Rents increase and rent arrears increase - seems a bit mad

In a normal world, landlords charge as much as they can get, full stop. There's no point trying to charge more than that because you will get lots of voids or rent arrears, which would reduce the average rent actually collected to less than what it should have been/what landlords could have got away with charging in the first place.

From the BBC:

People hoping to find a property to rent are going to ever greater lengths to secure a home. As well as having to put up more cash in advance, they're offering landlords CVs for their children and photos of their well-behaved dogs.

That's because a shortage of available homes is pushing up monthly rents, deposits and leading to bidding wars.

The Missing Homes Conundrum making an appearance there, we note. If a landlord sells up, that's one less home to rent and one household less looking to rent somewhere, as one ex-tenant household is now an owner-occupier.

From The Telegraph:

Landlords will lose thousands of pounds in rent as the cost of living crisis pushes the number of households falling into arrears to an 11-year high – and a third more than during the pandemic.

Nearly one in 10 tenant households in England will fall behind on rent this financial year, according to the Centre for Economics & Business Research think tank. That is equal to 407,000 families, who will be at risk of homelessness.

In which case, the Court should just order that the arrears be waived and the future rent set at a lower and 'affordable' amount.

"Landlords cash in with £100,000 Cop26 rentals"

Emailed in by MBK, from The Times:

It is billed the “best last chance to save the planet” but Cop26 has given Glasgow landlords a chance to save for the future by charging extortionate rents. Rates have soared above £100,000 for the two-week summit as politicians, scientists and activists vie for accommodation, in what has been dubbed the Glasgow gold rush.

An investigation by The Times found 20 properties on Airbnb and 30 on Booking.com that are going for more than £20,000 for the fortnight. The average nightly price for a rental on Airbnb during the two weeks is over £600, a threefold increase on the same dates in the following two months.

Well of course. Location rents are determined by what's going on in the area, if there's more going on, then rents go up.

What they overlook is that while this an extreme example of landowners cashing in on the efforts of others, their baseline rents also just represent landowners cashing in on the efforts of others. There's no moral or economic difference.

There's one interesting bit in these otherwise fairly meaningless stat's

From The Daily Mail:

* More tenants ditch city living in favour of living in commuter towns and villages
* Between May and August 2020, 34% of tenants wanted at least one more room
* Upsizing costs more with tenants who do so paying £149 more per month
* LonRes survey also found that space and gardens are in demand among buyers

So 34% of tenants rented a slightly larger home after they moved against 25% in the previous quarter? That's not surprising as more people are working from home now, so they need more space at home, and what they save on season tickets or commute costs they can spend on renting somewhere larger.

Plus, in the grander scheme of things, the stock of rented housing and the number of households renting is fairly stable. For every tenant trading up, there's probably one trading down. As Frank points out in the comments, on closer inspection, it might be trickier than this but we don't have that level of detail.

Tenants living in the South East of England are paying the most and have been the most likely to trade up, with 47 per cent of those moving post-lockdown adding at least one bedroom in their move. On average they are spending an additional £266 per month.

Yes, rents and prices in London are high to reflect the fact that wages are higher there, rents in the rest of the South East were slightly lower - people lived there but commuted into London, so the rents were depressed by commuting costs (Von Thünen's law of rent). Also, London was great for socialising, meetings, concerts and so on, but that has all fallen by the wayside now. Tenants' total rent-plus-commuting costs has probably gone down a bit, on average (assuming two adults commuting).

So far, so blah. Here's the interesting bit:

Renters remaining in the capital are benefiting from renters leaving in their droves for commuter towns and villages. It means, the average London-based tenant looking for more space spent £86 per month less, despite gaining at least one extra bedroom.

We'd expect that to happen, but it's nice to have confirmation of how big the fall is. £86 less for one extra room looks like about one-third less in space-adjusted terms, although HomeLet's August index says that London rents are only down by 2.1% year-on-year. Which I suppose is another interesting bit, how can two sources differ so wildly?

They own land! Give them money!

Apropos my comment on the last post "They own land! Give them money!", from The Guardian:

London NHS Nightingale hospital will shut next week

No 10 says decision is due to limited demand, with no coronavirus admissions expected in coming days

The showpiece Nightingale hospital in London will shut next week after treating a small number of patients but will be kept “in hibernation” in case a second wave of Covid-19 infections emerges.

No further patients will be admitted to the facility, which was created amid much acclaim in just 10 days, and the 12 patients being treated there at the moment are being transferred to other London hospitals...

Originally planned to have 4,000 beds, the Nightingale has treated just 54 patients since it was opened by Prince Charles on 3 April and received its first patient on 7 April. It has not admitted a new patient for a week as London hospitals have had spare capacity in their own intensive care units.

The four other Nightingales that were opened to stop hospitals being overwhelmed – in Manchester, Birmingham, Bristol and Harrogate – will also be wound down, though the London hospital will shut first. All were conceived in March, when ministers and health service bosses were concerned that NHS hospitals risked being overwhelmed by significant numbers of people needing to be ventilated to keep them alive, as Italy was confronting at the time.

But while the Manchester hospital has taken some patients, its sister facilities in Birmingham, Bristol and Harrogate have not admitted anyone.

