For many in the UK there is nothing going on but the rent

The words of Gwen Guthrie’s song are echoing this morning as the BBC seems to have discovered that renting in the UK has become very expensive. In particular it focuses on the impact on your people.

People in their 20s who want to rent a place for themselves face having to pay out an “unaffordable” amount in two-thirds of Britain, BBC research shows.

They face financial strain as average rents for a one-bedroom home eat up more than 30% of their typical salary in 65% of British postcode areas.

Many housing organisations regard spending more than a third of income on rent as unaffordable.

A salary of £51,200 is needed to “afford” to rent a one-bed London home.

How have we got here? There have been two main themes in the credit crunch era driving this of which the first has been the struggles of real wages. If we use the official data we see that setting the index at 100 in 2015 took them back to where they were in the summer of 2005 or a type of lost decade. In spite of the economy growing since then and employment numbers doing well we find that the latest number is a mere 101.7 showing so little growth. Even worse in an irony some of the growth is caused by the fact that our official statisticians use an inflation measure called CPIH which has consistently told us there is no inflation in rents.Oh Dear!

Added to this problem was a further impact on younger people from the credit crunch. We could do with an update but this from a paper by David Blanchflower and Stephen Manchin tells us what was true a few years ago.

The real wages of the typical (median) worker have fallen by around 8–10% – or around 2% a year behind inflation – since 2008. Such falls have occurred across the wage distribution, generating falls in living standards for most people, with the exception of those at the very top.

Some groups have been particularly hard hit, notably the young. Those aged 25 to 29 have seen real wage falls on the order of 12%; for those aged 18 to 24, there have been falls of over 15% (Gregg et al. 2014).

So younger people took a harder hit in real wage terms which will have made the rent squeeze worse. Hopefully recent rises in the minimum wage and looking ahead the planned rise from Amazon will help but overall we have gained little ground back since then.

Rents

Here is at least some of the state of play.

In London, a 20-something with a typical average income would spend 55% of their monthly earnings on a mid-range one-bedroom flat. Housing charity Shelter considers any more than 50% as “extremely unaffordable”.

That rises to 156%, so one-and-a-half times a typical salary, in one part of Westminster – the most expensive part of London – where an average one-bedroom home costs £3,500 a month to rent.

In contrast, a tenant aged 22-29 looking for a typical property of this kind in the Scottish district of Argyll and Bute would only have to spend 15% of their income.

Even to a Battersea boy like me that all seems rather London centric. Wasn’t the BBC supposed to have shifted on mass to Manchester? Perhaps it was only the sports section which has quite an obsession with United as otherwise no doubt we would have got an update on Manchester and its surrounds. Still Westminster is eye-watering and no doubt influenced by all MPs wanting somewhere close to Parliament. By contrast renting in Argyll and Bute is very cheap although the number of people there is not that great.

Mind you there is at least an oasis below for those who want a Manchester link.

This all comes at a time when young adults might look back in anger at previous generations

Still I guess they will have to roll with it or try to anesthetise any pain with cigarettes and alcohol.

Relativities

This provided some food for thought.

The BBC research shows that a private tenant in the UK typically spends more than 30% of their income on rent.

In 1980, UK private renters spent an average of 10% of their income on rent, or 14% in London.

So the amount spent has risen across the board and especially so in London. This however begs a question of our inflation measure which accentuates the use of rents by assuming and fantasising that owner-occupiers pay them. This is around 17% of that index. But contrary to the fact that rents are more expensive they seem to have got there without there being much inflation! As the fantasies are recent we sadly do not have a full data set but the response to a freedom of information enquiry tells us that the index has risen from 89.3 at the beginning of 2005 to 103.8 in early 2017. However they have apparently revised all this in the year or so since and now we are at 103.3 but 2005 is at 77.1. So measuring rents can go firmly in our “You don’t know what you’re doing” category and should be nowhere near any official inflation measure. What could go wrong with fantasies based on something you are unable to measure with any accuracy?

Size issues

This caught my eye as it goes against an assumption we have looked at on here which is that properties have been getting smaller ( as we get larger).

