Rising housing costs... rising poverty?

There is no doubt that we are living in the middle of a housing crisis that affects both landlords and private renters. Increasing costs of mortgages and rents have put many households into a challenging situation. But will this lead to higher poverty rates in the UK? 

Housing is one of the most essential things we need for existence, and good quality of housing is vital for our health and well-being. So it makes sense for us to prioritise it in our budget. But the rising cost of keeping a roof over our heads may force some households to reduce or stop spending on other essentials or even not being able to afford housing, which will lead to poverty. 

How do we measure poverty ?

But let’s start from the basics, what is poverty? Many of you may be aware of different measures of poverty such as the famous international poverty line, the number of people living below $1.90 per day (replaced now with $2.15). However, this doesn't apply in the UK as the wages and benefit system provides more monetary support than $2.15 to individuals. Does that mean that there is no poverty in the UK? Unfortunately not, poverty exists as many people don't have enough money to fulfill their basic needs such as food. In the UK poverty is measured in relation to household income. Based on that we have two main measures of poverty:  

• Relative low income: An individual is in relative low income if they are living in a household with income below 60% of median household income in that year. This measure essentially looks at inequality between low and middle income households.

• Absolute low income: An individual is in absolute low income if they are living in households with income below 60% of the median household income in 2010/11, adjusted for inflation. By using an income threshold that is fixed in time, this measure looks at how living standards of low-income households are changing over time.

Median income is the point at which half of households have lower income and half have higher income.

The relationship between housing costs and poverty

So what is the relationship between housing costs and poverty? We can see it clearly in the chart below which presents the percentage of people living in absolute poverty before and after housing costs. We notice that when we include housing costs, the percentage of people in poverty is increasing. This is because lower-income households tend to have to spend a larger share of their income on housing than higher-income households.

But housing costs are not the same in every city within the UK. The chart below shows how much the relative proportion of people in poverty increases for each region or country within the UK when we account for housing costs.

Perhaps counterintuitively, areas with higher salaries or income face an increased percentage of poverty when you account for housing costs. For example, London, one of the regions with the lowest poverty rates before accounting housing costs, becomes one of the regions with the highest poverty rates after accounting for housing costs. This is because London is a region with higher salaries and incomes compared to the rest of the UK, however this also comes with very high housing costs either for purchasing or renting a house. This means that, especially for households with lower incomes, a larger proportion are 'pushed' into poverty because of these high housing costs.

How things will be in the future?

And unfortunately the situation is going to get worse. The data from the Office for National Statistics shows that every month there is a new record on the increase in rental prices. In the 12 months to September 2023, rental prices for the UK (excluding London) increased by 5.5%.

Private rental prices in London increased by 6.2% in the 12 months to September 2023, up from an increase of 5.9% in the 12 months to August 2023. This is the highest annual percentage change since the London data series began in January 2006. This is in part because of the higher interest rates the landlords face, which have increased their mortgage payments. But also because there is higher demand for people to live in London alongside lower availability private rentals.

The sharp increase in private rents in London, will have as a consequence a higher proportion of people living in poverty. People living in social rented or private rented accommodation are more likely to be in poverty after housing costs are considered than people who own their home. Around 43% of people in the social rented sector and 35% of people in the private rented sector were in relative low income after housing costs in 2021/22.

Also the incomes are going to be squeezed more because of higher inflation. The Resolution Foundation, an independent think tank, forecast in January 2023 that absolute low income will increase from 17.2% in 2021/22 to 18.3% in 2023/24. This translates to an additional 800,000 people in absolute low income, demonstrating how renters are even more vulnerable to poverty in an era of continued rising prices.

Although interest rates are at (or close to) their peak, they are not expected to drop for some time yet, and are highly unlikely to return to pre-cost of living crisis levels, in the longer term hopefully this will mean the rate that rents and mortgage payments are increasing will gradually slow down, easing some of the pressure households are feeling at the moment.