Killer Arguments for Raising the Rent, Not

Down in the West Country, a railway company is trying to bring in more income by raising the rent:

Their reasons include these gems:

"This rent is considerably below what the PLC (the railway company) feel is its value, and as a reference (1) the rent for Williton/Sherrings Yard is £17000 pa; (2) WSRA at Bishops Lydeard (BL) pay a rent of £4,500.00 pa for their office space; (3) the WSSRT pay a rent for the BL Museum of £100.00 pa paid in 4 instalments and (4) for the Blue Anchor Museum it is £741.60 pa paid in 4 instalments, however this has been waived until Oct 21 to assist the refurbishment. (5) Quantock House at BL was set at £22,000 pa, but then withdrawn by the landlord. (6) 5542Ltd pay £10 per foot of siding space pa."

As we know, what sets the rentable value of land is two things. By far the greater one is location. The other is what stands on the land. The site in question is in a small village with access only over a working railway off a tight bend in a major road. The tenants originally rented a bare site, with no buildings, rails or services on it and have paid for all the infrastructure themselves. To compare this site with a yard in an industrial estate (1) in a large village/small town with good level access is a classic diagonal comparison.

As is it to compare the rentable value of an empty site with that of a building, (items 2-5). Even in example (6), 5542 Ltd. didn't install the rails themselves. Moreover, as we also know, what the landlord feels is the value of the rent is neither here nor there, the value of the rent is what someone else would be prepared to pay for it.

The railway company also think that the needs of the landlord have a bearing on the rentable value. A large part of the statement from it is along the lines of "the company needs money, therefore the rent must go up".

"The PLC met the Trust and made clear it needed to increase its income wherever possible. It was suggested that the Trust should review its finances, that a rent increase was needed and that as this would take some time to manage, the PLC would accept a staged increase over time, but that an increase was needed."

The final piece of wishful thinking is the suggestion that the rent was originally set at below market levels out of benevolence, however there is no attempt at justifying this statement apart from the slightly ludicrous :

"At that time the PLC agreed the original lease it was trading profitably and could afford to be more generous than now; the level set is also an indication of the historic weak financial management which has been part the PLC’s current financial situation."

Just because it could, doesn't mean that it did and just because the Plc is in financial trouble now because of "weak financial management" (even if that really is the cause) doesn't mean that was the case back in 1991.

3/10 - must try harder

YPP's proposals - how to deal with the corona virus crisis

Joint effort by TBH and me, cross-posted from here.
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Our proposals would achieve various things which the government's do not:
- keeping households afloat;
- helping businesses stay in shape during the lock down;
- minimising the cost to the government/the taxpayer;
- recognising that rental values have - temporarily - collapsed.

David Ricardo came up with his famous law of rent in 1809, and it remains one of the most important and firmly accepted principles in economics. The law states that rental values are equal to the economic advantage of using one site over the marginal (rent free) site for the same purpose. In other words, the economic surplus from using one site over the cheapest available.

In this time of national lock down, the "economic advantage" of using one site over another falls to negligible amounts. Imagine you need to rent somewhere for the next three months- would you price central London over rural Devon? Normally, the market does - by a factor of many multiples. Today - we doubt it.

This brings us on to the Governments response to COVID 19- specifically the Job Retention Scheme (aka 'furlough scheme'), but we can include the business loans and a few other policies with the same analysis. For an initial period of 3 months, if an employee is furloughed, the employer must continue to pay the full salary (liable to PAYE as normal) and the government will later reimburse employers 80% of the salaries of furloughed workers (up to a cap of £2,500 per month) (from Taxation.co.uk).

The government initially said it expected 10% of businesses to take this scheme up, but recent figures suggest that more than nine million employees (about one-third of all employees) will be furloughed (from the BBC).

The monthly cost of a furloughed worker on an average salary (say £2,500 per month) can be estimated as follows (from Listentotaxman.com)
Employer pays £2,500 plus £244 Employer's NIC (unchanged)
HMRC receives £740 PAYE
HMRC then later refunds £2,000
Net cost to HMRC £1,260.
Net cost to employer £744
Net income of employee £2,004

Multiplied by nine million furloughed workers is a net cost to HMRC of £11 billion per month.

The scheme does not cover the self-employed, although the government has said that something similar will be introduced, this will add another £1 billion or £2 billion to the cost. HMRC also expect that there will be significant fraud and error involved (from The Guardian) which will increase the cost further.

So the Government (i.e. current and future taxpayers) is diverting massive sums of cash that could be used in other ways to ensure that affected workers can cope through the crisis. Lovely - except when you look at where most of this largesse will go. For most households, their single largest payment (after taxes of course) is to their landlord or bank in the form of rent or mortgage payments. The payments were negotiated and contracted according to Ricardo's famous law - that is - they reflected the economic surplus available at that time.

But the economic surplus has largely collapsed; and true rental values (or notional house prices based thereon) have also collapsed. So, of all the money being used by the government to keep furloughed workers going will end up in the pocket of landlords and banks, based on the fiction that the economic surplus and hence rental values have not collapsed, however temporarily.

So we are paying surpluses that don't exist to groups that in their role as rent collectors produce nothing. Are we mad? That is above the problems and fraud risks associated with the scheme.

The government has therefore come up with the wrong answer to the wrong question.

