Tuesday, 12 July 2011

Embedded rents

The ONS published a fine survey today, which confirmed what we all knew - that the cost of living in London is higher than elsewhere, even if you exclude rents.

What's nice is that they give a breakdown of the relative price differences in various categories. As I've always said (having observed it in real life but never seen detailed numbers), goods which are harvested or manufactured thousands of miles away and which can be easily transported round the country cost much the same wherever you are - but goods and services which have to be consumed at or near point of purchase include 'embedded rents'. So an item of clothing in Primark costs the same in Oxford Street as in High Street, Anytown (see here or here); but a pint of beer in Oxford street costs £1 more than the UK average.

I reworked the figures in Table 2 to show how much more expensive things are in London (the highest rent area, having the highest concentration of people and transport infrastructure - the two main drivers of rental values or land values) and ranked them from lowest to highest:

Communication - 0.0% (1)
Alcohol & tobacco - 1.6% (2)
Transport - 3.5% (3)
Food & non-alcoholic beverages - 7.2%
Clothing and footwear - 7.2% (4)
Household and housing services - 9.4%
Furniture & household goods - 11.6% (5)
Recreation & culture - 14.1%
Miscellaneous goods & services - 14.4%
Restaurants & hotels - 16.5%

(1) BT and Sky charge the same wherever you are in the country, and in any event it's much cheaper per person doing cabling, setting up mobile phone masts etc in densely populated areas

2) This is off-licence and supermarket stuff; a pint in the pub goes in the category "restaurants and hotels". Further, most of the cost of these is duty and VAT, which are the same all over the country. Strip these out and the underlying difference will be higher.

3) A red herring. Public transport is heavily subsidised wherever you are, how much it costs depends on how heavily subsidised it is, and not on usual market forces.

4) "Clothing and footwear" is the only category with "and" instead of "&" in the original press release (screen shot below). I sent them an email about this.

5) The joker in the pack - maybe people in London just buy fancier furniture?
The ONS themselves summarise thusly:

At the division level, there is little price dispersion from the UK average for Alcohol & tobacco, with the price level for all regions close to the UK average (ranging from 98.3 for Wales to 101.3 for London). A high proportion of items within this division were affected by the dominance of large retailers who displayed consistency in their pricing across regions...

Greater price dispersion exists in the divisions that include services, including Restaurants & hotels, Recreation & culture and
Miscellaneous goods & services. This reflects the variance in labour expenses in the regions which make up a large proportion of the total costs in the service industry and also the variability in the cost of renting/leasing outlets across the regions... (6)

6) I love the ONS to bits and everything, but they make a silly mistake here. Higher rents do not 'push up' the price of these services - it's the higher price which people are willing and able to pay for these services which 'pull up' rents. Much the same applies to labour costs - where there are more people, there is more specialisation, so everybody is that little bit better at doing a smaller piece of the jigsaw, so everybody earns a bit more so everybody can pay a bit more (relative to more sparsely populated areas).

Here's the screen shot:


DBC Reed said...

Is this your coinage:"embedded rent"? Absolutely brilliant! I have been faffing about with this idea ,that every time you sit down in London you pay a private Land Value Tax,but lacked a succinct term.I will incorporate it in Reedonomics (i.e steal it ) with immediate effect.
BTW Are you going to post your Caroline Flint submision on the Net? LLC members and other of the usual supects need to be pointed in its direction.

Bayard said...

Do they say anything about fuel? I was always struck. in the days when I occasionally used to drive into London for work, that fuel was really cheap in London compared to elsewhere. It's partly "consumed at the point of sale" and partly "easily transportable from elsewhere", so I dunno what category it fits into.

View from the Solent said...

re Alcohol and tobacco
If ONS split into alc and baccy, then split the alc into on- and off-licence, that on-licence number would show a very different picture.

Mark Wadsworth said...

DBC, I've Googled 'embedded rent' and it doesn't seem to be in common usage. Feel free to forward my Flint thingy to whoever does the LLC website.

B, I don't know whether petrol is cheaper or more expensive in London. I've never paid attention and this report doesn't say. As you say, there are two opposite forces acting here, so even if we knew, that wouldn't really prove anything either way.

VFTS, I've reworded it to make it clear that's off-licence prices - but I did mention that a pint in the pub is £1 more expensive in central London than elsewhere.

Robin Smith said...

And the reason people choose to live there is because the power to earn "wealth" is still greater, even when the higher prices are netted off?

Mark Wadsworth said...

RS, everybody has to live somewhere, and any advantage to moving to a more productive area (i.e. more densely populated etc) is of course largely soaked up in higher rents (or the 'cost' of having to make do with a much smaller garden etc.)

Robin Smith said...

Agreed. And the difference between "largely soaked up" and a worse location is why they go there.

People try to meet all their needs with the lease possible effort. Not an iota more.

The first law of political economy.