 In the last 10 years, when families have been increasingly likely to rent, owners have seen the average floor space of their homes increase by 7% compared with a 2% rise for tenants. That leaves owners with an average of 30 sq m extra floor space than tenants, which the charity suggests is the equivalent of a master bedroom and a kitchen.

I am not sure how they calculate this issue for renters as back in the day when I was saving up I rented in a shared house. This was pretty much the same house as all the others in what is called Little India in Battersea (because of the names of the streets).

It wasn’t me

This is the response of landlords who presumably need some fast PR. After all longer-term landlords have made extraordinary capital gains on their investments and now seem to have done pretty well out of the income via rent.

Landlords say they face costs, including their mortgages, insurance, maintenance and licensing, that need to be covered from rents.

“These costs are increasing as the government introduces new measures to discourage investment in property, such as the removal of mortgage interest relief and the changes to stamp duty,” said Chris Norris, director of policy at the National Landlords Association.

 

Comment

The underlying theme here is the march of the rentier society. This seems set to affect the younger generations disproportionately especially if the current trend and trajectory of real wages remains as it has been for the last/lost decade. This gives us a “back to the future” style theme as that was the life of my grandparents who owned little but rented a lot. My parents managed to escape that and started by buying a house in Dulwich in the 1970s for £9000 which seems hard to believe now. But were they and I a blip on the long-term chart? It is starting to feel like that and this line of thought is feed by this from the BBC.

The charity estimated that private tenants in England are spending £140 more in housing costs than people with a mortgage.

That has been driven by the extraordinary effort to reduce mortgage rates starting with the cutting of interest-rates to as low as 0.25%, £445 billion of QE and to top it off the credit easing via the Funding for Lending Scheme. No such help was given to renters who of course have not benefited from “Help To Buy” either. Thus renters have a genuine gripe with the Bank of England.

Let me finish on a more hopeful development which is the Amazon news.

1) This is a significant increase. Around 20% above the national living wage and 10% above the real living wage. It amounts to hundreds of £ per worker, and also raises the prospect of other warehouse operators following suit ( Benedict Dellot of the RSA )

Whilst their working conditions may still be a modern version of the dark satanic mills of William Blake at least the wages are a fair bit better.

 

 

 

 

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37 thoughts on “For many in the UK there is nothing going on but the rent

  1. Shaun,

    Yes rent is a significant factor but people have to eat as well! Worst decade I believe for child poverty many kids go to school hungry its a disgrace, some kids do not go to school with adequate clothing.

    Today we have news on BRC shop price index cost of food risen sharply the last few years and according to BRC a no deal BREXIT will make things worse.

    British Retail Consortium chief executive Helen Dickinson said: “Global commodity conditions, in particular oil prices, would indicate that there are likely to be further inflationary pressures in the short to medium term which could lead to further price rises.
    “This would be worrying enough for hard-pressed British consumers if we weren’t staring down the barrel of a no-deal Brexit. Food prices alone have now been inflationary for more than a year and the BRC estimates that consumers could face up to a 29% increase in prices of products such as beef in the event of a no-deal.”
    Mike Watkins, head of retailer and business insight at Nielsen, said: “Looking ahead we expect shoppers to maintain their grocery spend by making savings elsewhere in their overall household expenditure.”

    http://www.morningstar.co.uk/uk/news/AN_1538544220985559700/uk-shop-prices-increase-for-second-consecutive-month.aspx

    The UK not in a good place at the moment and the poor feel the brunt of the pain, I dislike seeing or hearing children suffering in the developed world while the rich spend money on yachts and other lavish spend.

    This is a truly shocking state of affairs.

    • The most pronounced benefits of hard Brexit would be on the cost of food, clothing & footwear, via dropping EU tariffs of these goods from outside EU, & would benefit those with least, most.

  2. So, are you saying that imputed rents should be very much higher? If so, the effect on GDP will be enormous….we’re all rich Rodney!