The question is not "How do we maintain landlords' and banks' unearned income?". The correct  question is "how much do people really need to live on as a bare minimum during the lock down period, assuming they have no rent or mortgage to pay?". There's no right or wrong answer, the lowest defensible figure is approx. £75/week per adult, just enough for food, utilities, broadband and mobile phone (there are arguments for higher amounts such as £100/week). People do not need extra for clothes, entertainment or holidays at the moment, for obvious reasons. People who smoke or drink will just have to cut back or dip into their savings.

Our proposals answer the right question - making sure funds are directed to where they are needed most in an efficient and simple way and at the lowest cost to the government (i.e. current and future taxpayers)

For the duration of the crisis:
• Suspend the enforceability of rent payments by all tenants: residential, commercial and retail  (except those largely unaffected by the lock down - such as supermarkets);
• Suspend interest charges on all mortgages: commercial, residential and buy to let, except for those businesses largely unaffected by the lock down such as supermarkets. (As a quid pro quo, any deposit or savings accounts currently paying interest will become non-interest bearing.);
• Allow mortgage borrowers to defer mortgage repayments if they wish;
• Offer a UBI of £75 per week to every legally resident adult in the country who is not already receiving welfare payments or a state pension in excess of that;
• The claims process should be as simple and automated as possible. All claimants should have to do is provide their National Insurance number and bank details. Payments can start almost immediately;
• To minimise the number of claims, the quid pro quo of claiming is that a claimant foregoes the income tax free personal allowance and the National Insurance exempt threshold, so would be paying approx. £75/week more in income tax and NIC. So the lucky majority still in paid employment have no incentive to claim, meaning that HMRC and/or DWP can process the neediest claimants first;
• The same general principle applies to Child Benefit and Child Tax Credit. HMRC pay a total of £30 billion a year for 12.7 million children (from HMRC Annual Report 2018-19). These could be replaced with a flat £45/week for each child (there is no reason for long-term unemployed parents to receive more than the short-term unemployed or furloughed parents);
• A family of four would therefore have a basic income of £240/week, which is surely enough for the basic necessities.

The total cost of YPP's proposal would be less than half the total cost of the furlough scheme, it  would cover the self-employed and it would place a much smaller drag on the economy. The saving to the taxpayer is broadly speaking equal and opposite to the fall in income that landlords and banks will have to bear in the interim. The homes they own and the stock of outstanding mortgages will still be there in a few months time - people's businesses and jobs might not!

The other important question is "how do we ensure that businesses survive the crisis?"

People need jobs to go back to once this is all over. Many businesses will run out of cash to pay salaries long before HMRC start paying out the furlough refunds. Those businesses will fold through no fault of their own, which will set off a chain reaction. It is madness to expect employers to pay the £744 a month cost of a furloughed employee (workings above) for nothing in return, which is the best case scenario assuming HMRC can implement the scheme very quickly.

We will just have to give employers the flexibility to put employees on temporary leave or ask them to cut their hours (with a corresponding salary reduction) with the guarantee that the old terms and conditions will be reinstated once the lock down is relaxed or lifted. This would be similar to Maternity or Paternity Leave. Yes, this will mean a fall in income for many, but there will always be the £75/week per adult and £45/week per child to keep them going.

Businesses would also be exempt from payment of rent or mortgages for the time being (see above). Instead of waiving Business Rates for a year for small businesses, there should be a general waiver of all Business Rates (except for businesses still allowed to trade as normal, such as supermarkets) for the months that the lock down continues. Large businesses are just as much at risk and provide as many jobs as small ones. Under YPP's proposals, businesses would just go into hibernation for a few months and can hopefully pick up where they left off afterwards.

"Basic Income During Quarantine: The Only Way To Avoid Societal Collapse"

John McCone explains on his blog why only Basic Income, Combined With Freezes In Rent, Mortgage and Debt Payments Can Stave Off Calamity.

This is not the usual landlord-bashing. Fact is, at present, the rental value of most business premises is zero as they can't be used; residential rents are set by local average incomes - if average incomes have plummeted everywhere to the same low level (the level set by UBI for most people), then residential rental values are to all intents and purposes zero as well.

The same goes for mortgage payments; they come out of the rental value, and if that is effectively zero, then there's no income to cover mortgage payments (for owner-occupiers or for landlords).

The unsurprising impact of scrapping bridge tolls

From the BBC:

Journeys on the westbound carriageway on the Prince of Wales Bridge have increased by 16% in the year since the tolls were removed.

An average of more than 39,000 journeys are being made each day, up from less than 34,000 per day in 2018 when the £5.60 charge was still in place. Highways England said traffic rose by about 32% on the M48 Bridge, but exact figures were not available.

All those journeys mean more economic activity and so on. Tolls mean income for the bridge owner and and equal and opposite cost to motorists, so that is just a transfer of wealth and cancels out. Tolls also depress economic activity, so scrapping them is a clear win overall. Which is why I don't like tolls.

The bad news is, the value of that extra economic activity in south Wales and Bristol largely goes into higher land values, so the total rent collected i.e. land rent + tolls, stays the same.

This bit is interesting:

In the past two years the eastbound carriageway had seen a daily average of 3,000 more journeys than the westbound carriageway, where the tolls applied.

