrictions mostly benefit the landowning, rent seeking aristocracy.

      • They also benefit the large housebuilders. They want restricted supply and high prices; they have no interest in increasing supply.

        The reason they want a relaxation of the planning system is so they can build on more desirable land (higher prices). It has nothing to do with increasing supply.

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