Wednesday, 9 May 2012

Embedded Rents (2)

As I showed this morning, there are three types of goods and services:
i. goods which can be easily transported, and for which the retail price is the same anywhere in the UK, any difference in price would be competed away, so the price consists of [cost] only.
ii. goods and services which have to be consumed at or near the point of sale, the stronger the link between the consumption and the point of sale, the wider the variation in prices will be across the UK (or the closer the correlation between the price and local rent levels), so the price consists of [cost] + [embedded rent].
iii. pure land rents (or house prices above and beyond build costs) where consumption is by definition 100% linked to the location, there is no alternative and the price differences cannot be competed away. The price consists of [rent].

Handily enough, The Daily Mail published further stat's this afternoon on the correlation between average net wages and average rents in eleven regions of England & Wales.

They express rents as a % of net-of-tax wages; we can sort the regions be ascending average wage and it gives us a chart like this. As we see, rents as a share of 'GDP' increase as 'GDP' increases, so this is exactly the same picture as we had showing the increasing share of GDP taken up by rents over the last sixty years (GDP having increased significantly over that period): So far so good. It is of course just as interesting to plot wages net of rents and rents in absolute terms, to see whether Ricardo's Law Of Rent applies, i.e. that rents soak up extra wages in higher wage regions.

Oh, what a surprise, they do. However, Excel's wonderful TREND function tells us that rents only soak up 67.8% of the extra wages. Does that mean the law requires modification? No, not really, because once we deduct 'embedded rents' (calculated, for sake of argument as another 20% of pure rents*) and apply the TREND function again, we see that wages after pure rent and after embedded rent are as flat as a pancake.

I've left London off this one and as you can see, the only two regions where net wages buck the trend and are 'above the line' are the East Midlands and East (presumably because the landscape is a bit dull) and the South West is 'below the line' (because it has the nicest landscape and weather): * If I had tons more data and could be bothered to crunch the numbers, the more sophisticated approach would be to work out how much of his wages after rent somebody in the North East spends on Type i. goods and on Type ii. goods; then we would work out how much extra somebody in the South East would have to pay on the same basket of Type ii. goods and services. The extra cost in the South East represents the extra embedded rent, to give us a true figure for wages net of pure rents and net of embedded rents. But simply assuming that embedded rents are one-fifth as much as pure rents in any region is probably close enough.


Anonymous said...

It really is quite fascinating why house prices are as low as they are in the East Midlands. The landscape is most certainly not "dull" and I've never quite been able to fathom it. Clearly there must be some reason behind it.

Graeme said...

am tryihng to resist the urge to play the role of a fat bigot, smoking his cigarette outside AQhmed's It is all about fixed costs.

Mark Wadsworth said...

AC, but what is it? All we can do is look for something that EM and E have in common and which is different to SW. I assumed it was landscape or weather.

G, what's about fixed costs? I would summarise and say that it's all because people can move, land can't.

Bayard said...

"the South West is 'below the line' (because it has the nicest landscape and weather)"

Landscape perhaps, weather definitely not - much inferior to the eastern side of the country - it may be warmer, but by God is it wetter.
I would suggest that house prices are affected by the "Costa Geriatrica" in Dorset, Devon and Cornwall, though. The East Midlands and the East are a similarly rural region, but with less and less attractive coastline to appeal to retirees. Also the same sort of snobbery that has meant that Dorset has been more expensive than Somerset for as long as anyone can remember.

Lola said...

(In a stage whisper) "Look, shush, rents in Ipswich and Suffolk are low - decent offices at about £8 / ft and three bed semi at about 450 to 600 pcm - but don't tell anyone - they'll bloody well come here"

Lola said...

MW any chance you can supply the native Excel file for the graphs? I want to annoy as many people as I can locally...

Mark Wadsworth said...

B, I think Cornwall etc is very pretty but actually I like it where it's flat, so East Anglia is the place for me.

L, I'll email you the files this evening.

Mark Wadsworth said...

B, and I don't like rain either, so that's another big plus for Essex.

Lola said...


1. Thanks.

2. Don't you come wanderin' down here with your big city ways and your cheque book. We 'ave enuff of ye incomers.