But after the removals of the tolls, the difference has fallen to about 1,000 journeys more eastbound per day since the tolls were removed, with an average of 40,364 trips from Wales to England in 2019.

How is this sustainable? To get from south Wales to Bristol, you have to take one of the two toll bridges, so the number of journeys each way should be the same.

One possible answer is that 1,000 people emigrate from Wales permanently each day, but that can't be right because Wales would be empty by now.

Yay! Go John Lewis!

From the BBC:

John Lewis is seeking discounts from its landlords to cut costs, in a highly unusual move that highlights the huge pressures on retailers.

The BBC has learned that the retail giant has been telling landlords in some locations that it will withhold 20% of this quarter's service charge. These are the fees retailers pay on top of rent for services such as heating and security. John Lewis said the charges had become too high and urged landlords to help...

Debenhams has managed to slash its rent bill with reductions of up to 50% after securing a restructuring deal with its creditors. Struggling retailers have been turning to these so-called company voluntary arrangements as a way to cut costs. House of Fraser was bought out of administration by Mike Ashley's Sports Direct and many of these stores are currently paying little if any rent.

John Lewis are just nibbling at the edges here, the service charge is only a fraction of the rent, and they are only withholding a fraction of the service charge, but it's a start, and hopefully every other tenant will follow suit. And once landlords have reduced their rent expectations, there'll be fewer vacant shops.
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I tweeted this article, some drone from Conservative head office promptly started wailing on about pension funds etc. They are very efficient, it must be said.

Von Thünen's Law of Rent - it's all about lack of supply... NOT!

In an idle moment, I googled "average disposable income UK regions wages rent", the first relevant result was in This is Money:

The survey compared average city salaries against local rent and other standard monthly outgoings for 30 UK cities, calculating the disposable income of city residents after deducting tax, bills and other necessary general outgoings such as travel and food.

It discovered that the average British person gets to keep £1,083 per month after expenses and tax with the average monthly wage coming in at £2,073, while the average essential outgoings, such as rent, travel and food, total £990...

Despite Londoners' earning the highest wage, they also, unsurprisingly, have the most bills and so feature much lower on the overall list. Their disposable income is £1,095, only £12 above the UK average in the study. Their monthly outgoings of £1,629 are also over £350 more than any other city.

Hull is the city with the lowest outgoings of any city in the UK at just £767 per month. However, residents have a lower monthly wage of £1,816 which means their disposable income is £1,049, below the study’s UK average.

Which is exactly what you'd expect from Von Thünen's law (or even just a basic understanding of human nature). The lowest wage area sets the baseline. In areas with higher wages, the extra wages go into higher rent (other fixed costs are pretty much the same everywhere).

The equilibrium is reached when few people are willing to move because the rent saved is matched by lower wages; or the higher wages are matched by higher rent, which is what we observe in real life.

For sure, there are outliers - the survey mentions Derby with the highest disposable income after rent (£1,456) and Brighton with the lowest (£751). This can't be explained by the basic analysis, but boils down to the fact that Derby is considered boring (no idea if it is, but perceptions matter) and Brighton is considered fun, hip and fashionable, plus has nicer weather and a beach.

To paraphrase W C Fields, "people would rather be dead in Brighton that live in Derby" and they are prepared to pay £700 a month for the pleasure.

Here is their chart which is quite striking (blue dots = wages, red does = rent plus other fixed costs):


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So the next time somebody says that rents are high in London because of "lack of supply", refer them to this.

You do not need to adjust for "lack of supply", all you need to know is average monthly wages in any area. You subtract £1,800 (average wages in lowest wage areas), which gives you location rent. Add on about £400 for cost/value of bricks and mortar and that tells you local average monthly rents.

To estimate house prices in an area, you then divide annual rents by mortgage repayment rates (interest + principal, currently about 3% - 4%).

Fun in The Sun

From The Sun:

Tenants suffer as rent prices soar following ban on fees

MORE tenants than ever before have been hit with rent rises following a ban on fees, claims new research. The number of letting agents who saw renters suffering increases rose to the highest figure on record last month at 55 per cent, up from 45 per cent in May.



So far, so rehash of ARLA press release. To my relief, the article pounces on the obvious weakness with the figures:

ARLA Propertymark didn't share how much it's seen rents increase by when contacted by The Sun. The figures should also be taken with a pinch of salt as they're based on a survey of 272 members out of a total of 9,500.

The article then continues to take apart the ARLA propaganda...

Independent property expert Henry Pryor told The Sun: "I simply don’t believe that rents are rising and where they are that it is down to the tenant fees ban.

"Landlord groups have cried wolf over tax changes, stamp duty changes, the banning of the high dubious practice of stuffing tenants for costs that the landlord should be paying and yet rents have risen at most by inflation.

"Whilst of course there will have been some increase in rents, this will have been offset for tenants by the reduction in the fees being forced upon them."

Georgie Laming, campaigns manager at Generation Rent, also said it hasn't had tenants saying that rents have gone up.

She said: "Some landlords might try to increase rent to cover loss of earnings from the tenant fees ban but this is much preferable to large upfront costs that put lots of families into debt at the start of a tenancy.

