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Are High Rents Killing The Economy?

October 4, 2012 | Professionals  

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An argument has been laid out by Pete Jefferys, who is in the policy team at Shelter, and has previously worked on climate change policy in the civil service, in which he makes the case for the construction of affordable social housing and a reformed private rented sector to give tenants more disposable income, and therefore, more spending power.

There are 8.5 million renters in the UK, a very significant proportion of the working population, the majority of whom now find themselves facing a situation in which they cannot escape because they can’t save enough money to afford a deposit for a mortgage due to their high rents.

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But also, in areas of high demand where rents are highest, like London (where a quarter of the population are private renters) and the South-East, the cost of rent can eat away as much as 70% of a tenants income, leaving next to nothing to be spent on goods and services, leaving the economy stagnant. For the UK as a whole it is estimated that renters spend between 42% and 46% of their income on rent.

He further argues that the money spent on rent does not go back into the economy. He said, “The majority of landlords are individuals or couples renting out just one or two homes. Many of those landlords are using the rents to pay off their mortgages and make a small yield. A huge amount of money paid in rent is not re-circulating into the economy, but rather it is financing mortgage debt. If banks were re-lending this money, again it might not be a problem. But, as we’re constantly hearing – bank lending has dropped massively since 2008.

“Equally, even if all rent went straight into the pockets of landlords there would still be a case that this is reducing spending in the economy. Higher earners spend proportionately less of their income compared to lower earners and on average landlords have higher incomes.”

He shows that the increase of rent since 2000 has far exceeded both inflation and wages, and that, if rent had remained in line with inflation, renters today would have an extra £8bn a year in disposable income.

His solution? Build more affordable social housing to reduce the huge demand on private housing that is driving costs up whilst simultaneously putting more spending money in the pockets of social renters.

However, this is unlikely to benefit the poorest in society, as to someone earning below average wages is still going to find “affordable” housing unaffordable.

 

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