    • Hi Hotairmail

      I was not thinking of it in Imputed Rent terms but my logic would go the other way. If there is a certain amount of it recorded as income and you have to put more of it in the inflation category there is less you can claim as GDP growth.

  3. A couple of comments, Shaun, on what is a real problem:
    1. London rents have always been expensive – when I moved to London in1980, my net salary was £240 a month and the average rent was about £100 (obviously not in smart parts – I was in Bermondsey before it was gentrified
    2. It seems odd to me to take a one bedroom flat as everyone I knew then and know now shares a bigger flat to deal with the rent
    3. The big difference then was that, after years of renting (4 years of renting a single room in a house in my case), I could escape by buying a house. That route seems closed now to all it a few people. I think that the rents were bearable then because everyone expected to move on to buying.
    Now they seem very high and a life sentence.

    • Same here, I shared for about eight years, then met my now wife and moved in together. Took about ten years of effort to get on the housing ladder, it wasn’t handed to us on a plate

      • How about stating what years this happened. If it was prior to the 2007/8 bubble i have empathy. If not it was far easier than what it is now.

        • True (I’m talking 1994 to 2004) so somewhat easier in terms of prices but far higher interest rates

          It still took a lot of discipline and going without (I never owned a new car for instance)

    • James, your story is one of unrelenting inflation of house prices by government policy that has now reached its logical conclusion -unaffordability by the masses to buy, prices will not be alowed to fall so even more extreme stimulus measures and further massive devaluation of sterling are to be be applied.A few real world examples below:

      Using Birmingham as an example, I remember my father telling us he paid £500 for his second house in 1958, which was admittedly in a slum area but had four bedrooms, I estimate that was around the gross annual wage of your average manual worker then(please correct me if I am wrong). So a working man could buy a house with one years wages. These houses are now going for around £150,000.How many times is that of the average manual worker?

      My son stayed in Bermondsey in 2011 for a year and rented a (town house?), lounge/kitchen,bathroom and one bedroom for £1,000 a month, he is now working down there full time and despite earning a good salary, cannot afford to buy.

      So it took nearly a hundred years for unions to get living standards of the working man to where they could afford a few luxuries and buy their own house, and now we are back virtually to square one, with little or no worker rights, gig jobs(they didn’t even go that far then!), a minimum wage so low that noone can live on it and it has to be boosted by government benefits(using borrowed money naturally) and unions so weak they may as well not exist. The return to the imposition of the “Victorian mill owner” style of mangement and the rentier society will keep the working man in this country down for the foreseeable future, but this time the unions won’t get him out of the nightmare.

    • Anyone else remember the old “bedsit” alternative ? In the mid 70s with my first job paying around £190 a month I rented one just off Notting Hill Gate for £13 a week (and later paid a bit less for one on Kensington Church Street).
      Ee, when I were a lad…

  4. There is a correlation between house prices and rent, especially in major cities with short supply of accommodation. Not curbing house price inflation, in fact encouraging it with HTB etc, leads to high rents – not rocket science!

    • Hi Foxy

      I think there are two main pulls on rents, The first is as you say the concept of yield which means a higher rent as prices rise at least for new landlords. The downwards influence is (real) wages as you can ask whatever rent you like but you also need someone both willing and able to pay it.

  5. The rental sector was boosted by IO loans and low mortgage rates. This resulted in properties which would formerly have been the choice of FTBs unavailable because they were outbid by BTL types.

    However, IO loans are now more difficult to obtain and the profitability of BTL has been undermined by Section 24 of the Finance Act 2015 which has restricted interest payments in respect of non corporate holdings. This is already causing a drift out of BTL and many landlords are looking to cash out. Also as property is going off the boil the attraction of IO loans is not what it was and many may be looking to cash out because properties they hold will not generate the capital gains they were expecting. Many of the “amateur” landlords – and there are many- are unaware that BTL property is subject to capital gains tax and are in for a rude awakening as HMRC are getting cuter on this sector.

    A lot of BTL property is not desirable and, in any softening, or worse, in the property market may well result in a stampede for the exit to get out while the going is good.