"Whilst landlords may now claim that rents are rising because it's now cheaper to move, tenants have more clout to negotiate with their landlord over things like repairs that need doing or rent increases. It's important to remember that rents can only rise to an amount that tenants can afford - so landlords raising their rents will find it harder to let in the long run."

The article then concludes with this:

Rents could rocket by 15 per cent over next five years as the number of properties "dries up", an industry expert warned a year ago. Yet the cost of renting fell for the first time in over a decade earlier this year.

Economic myths: "It's all about lack of supply"

I was involved in another Twitter spat recently with a Faux Lib who insisted that high house prices are all about lack of supply.

Despite our best efforts, he was ignoring logic and facts, so I'll try to explain again why it is nonsense (for my own sanity and for future reference).

OK, first you have to understand the rent-setting process, which I covered here in a separate context (why a Universal Basic Income would not change rents).

It is easily observable that differences in average rents between different areas are pretty much equal to the difference in average wages between areas (plus or minus lots of other things, like nice/poor views, good/bad state schools, ease of commute, but average wages are easiest to quantify so let's stick with that).

To simplify the example, a country has a low wage Area A and a high wage Area B. Averages wages in Area B are £10,000 higher than in Area A, so average rents in Area B end up £10,000 higher than in Area A. This is because people will move from Area A to Area B to earn the extra £10,000, provided the extra rent they have to pay is no more than the extra wages of £10,000. If the difference were greater, people would move from Area B back to Area A, so there is an equilibrium where the higher rent soaks up the higher wages.

The location rent in Area A is zero; the rent you pay in Area A is just enough to justify maintaining existing stock with no surplus. Even in the wealthiest countries in the world (excl. city-states) you will find areas where the location rent is zero and you can buy homes for less than they cost to build, that's just a fact.
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Let's assume they build more homes in Area B. So people will move from Area A to Area B for the same reasons as before. Let's assume that this migration has no effect on average wages (agglomeration benefits mean that average wages will go up in the medium term; it could be argued that new comers will be slightly less skilled than current residents, so overall let's assume no effect).

The average location rent in Area A can't fall below zero and the equilibrium difference in rents is still £10,000, and there is no change in rents in Area B, despite the additional supply.

You can build as many new homes in Area B as you like. Even at peak capacity, new construction will only add a couple of per cent to existing housing stock and people can move just as fast as new homes can be built (at least ten per cent of the population move home each year, against a three per cent increase in housing stock, let's say) and the equilibrium will always re-establish itself.
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Circling back to real life, the Faux Libs claim that rents in London are only so high because of lack of supply. What they are saying is that people in London pay £15,000 extra in rent to be in an area where wages are only £10,000 higher. That is clearly nonsense - most people who move to London are in their twenties and they move there because they want to be better off. It is madness to say that people move to London to be worse off (they might take it on the chin short term, i.e. do an unpaid 'internship' but not medium or long term).

UPDATE, James Skillen posted this chart, saying it supports the idea that there is a need for more housing in London:


Maybe there is, maybe there isn't, that's not the issue here. If you do the maths, you will find that net incomes after paying rent are pretty much flat in absolute £ terms across the UK, which is a basic law of rent and the basis of the whole thing. For example, London wage £30,000 minus rent £15,000 (50% of wage) leaves £15,000 disposable. North East wage £20,000 minus rent £5,000 (25%) leaves £15,000 disposable.
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What is slightly more interesting is to look at Area A once some people have moved away. There are now more households than homes.

Two things can (and do) happen:

a. People spread out a bit; people leave home at a younger age; unhappy couples are more likely to split up etc. So the average number of people per home goes down a bit, and you can now rent more home for the same money - which discourages people from moving to Area B, so the effect is weak.

b. Less desirable homes in less desirable parts of Area A are simply abandoned. Once a couple of homes on a street are left empty for long enough, there is a domino effect and after a few years the whole street or whole estate is almost empty. For every new home built in Area B, one home is abandoned in Area, so the process is only gradual.

These abandoned homes simply fall out of the equation; they are no longer homes and can be ignored - it would be like including the selling price of beat-up MOT failures in a scrap yard when calculating the average price paid for second hand cars. The remaining people in Area A all end up occupying the same amount of housing and paying the same rent as before in the parts which have not been abandoned. The equilibrium rent difference between Area A and Area B is maintained.
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Whichever way you twist it, either you accept the simple logic of the rent-setting process which is easily observable in real life (comparison of average wages and average rents) - or you believe that people will move to a high rent area, knowing full well they will be permanently worse off; or will not be tempted to move to a low rent area if it made them permanently better off.

Killer Arguments Against Citizen's Income, Not (21)

This one keeps rearing its ugly head:

"If we pay out a universal Citizen's Income at a flat rate to all adults, this will go straight into higher rents so landlords will be the only beneficiaries"

Clearly not true as it ignores the basic rent setting process (and it ignores the real world, in which UBI would be a straight swap for many existing welfare payments and tax reliefs, a few winners and losers, most households break even to within £10 or £20 a week).

(Clearly, a UBI, like nearly any type of government spending, good or bad, ist best funded out of LVT but that is a side issue.)
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1. The main driver of rents is the extra income you can earn for a similar amount of effort by moving to a higher wage area. If you do not understand or accept this, go to jail, do not pass Go, do not collect $200. This is easily observable in the real world, what it boils down to is that the net disposable income, after paying rent, is pretty much the same all over the country.

