From the BBC:
Rising rents mean young people are less likely to move to UK cities where average salaries are higher, a report indicates. The number of young people in private rented accommodation who moved for a new job has almost halved in 20 years.
Despite the higher wages available, financial incentives for moving are lower, say researchers.
"Pay gains are being swallowed up by high housing costs," said Lindsay Judge of the Resolution Foundation. "For young people in particular, there are real advantages to moving when it comes to trying new roles and developing skills - and housing should not be a barrier that prevents them doing this."
Although unemployment has fallen, the Resolution Foundation found that rents had climbed the fastest in higher-paying areas of the UK. Private rents have risen by almost 90% in the UK's highest-paying local authority areas, while rents have increased by just over 70% among the lowest-paying local authority areas.
In 1997*, after housing costs were deducted from salaries, private renters moving from a low-paying area such as East Devon to a mid-paying area such as Bristol would have received an average financial gain of about 16%. Today, the financial gain would be a mere 1%.
I trust this is no surprise to anybody who reads this blog, this is all entirely as predicted.
* In 1997, the UK government made no-fault evictions much easier under s21 Housing Act. This was the last vestige of Georgism Lite that kept rents and prices down for most of the 20th century. Banks were suddenly falling over themselves to offer buy-to-let mortgages, knowing is would be much easier to sell the home with vacant possession if they wanted their money back in a hurry, and the rest is history...
But back in 1997, rents had not yet rebounded to their full market rate and you could still improve your net income by moving to a higher wage area. That quest is now pretty futile.
Thursday, 6 June 2019
The Law of Rent strikes again!
My latest blogpost: The Law of Rent strikes again!Tweet this! Posted by Mark Wadsworth at 12:14
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10 comments:
How much % do you think a % point change in mortgage rates affects house market prices.
Din, the purist assumes that it is a straight inverse correlation
Monthly rent = what people are prepared to pay in monthly mortgage payments.
If mortgages ran for infinity, it would be rent ÷ interest rate = selling price.
They don't run for infinity as their are principal repayments as well. So it's not quite a direct inverse correlation between prices and interest rates.
In real life, this is trickier to establish, as there are lots of other factors.
Bayard always says the main one is credit availability, which is crudely speaking, income multiples.
For a given interest rate, if banks will only lend twice income, then prices level out at a bit more than twice income; if the limit is five times income, borrowers end up in an arms race and prices level out at a bit more than five times income.
So prices go up and people assume that this is a straight trajectory upwards, so over borrow to cash in etc etc.
"The Law of Rent strikes again!"
On the other hand , a cold and objective economics look at it shows that productivity, wages and efficiency of allocation in the Housing market in London have both increased together. In accordance with the law of rent. BTL mortgages etc. Rents and have gone up in London because it has been easier for young people to move to London. Agglomeration also.
Din, there is no 'on the other hand'.
"In accordance with the law of rent. BTL mortgages etc. Rents and have gone up in London because it has been easier for young people to move to London"
Correct.
In 1997, there was a clear advantage to moving to London, so rents go up and up until the advantage is eroded to nothing. That's the law of rent equilibrium. Logic, evidence and explanation all match perfectly and always have done.
BTL mortgage - Bacon Lettuce and Tomato mortgage.
"For young people in particular, there are real advantages to moving when it comes to trying new roles and developing skills - and housing should not be a barrier that prevents them doing this."
But is it? If someone brings them in for a higher skill, they earn more, right? That compensates for the rent.
Also, why do they assume that developing skills=high rent? There are some super smart people in a few business in London, but London and South East's rents are largely about a massive public sector and quangocracy. Dyson's design centre is in Wiltshire. F1 cars are designed in Northamptonshire. Airbus are Bristol. I know clinical research companies in Camberley and rural Oxfordshire.
And this is getting sharper and sharper. It doesn't matter where your massive machine learning startup is based. You can have your developers dotted all over the country.
No mention of immigration in the BBC article. Imagine my surprise. I mean immigrants pouring into UK cities, London in particular couldn't possibly have anything to do with rising house prices and rents could it!!
TS:
"If someone brings them in for a higher skill, they earn more, right? That compensates for the rent."
Higher wage doesn't 'compensate for rent', that's confusing cause and effect. The rent soaks up the higher average wage.
"Also, why do they assume that developing skills=high rent?"
The actual rule is, higher average wages, not 'developing skills'.
"Airbus are Bristol."
Bristol is mentioned in the article as being a higher wage area than East Devon, it's a big city with lots of employers, not just Airbus, and rents are higher than in East Devon.
"I know clinical research companies in Camberley and rural Oxfordshire."
For sure. But if those businesses are not big enough to push up average wages in the area, they have no impact on rents.
In theory, an employer requiring high skills and willing to pay high wages could decide to set up shop in the middle of nowhere, an abandoned Scottish island or the most down trodden part of Stoke on Trent, where rents are zero.
In theory, high skilled people would say "Wahey! High wages and zero rent! Count me in!"
But employers don't do that because high skilled people wouldn't. You must know that intuitively.
And if, as happens sometimes, a few such employers drew enough high wage high skill people to an area, average wages and rents go up, agglomeration kicks in, rents go up more and we are back to square one.
RM, no they don't. There is no evidence for that, it's a couple of percent either way. Sorry. If there were evidence for it, I'd say it and political correctness be damned.
If anything, having a large percentage of foreigners who don't want to fit in to British society brings down rents in an area, not up.
Actual housing construction numbers have more than kept pace with population growth, even under Labour's open door migration policies.
@thestigler
"You can have your developers dotted all over the country."
If you are going to dot them around, you might as well do it in a lower wage country. Our development is done onsite in central London, any offsite is done in India. The agglomeration effect is very much about face to face and access to a large labour pool. If you can't have face to face because you don't want to pay the high rents and high wages of an agglomerated UK city, you're often much better off skipping medium wage UK areas outside the big cities and doing it where it's cheaper
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