Prioritising the housing headwind in the debate on living standards

Much has been made in recent days of the role that living standards may have played in the Brexit vote. But while we often hear about pay and jobs, the crucial question of housing has been largely absent from the discussion. A new Resolution Foundation report published today shows why housing costs need to be brought front and centre stage in the living standards debate. 

When prices of most items go up households can usually trim their budgets – by switching supermarkets perhaps, shopping around for a better utilities deal or spending less on non-essential items. In contrast, housing costs cannot be flexed with ease. Cutting back essentially means moving, with all the upheaval (think children changing schools, longer commutes to work) and transaction costs (estate agent fees, stamp duty or rental deposits) that this entails.

Small surprise, then, that most stay put. But if housing costs race ahead for long periods of time while earnings lag behind, households find themselves spending a growing proportion of their income on their homes and less to spare for the other essentials in life.

This has been the experience for most households across Britain over the last twenty years. During this period, the proportion of income the average working age household spends on housing has increased from 17 per cent in 1995 to 21 per cent in 2015. And many groups set aside a far higher share of their income for housing than that: 30 per cent for the average private renter, 28 per cent for the average London household, and around a quarter for those on low and middle incomes.

But it is not just the usual suspects who have seen rising housing costs drive down their living standards over time. The proportion of income that households in the North dedicate to housing has played catch up with the South over the last two decades. Far from being a niche issue, housing costs are now a majority concern.

So what has driven housing costs to increase at such pace? Runaway house prices are the most obvious culprit, forcing households to take on larger debts both when they first buy a home and later upgrade. There is a clear feed through to private tenants, most directly in the form of higher rents as landlords seek to cover their bigger mortgage costs. But rapid house price inflation has also locked millions of people out of home-ownership, forcing them into the private rented sector where they can expect to spend an even greater share of their income on housing costs.

When we stack up trends between 2002 and 2015 the full force of the housing headwind becomes clear. Real average working age household income has grown by 7 per cent in this time. But real housing costs have increased more than four times as fast (32 per cent). Rising housing costs have blown away the already weak income gains of low and middle income households in particular, resulting in a prolonged period of stagnating and sometimes falling living standards for the bottom half of the distribution.

Behind the Brexit vote is a wellspring of disaffection that is political, cultural and economic in origin. The impact of migration and educational disadvantage are clearly part of the story. But we should not forget that housing has borne down hard on the living standards of many in recent years, and that the absence of a comprehensive programme to reduce these costs represents a real and continued risk. Affordable housing has been the most sustained policy failure in recent decades – but is within the power of government to start putting things right.