    Of course if interest rates go up then this situation will be accelerated as it might well be by Brexit and any following restrictions on immigration.

    I’m not saying that the rental sector will collapse in the next few years but things may look quite different in five years: much less rental property and a resurgence of the FTB; I certainly hope so.

    • Hi Bob J

      The stampede point is an especially interesting one I think. As so many have become BTL landlords for the capital gain there would come a point in any sustained house price fall where many seem likely to try to cut their losses. It could get very unstable for a while.

  6. Shaun, your quotes:
    Size issues
    “This caught my eye as it goes against an assumption we have looked at on here which is that properties have been getting smaller ( as we get larger).
    In the last 10 years, when families have been increasingly likely to rent, owners have seen the average floor space of their homes increase by 7% compared with a 2% rise for tenants. That leaves owners with an average of 30 sq m extra floor space than tenants, which the charity suggests is the equivalent of a master bedroom and a kitchen.”

    “I am not sure how they calculate this issue for renters as back in the day when I was saving up I rented in a shared house. This was pretty much the same house as all the others in what is called Little India in Battersea (because of the names of the streets).”

    Well if the landlords rent the property out to more people than is allowed that is one factor and the press highlighted numerous cases when the landlords haven’t just filled their actual properties with more than is allowed they have in some cases rented out the garden sheds and garages as well to get in more money.

    All this is illegal of course but with less properties available now and less council houses being built I suspect there is less space for each tenant due to emergency accommodation as well people being forced to live in cramped conditions in temporary or permanent accommodation.

    It must come down to the need to build more affordable accommodation and ensure the builders only hold onto plots of land in the short term and if they don’t build quick enough and with more affordable houses the government take off their land bank for nothing and build on its themselves.

    This may sound draconian but some builders making 25% profit on their sales by holding back building. where as a supermarket selling food margins are between 1-3% on average.

    • Shaun,
      With regards to your comments here which I also copied above:

      “This caught my eye as it goes against an assumption we have looked at on here which is that properties have been getting smaller ( as we get larger).
      In the last 10 years, when families have been increasingly likely to rent, owners have seen the average floor space of their homes increase by 7% compared with a 2% rise for tenants.”

      We are indeed getting larger in fact we are getting taller as this article explains:

      https://www.scientificamerican.com/article/why-are-we-getting-taller/

      Now I am not suggesting for a minute the statisticians are using this data but the taller we become we will need higher ceilings!

      As an example in this video:

      • Peter, Genesis were wrong, then, in Get ‘Em Out by Friday:

        “I hear the directors of Genetic Control have been buying all the
        Properties that have recently been sold, taking risks oh so bold
        It’s said now that people will be shorter in height
        They can fit twice as many in the same building site
        They say it’s alright”

  7. I would point out that in 1980 there were few private landlords. The expansion came in after that when Assured Shortholds were created. Therefore comparisons with 1980 are unlikely to be helpful…or possibly that’s the BBC agenda.
    However there is little doubt that rents now consume more of the tenants income. Of course the population is also greater and house building has not kept pace…

    • mickc,

      You have made a good point which I feel needs elaborating upon.

      Although I don’t have the statistics more people owned their own homes in the Thatcher era. Prior to the financial crisis the buy to let boomed it was seen a better investment than a pension. One had the benefit of both a capital return which would at least keep up with inflation long terms and also an income from the rent. Outright purchase with no loan the better for those that had saved a few bob but even those who borrowed money did well.

      The problem with a lack of good supply of house building must fall on the government at the time. and has exacerbated the current situation.

      Supply and demand effect, less supply the rents go up!

      Another factor is the abolition of rent control some may not remember that but the older posters like me do.

      https://en.wikipedia.org/wiki/History_of_rent_control_in_England_and_Wales

  8. Difference between your grandparents generation renting and that of now, is they predominantly rented off the council on lifetime tenancies. Whereas people now are renting of amateur landlords on 6 month AST’s, whose for the most part have an interest only mortgage and could evict at any given moment.

    Too add that generation had a life expectancy of the late 60s if working class thus the state would only need to fund their rent for a few years on average.