This must be true, or else what's stopping everybody from moving to higher wage areas? Answer: the equal and opposite force of higher rents!

2. In the lowest wage area, the location rent is always nil.* There are vast swathes of land/housing, even in developed countries where the location rent/site premium is £nil i.e. where you can buy a house or flat for less than it would cost to build, or where some homes/shops have been abandoned. This is easily observable in real life.

That is our fixed point, call it Town A, where average wages are £10,000 (or those in work earn £15,000 but one-third of adults are unemployed, for example).

People in Town B have average wages £11,000 (could be higher wages or lower unemployment/more jobs, doesn't matter).

People in Town A would like to earn that extra £1,000, so they are willing to move to Town B, provided the extra rent is no more than £1,000.

People in Town B would like to save rent by moving to Town A, but they know that wages are £1,000 lower, so they expect rents to be at least £1,000 lower in Town A (and at least £1,000 higher in Town B).

So the equilibrium point is where the rent in Town B is £1,000 more than in Town A, the same as the difference in average wages between the two.

This applies to all areas up to Town Z, with the highest average wages in the whole country.
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OK, so let's imagine the government pays the UBI out of thin air, like some new royalty income (oil, 3G 4G 5G licences etc), so requires no change to taxation which would confuse the discussion.

Town A is still the least desirable area, so location rent is still nil. That is a fixed point.

Average wages (even including UBI) and rents in Town B are still £1,000 higher than in Town A, i.e. unaffected.

The incentive to move from Town A to Town B (higher wages) and to move from Town B to Town A (lower rents) are unchanged and still in the same equilibrium as before.

This applies all the way up the chain to Town Z, the highest wage area in the whole country.
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* Imagine an outdoor concert with so many rows of seats that there are more seats available than the number of people with even the slightest interest in seeing the show.

The front row seats will go for £100, the second row for £95, the price/value will drop slightly for each row further back, and so on until the seats are so far back that people aren't willing to pay anything for them (not even the price of the bus ticket to the venue) and the promoter can't even give them away.

The marginal location is the last row where people want to sit, even for free. Their location value is £nil. Any further in, and you'd have to pay at least £1. Any further out and there are no takers at all, as the last few people with an interest in the show have already taken a free seat in the back row.

Cheap food

I was listening to Radio 4 today and there was an article on cheap food, which mentioned, inter alia, that the government has a policy of keeping food cheap, to the detriment of farmers in particular and others in general.

This is something my mother had been wont to bring up now and again since my childhood and for some time I wondered why.

However, my wondering ceased when I heard on Radio 4 a few months ago that 100 years ago, on average, 20% of the expenditure of the poor went on rent and 50% on food. Now it's the other way around. A similar point is made in this article.

So basically, farmers are kept poor and subsidised, we eat rubbish food and animals are reared in inhumane conditions so that landlords can grow rich, but, of course, it's never put like that.

"Lies, damned lies and rent statistics"

Fine article by Ian Mulheirn, who is one the heroic few pointing out that the "lack of housing supply" explanation for high prices is a bit of a myth. Sure, selling prices have rocketed, but that's largely due to easy credit availability/low interest rates. The true measure of housing costs is of course rents. They have shot up in London/south east over the last twenty years, but that's due to higher wage differentials and not lack of supply. Overall, they'd been pretty flat.

The housing supply numbers commonly used and, until recently, the housing need numbers bandied about, have long been wrong or misleading. Given the importance of rent — the ‘price’ that tells us whether demand for housing services is outstripping the supply — using the right measure of that is particularly vital...

Unfortunately [the ONS Index of Private Housing Rental Prices] only goes back to 2005. However, combining it with the prototype index for the UK prior to 2005— albeit based on a much smaller sample —suggests that real like-for-like rents have been pretty benign since 1996, and comfortably below average household income growth.

Fun with numbers

I've just stumbled across this month old article on the BBC:

Where does rent hit young people the hardest in Britain?

People in their 20s who want to rent a place for themselves face having to pay out an "unaffordable" amount in two-thirds of Britain, BBC research shows.

They face financial strain as average rents for a one-bedroom home eat up more than 30% of their typical salary in 65% of British postcode areas...

Least affordable areas outside London

Epping Forest - postcode areas IG9 (rent £1,230; 71% of income), RM4 (rent £1,126; 65% of income), and IG7 (rent £1,087; 62% of income)

I live in one of those postcodes, they're in south west Essex inside the M25 and while the rent estimates look about right to me (good enough for a low level Land Value Tax assessment, for example), the percentage figures look way too high.

If you look at outer London postcodes just across the Essex/Greater London boundary, the % spent on rent drops significantly, even though the rents are just as high.

As you might have guessed by now, this is because they used average rents down to postcode district levels, but assumed that wages are the same across whole regions. Essex is part of the East Anglia region, which has an average wage of £1,755 per month, as against an average wage of £2,275 for people living in Greater London.

1. It would be much more meaningful if they used average wages at postcode district level.

2. The percentage is actually meaningless in itself, it is a derived figure. The relevant figure is wages net of housing costs. If they bothered to do that, they'd find that this is fairly constant everywhere in Great Britain (Ricardo's Law of Rent).

