High housing costs outweigh cheap food to widen living standards gaps between poor families in Britain and their German, Dutch and French counterparts

The sky-high cost of housing outweighs the relatively low cost of food to make Britain a particularly pricey country for poorer families – and widens household income gaps between poor British households and their German, Dutch and French counterparts – according to new Resolution Foundation research published today (Monday).

The briefing note Whose price is it anyway? compares the spending power of low-to-middle income families in Britain with other advanced economies, and what this means for cross-country household income gaps.

The report notes that overall prices in the UK are comparatively high – the OECD’s Purchasing Power Parities (PPPs) show that UK price levels are eight per cent higher than the OECD average. Switzerland is the most expensive country (47 per cent above average) while Turkey is the cheapest (65 per cent below average).

However, the Foundation notes that this data doesn’t take account of the fact that low-to-middle income households have different consumption patterns to richer families – spending more on necessities, and less on luxuries.

Specifically, families in the bottom half of the income distribution spend 9 percentage points more of their total budgets on housing (22 per cent vs 13 per cent), and 4 percentage points more on food (17 per cent vs 13 per cent), than those in the top half.

The good news for lower income households is that food in the UK is 12 per cent cheaper than the OECD average, in part because many items are exempt from VAT. Furthermore, poorer households are less affected by the relatively high cost of transport in the UK, which is 26 per cent higher than the OECD average, as they spend far less of their budgets on it than richer households (11 per cent vs. 15 per cent).

However, these cost-of-living tailwinds for lower-income households are dwarfed by the sky-high cost of housing, which is more 44 per cent more expensive in Britain compared to the OECD average.

As a result, the overall price premium in the UK compared to other OECD countries is higher for low-to-middle income families than it is for the country as a whole. This in turn means that the income gaps that already exist between poorer British families and their counterparts in Europe are even wider than suggested by headline figures – which typically adjust incomes based on the cost of all goods and services, not those that matter most to poorer families.

The Foundation notes that, when adjusting for the cost of all goods and services, poor (10^th percentile) German families are 16 per cent better off than poor British families (a gap of £1,700 a year).

But, adjusting instead for the cost of a spending basket typical of lower-income families in the UK, that gap widens by a third to 21 per cent, or £2,300 a year. The income gap with poor Dutch families is even wider at 39 per cent, while the gap with poor French families is 8 per cent.

High housing costs are both a major driver of income inequality and poverty in Britain, says the Foundation, and a major driver of income gaps between low-to-middle British families and their counterparts across Western Europe.

Simon Pittaway, Senior Economist at the Resolution Foundation, said:

“Britain’s recent toxic history of low growth and high inequality has left low-to-middle income families far poorer than their counterparts in Western Europe. These damaging income gaps are even worse once we factor in the prices of goods and services that matter most to these families.

“While food and clothing are relatively cheap, the sky-high cost of housing – which accounts for almost a quarter of all spending by lower-income households – makes Britain a particularly pricey country for poorer families.

“Britain’s housing costs crisis is a major driver of child poverty, and contributes to poor families being £2,300 worse off than their German counterparts. The crisis needs to be tackled urgently – from building more affordable homes to providing better support for low-income renters.”

Notes to Editors

Housing consumption, as measured in the ONS’s CPI spending weights, comprises rent, utility bills and maintenance. It excludes mortgage interest, which is often included when measuring housing costs. Including mortgage interest slightly reduces the gap in housing expenditure between low-to-middle income households and those on higher incomes, but the gap remains wide.