    Finally when they rented the state did not spend £30bln a year on Housing Benefit thus keeping the floor for rents artificially high.

  9. One could argue that this situation is as a result of the BofE holding emergency rates too low for too long forcing investors into the BTL market when they would have been happy to stay invested elsewhere if they actually could make a positive return on savings. For many small investors (and I am not one of them) BTL is the only game that provides a degree of security with an actual positive return. Once upon a time, in a land long forgotten about, that could be achieved with bank / building society deposits and the deposits used as loans for mortgages. The BofE has completely screwed the market up.

    • Hi Pavlaki

      I agree with you and it is a shame that the research on the QE era is compiled by the body which undertook it and the credit easing, which is of course the Bank of England. We end up in some ways with the same issue as with Keynesian economics which is as Muse put it “Time is running out” or in this instance long gone.

  10. Ok usual bunch of false nostalgia above. Rents were low in the 1970’s because the housing stock was crap and people were poor, really poor compared with today. House prices were also low because of high interest rates, which meant high mortgages, which meant initial costs of buying a house was really high. I remember my first flat, bought in 1987. Interest rates went up to 15% and I barely could afford to eat once I had paid my mortgage. A few years later, due to inflation, my salary was more than what my flat cost and I could easily afford the mortgage. If you want to return to the same dynamics we need to create inflation, this will cause mortgage rates to go higher. How to create inflation – start printing more money – i.e. more and more QE. It is really strange how the commentators here hate QE but then complain about low interest rates. You really don’t understand how the economy works – high interest rates are caused by high monetary expansion – money printing in other words.

    • People were not really poor in the 1970’s they didn’t buy things they couldn’t afford.Housing was affordable because there was good supply of social housing we had a manufacturing economy.
      Banks were not lending people ludicrous amounts of money or mortgages based on the greater fool theory.
      We are now a debt ridden basket case economy with greater and greater wealth disparity and a lot of people think this is the fault of the EU you couldn’t make it up

    • The false nostalgia you refer to represents a period when working class people, despite the high interest rates of the time could still afford to buy a house, and that was with only the male half of the family unit working.

      Now wages are so low that despite two incomes, a house is still out of reach even with a ZIRP. Now wages are falling in real terms and have been for over twenty years, so your argument about afforadbility in the 80s improving with wage increases no long is valid as wages are actually falling in real terms when adjusted for the fiddled rates we have today.

      Your pain of 15% interest rates was when interest rates were allowed to be determined by the market, this also no longer applies since central banks now control interest rates, they will never be allowed to rise to the level where they threaten the housing market. All in all your comments are totally inaccurate,outdated and have been surpassed by central bank policies.

  11. Dear Shaun, quite extraordinary that all of your correspondents ignore the “elephant in the room”! Increase the population of the country by 10 millions in 10 years; continue to increase the population by 400K every year, and ensure that the vast bulk of the increase is made up of relatively unskilled people with little, or negative, social capital. The result will be a chronic shortage of accommodation and, incidentally, enormous pressure on education, health, and other services. It is straightforward Economics 101; increase demand and prices go up; surprise, surprise!
    Regards Charles

    • Hi Charles

      That has to be a factor around London which is so packed these days ( Nine Elms excepted….). The official view is that it brings an economic boost but if it is a strong one there is the issue of Italy which has seen plenty of it but the economy has not grown.

  12. A timely article Shaun giving we’ve been in party conference season. Brexit dominates the headlines, but I think the housing crisis, along with immigration, will be where future general elections are won or lost for the next 15 years.
    The unreliable boyfriend may actually be correct (for a change) when he said a hard brexit would crash house prices by thirty percent. But wouldn’t that be a good thing?
    Combined with the rise of remote working – allowing people to move out of the south-east – and an intelligent house building programme (I’m thinking new generation of pre-fabs), and the housing crisis can be solved.
    The other alternative is a Corbyn government, which would have the same affect on house prices in the short term, although his policies would probably end up compounding the housing crisis over the longer-term as he would not pursue a responsible immigration policy.

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