"An early warning sign to help spot struggling UK retailers"

I spotted the headline in City AM and thought, oh dear, this will just be some puff piece about getting the right product mix, and glosses over the fact that landlords aren't dropping the rent fast enough, but no, she nails it:

The metric we use to assess this aspect of a retail business is called ‘fixed charge cover’.

If you felt moved to calculate this yourself, it is a company’s ‘EBITDAR’ (earnings before interest, depreciation, amortisation and rent) divided by total debt service costs (net interest and rental expenses).

At its heart, however, this ratio illustrates the ability of a business to service its debt and rental obligations. Our rule of thumb is that when a fixed charge cover [drops to] 2x or 2.5x, serious alarms bells start to ring.

Take a look at the following chart, which ranks a dozen of the UK’s household-name retailers by their fixed charge cover and also shows the total returns on their share prices over the last six and 12 months.

As you can see, there is a huge correlation here. All the companies with a fixed charge cover of less than two times have seen their share price fall by a half or more over the last 12 (and the last six) months.

Killer Arguments Against LVT, Not (437)

Patrick Hutton left this comment half way down a thread on Peter Thiel balking at the high rents in Silicon Valley:

An important apologerap* is the response to "won't a LVT exacerbate the high rent problem?" I know there'll be face palms of frustration at this question. But it's one we need to be able to answer off the cuff.

* That was a typo, PH explains what he meant in the comments.

I never replied to that comment because I haven't come up with anything pithy yet, despite having mulled it over for the past week.

Agreed, we are pretty certain that in absolute £-s-d terms, rental values will be much higher under an LVT-only system. Any reduction in taxes on output and earnings grows the economy (= higher rents) and rents will increase to soak up the tax saving.

Two counter-arguments why people in the productive sector will be better off are:

1. Instead of average earners in high wage areas paying 40% of their gross income in tax and then 40% of their net income in rent, leaving them with 36% of gross income as disposable, they will be paying 60% of their new, higher gross income in rent/LVT, leaving them with 40% of their higher gross income as disposable.

2. At present, landlords (and banks/depositors) collect rent (and mortgage interest) and spend it on themselves without actually producing anything, meaning a huge net cost to the productive sector. LVT is just the government collecting rent, of course, but most of it (assuming a reasonably efficient and honest government) will be recycled back to 'everybody' and most of 'everybody' are in the productive sector. Collectively, we will all be owner-occupiers.

So even though people in the very high wage areas might be paying 60% rent/LVT instead of 40% taxes on earnings, they'll be getting a lot of that extra 20% back in one way or another.

Neither of which is very pithy or off the cuff, I'm afraid. I'm sure some of you can do far better.

Big scary numbers!

From City AM:

Water companies have hit out at Labour after the shadow chancellor John McDonnell described the industry as a "national scandal". Labour attacked the water industry today, saying the private sector was handing out "scandalous" amounts in dividends, which have totalled £13.5bn since 2010...

Divide £13.5 bn by eight years and by 27 million households and (say) 3 million businesses, that's an average of about £50 a year, one-third of the cost of the TV licence. I can't get too upset about that.

But compared to my annual water bill (rates not meter) of about £500, that seems quite a chunky dividend. Most competitive businesses pay about £1 or £2 in dividends for every £100 of turnover, not £10. If Labour were really worried about this, instead of making token gestures, they could simply cap prices at a few per cent below current levels, dividend halved, perceived problem solved.

And in the blue corner:

Michael Roberts, chief executive of industry organisation Water UK, has condemned McDonnell's attack on the sector, saying that private companies have invested heavily in water networks and have brought down costs for consumers.

Roberts said: "It's wrong for Labour to suggest that our water system is broken. Water companies secure capital provided by lenders and shareholders, who need water companies to make a return in order to finance significant improvements to the industry. He said that the water sector was "starved of cash" under public ownership, and that private firms have invested in reducing leakages, and have improved water quality.

Change the record, mate. Water companies were privatised nearly thirty years ago, you've had plenty of time to sort it out. Dividends are paid after deducting interest costs, so that's double counting. Further, borrowing money ("to fund investment") while continuing to pay big dividends is Carillion territory. Re-invest your current profits first, if there's nothing left to pay dividends, then so be it.
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Also from City AM:

Renters in the UK paid out £51.6bn to landlords last year, the highest rent bill on record.

The UK's rental bill rose by £1.8bn in 2017, according to research published today by Countrywide. The estate agency group said the rise was driven by an increase in the number of renters, and rising rents; the average cost of a new let rose 2.4 per cent year-on-year to £958.

Two-thirds of that is location rent and that IS a "national scandal", not so much that tenants are paying it, but the fact that private landlords are collecting it.

Either way, we're not talking about £50 a year from every household, but £6,000 a year being channelled from every "asset poor" househol to a small minority of "asset rich" households.

And what does Labour have to say about this? They dared mention LVT briefly in their manifesto but beat a hasty retreat once the Homeys co-ordinated their strategy and started mis-describing it as The Garden Tax.

Round-up of the week

I was very busy at work this week; Mrs W was abroad on holiday all week so I was on single-parent duty (which is not that difficult once your kids are school-age) and the weather was nice so sitting in the garden was always the obvious thing to do.

