The IEA recently published a piece of work arguing that although the UK has high rents, rent controls will only make things worse. Illustrating the point regarding high rents, they link to a piece in the Telegraph showing a table comparing average rents across Europe. As the IEA points out “To be precise, British tenants are paying the highest rents in Europe, both in absolute terms and as a proportion of their incomes. Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France. They also exceed those of Luxembourg and Switzerland, two countries that are vastly richer than Britain. In most of Europe, rent payments account for between a fifth and a third of tenants’ incomes; in the UK, they account for around 40%.”
Only there are a few problems with this analysis.
Firstly rents are affected not only by wages, but by taxes and other major spending, like healthcare provision. So any measurement needs to be as a ratio of discretionary income.
Secondly, average rents will be affected by social housing and rent controls on one hand, and housing benefits on the other.
Thirdly, if unemployment is high, average wages might be high, but average rents will be lower.
Fourthly, London is by some margin the largest city in Europe accounting for 22% of UK GDP. It therefore pulls in demand for housing from around the globe. Over half of people in the capital rent, many of them in high pay jobs, or just very wealthy. This will completely distort the UK “average” rent compared to other countries.
Fifthly, if all things are equal and UK rents are higher than those in Europe, it is axiomatic that discretionary incomes must be lower. If this was the case, we would have expected to see an exodus of people leaving the UK to work in France, Germany and indeed Poland. But the opposite is true isn’t? So, all things cannot be equal.
Rents are set by disposable incomes at the margin. While they may well be expensive in London, distorting UK averages, this will have little to do with the supply of housing. We can build loads of homes in the UK, but as we discussed recently, this will just move the margin of production, as more people will continue to migrate towards London/SE. Good perhaps for London landowners (as they will capture the rise in London GDP), not so good for everyone else.
It might therefore be better if the IEA were to tell us where they think David Ricardo went wrong with his Law of Rent. Then we can all move on.