London -rents and affordability

Ian Mulheirn has responded to Simon Wren-Lewis’s blog see below.

I agree with almost everything here, Simon, as you’d expect from what I’ve written. But lest anyone be tempted to jump to conclusions on London based on the IFS chart, I think we should be careful about measuring rent as a proportion of renters’ incomes to draw any conclusions about the supply situation there.

The composition of the London PRS has changed radically over recent years, so we can’t be sure we’re comparing like with like over time. Secondly, and more importantly, we know that groups that tend to rent (e.g. the young) have been hit hardest by weak wage growth and cuts. All of that means rent is likely rising as a proportion of the average renter’s income, but not necessarily as a proportion of average incomes for all London households. If that’s the story, then the reason why the London line in the chart is rising is distributional: it’s not that London housing costs/rent have got more expensive but that the incomes of the people renting have deteriorated.

To isolate these effects, we can compare changes in the ONS’s rent inflation index and gross household disposable income per head for London. Those series suggest that rents as a proportion of average incomes have not grown since 2005 in London and have fallen elsewhere. That suggests that even in London housing costs/rents have been benign, and the problems (and hence solutions) are distributional.


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