But lots of things caught my eye:

1. From The Sun:

YOUNG families are being milked by councils who are now charging to take away nappies as part of their household rubbish.

The charges – for either big bins or special plastic bags – have been slammed as being unfair on families and could cause fly-tipping.

It is complete nonsense.
- The cost of emptying household bins (and those of most businesses) is surprisingly small, average £100 to £200 per year per household/business.
- If they are going to charge extra for nappies, why not charge extra for everything that people throw away?
- If they are going to levy specific amounts for what people put in the bin, the most efficient way of doing it would be to levy the charge when they buy it new. I covered all that years ago. That largely solves the fly tipping and enforcement issues.

If you want to simplify it and put a number on it, a flat tax of 1% of the value of all the products which households and businesses buy would cover the cost of refuse collection. Seeing as VAT is already 20% on most things, people buying e.g. disposable nappies have already paid for the cost twenty times over.

2. My view is that each election is actually a referendum in which everybody can choose their own question.

So while the Greens and UKIP have had little electoral success (apart from in meaningless EU Parliament elections), they did manage to shift the terms of debate in their favour and the two big parties adjusted their policies accordingly.

That being so, the Tories messed up the election because Labour nearly outflanked them with their two main vote grabbing proposals - "an end to austerity" and "reducing tuition fees". Lots of people voted for the former and they got an extra few million younger people who'd like to see the end of tuition fees.

Hey presto:

From The Guardian:

One of the key architects of David Cameron’s austerity programme has suggested the government must consider tax rises and increased spending on public services to respond to overwhelming pressure on social care, schools and the NHS.

From the BBC:

The Conservatives must "change hard" to win over young voters who backed Labour in June's general election, Theresa May's most senior minister has warned.

Damian Green told Tories to modernise after losing their majority in the general election and trailing behind Labour by 30% among voters aged 18-35... Speaking at the Bright Blue liberal conservative think-tank's conference in central London, Mr Green said a new "city Conservativism" would woo young, metropolitan voters... Mr Green also suggested there was a "national debate that we need to have" about university tuition fees.

This is all tokenism of course, there is no sincerity on either side, but it confirms my suspicion that there is no need for - or any real prospect of - any YPP candidate with Georgist policies to be - or being - elected. As soon as we are getting a few per cent of the vote, the big two parties will modify their policies accordingly to try and put us out of business.

(The most successful UK movement of recent years doesn't even bother having their own party - it's the old age pensioners. They push out simplistic and inherently contradictory slogans i.e. "We have worked hard and paid taxes and saved hard all our lives". The "worked hard and paid taxes" justifies higher old age pensions, plus all the extra NHS spending. The "paid taxes and saved hard" bit is the argument against taxing land values i.e. clawing back inflated house prices. Hang about here - if they really have saved so hard, how come they need hand outs and subsidies? A century of deficit spending suggests they weren't paying enough taxes, doesn't it? But they get what they want because they bother to go out and vote, that's it, one tick every few years, job done, don't bother with silly protest marches, get on with more important things - a winning strategy.)

3. EU v Google.

Disclaimer - I am big fan of Google: their search engine, gmail, Blogger, Google maps, Google translate, Chrome are all free to use, work very well and make the world a better place. I am no fan of the EU for various reasons. But every now and then the EU get it right.

As I said last year, we all now that these supra-national corporations take the piss on corporation tax, which is not actually that important, because they get stung for VAT, PAYE and Business Rates which are more difficult to evade. National governments know this but find it difficult to draw up and enforce rules which would make them pay "the right amount" of corporation tax in any country.

So the EU doesn't bother with all that, it just invents some trumped up anti-competitive practices and fines them a few billion every few years.

From The Telegraph:

The European Union has fined Google €2.42bn (£2.14bn) after a seven-year investigation into claims the technology giant abused its internet search monopoly.

The penalty is the biggest ever competition fine from the European Commission, doubling the previous record handed to Intel in 2009. The EU said Google had broken EU competition law by exploiting the power of its search engine to promote its online shopping service, at the expense of other price comparison sites.

Which doesn't make sense on their terms - it's Google's search engine and they can use it to advertise what they like, surely? You wouldn't expect the Tesco website to carry advertising for competitors.

The real point, which the EU seem to have missed is not just that Google have a competitive advantage that amounts to a monopoly, it is that what they are charging their advertisers is rent. As with land rent, the value arises from agglomeration benefits (same as Air BNB or Uber), consumers use it because so many sellers use it and vice versa. It is surely more efficient for everybody to use the same marketplace for buying and selling, that's fine, what is not so fine is for a third party, to siphon off part of the producer and consumer surplus.

4. On the topic of Google, Microsoft etc, Benjamin' emailed me a link to a splendid lecture by a succesful Silicon Valley insider/investor called "Competition is for losers".

It's fifty minutes long but I watched it all the way through. I gritted my teeth at the appalling typo at 25 minutes 14 seconds; applauded at 31 minutes when he points out that the main beneficiares of the British Industrial Revolution were landowners ("The workers didn't make that much, the capitalists didn't make that much either"). The most telling bit is where he cheerfully admits that competition and free markets are good for society as a whole, but promptly dismisses it as a way for an individual businessman to make money (I didn't make a note of when he says it).



5. Right, I'm off back into the garden, shame to waste the sunshine.