Redistribution in property-constrained economy: raising the minimum wage or lowering effective rents?

Rising rents in the UK are making hardship harder, while low interest rates transfer wealth from the have-not's to the have's. Can we be doing something more sensible?
Julian Sayarer
6 July 2011

Two competing ideas dominate debate of how to improve quality of life at the wrong-end of society, and though both find immediate sympathy with progressive thinking, they are, alas, somewhat opposed to one another. The first idea, steadily gaining traction, is improved wages for low-skilled work, whilst the other, yet to receive any great clamour for change, is the need for serious interventions to reduce the cost of housing. With rent expenditure reckoned to account for 35% of income to the poorest households, and rising as high as 80% amongst students, although some might see higher wages and lower rents as different methods for skinning the same cat, the reality is a little different. If reduced rents can be said to get to the bottom of the problem, higher wages are the palliative that allow us to forget the problem for a little while longer.

The case for higher wages has been boosted recently, with the London Living Wage increased last month by 5%. Now at £8.30, the wage, which is received by one-in-six low-paid Londoners, embodies the irrefutable argument that wages should do more than merely allow people to live-on in poverty. More recently, the Institute for Public Policy Research (IPPR), last week released its report, Getting What We Deserve?, which demonstrates broad support for wage increases to the lowest paid. With statistics showing that bosses in FTSE 100 companies received 88 times the UK median wage in 2009 (even as recently as 2000, the amount was ‘only’ 47 times greater), it is hard to dispute both the validity and the rightness of a call for change.

Housing rents have also come in for attention of late, with the Halifax Bank labelling ‘Generation Rent’ as the current demographic of 20-45 year olds, of which only about 5% are given a realistic chance of eventually owning a house. Though there exist sound arguments in favour of Britain moving away from a model of home-ownership, with frequent nods towards the preference for renting elsewhere in Europe, until the cost of renting is reduced, Britons are undoubtedly getting a raw deal – the advantages of housing flexibility but at the full cost of ownership. Despite this, whilst the living wage campaign gathers a degree of groundswell in its favour, the story of UK renting reads more like a ‘how high can it go’ horror story. New statistics show 7.8% increases in London rents, average rises of 6.3% across the east Midlands and north-east, and landlords pocketing an average £6152 from their tenants annually, additional, of course, to ownership of the house itself. Whereas rent increases in London and the south-east are traditionally brushed-aside with arguments for crowding and supply-and-demand economics, comparable rises elsewhere in the country belie not just benign demographic changes, but the broader picture of a skewed market.

The imbalance of power between landlords and tenants is compounded not only by direct exchange of wealth, but indirectly by steadfast refusal from the Bank of England to raise interest rates from 0.5%. What ensues is an implicit, low-interest subsidy to mortgage-holders, whilst the consequences, namely a 4.5% rate of inflation, means every £100 saved by aspiring home-owners will only be worth £91 in two year’s time anyway. In the face of this massive movement of capital from have-nots to haves, there is precisely nothing on the horizon to ameliorate matters.

And, somewhat tragically for such a noble cause, wage increases will ultimately exacerbate the problem, they represent the equivalent of giving blood to a patient bleeding to death, rather than repairing the severed artery. With all evidence pointing towards rent as an egregiously high proportion of people’s essential outgoings, the more obvious solution is to right the fundamental wrong, rather than tamper with the numbers entered into a machine already some way past broken.

Nothing could illustrate this more clearly than the fate of the 5% increase in the London Living Wage. With the raise already down to 0.5% after inflation, by the time the 7.8% rise in London rent is accounted for, workers are likely to have experienced marginal decreases in their real wages. Moreover, in this we see a housing model subsidised not only by a devaluation of our monetary supply, but subsidised a second time by a tax on productive business, whose increased wage bill is immediately appropriated, not by workers, but by landlords. As if this were not already bad enough, increased wages, once fed back in to market prices, contribute to the very inflationary process that inflicts disproportionate harm upon the very poor they seek to help. With both the unemployed and pensioners bypassed by wage rises but clobbered by inflation, we are left, excuse the continuing metaphors, throwing water on a chip pan fire. Not just economically harmful, wage increases pay homage to the very financial mechanisms that are widely accepted as disempowering the socially vulnerable. With headline inflation forecast to reach 5% even before increases in the UK’s current 2% rate of wage inflation, it is a no-brainer as to whether the poor will be better served by higher numbers of monetary units soon to be devalued by market forces, or by steps to liberate the human right of housing from those forces. If an austerity beset Westminster has political capital in it for one significant act to benefit the working poor, make no mistake that wage increases should not be it.

And yet, whereas David Cameron has dubbed the living wage ‘an idea the time for which has come’, try finding a peep out of government on the subjects of land and property ownership, or taxes on rental incomes. A handful of companies have made positive efforts to tap the inefficiencies of the property market, renting empty premises at low rates, and so providing tenants with cheap accommodation whilst saving landlords the security and maintenance costs of an empty building. The social enterprise, Dot Dot Dot, estimate that a million premises lie empty in the UK at any one time, and although this newly-launched venture seems to have all the best intentions, more established competitors, such as Camelot and Ad Hoc, have seen rents and deposits creep towards normal market rates. The situation drifts further from ideal when considering that tenants are left with the insecurity of two weeks eviction notice, and average residencies lasting just eight months. Although such ventures make the most of a bad situation, it is hard not to feel that the situation itself demands improvement.

A land tax is one obvious solution, annual levies on property ownership representing a disincentive to buildings kept empty for purposes of cashing-in on economic upturns. That such upturns are generally driven by government spending and business innovation, and rarely by the parasitic activity of property speculation, adds an extra justice to the proposition. A land tax would also mean that simply holding land without putting it to productive use would be expensive, and would therefore encourage an increase in the supply of new build – an important part of the solution, ultimately, to housing costs in the South East.

It is a great shame, therefore, that rents and property have failed to capture the media and third-sector imagination to quite the same extent as wages. Though none could doubt the integrity of living wage campaigns run by Citizens UK, nor the good intentions of IPPR recommendations, the focus on wages leaves rents as the enormous elephant that nobody wants to shove out of the room.

Across the board, such is the tone of media and politics. The Guardian has condemned Tory plans for a £26,000 cap on benefits, with ‘high rents’ accepted at face value as one reason why government and taxpayer must continue to stump-up the money for people who cannot, independently, afford to be alive in twenty-first century Britain. The Salvation Army voiced dismay when the government announced that those on jobseekers allowance would receive a 10% cut in housing benefit after an initial twelve-month period. The charity receives in excess of £20million of housing benefit annually (plus service charges deducted from other benefits received by residents, plus a further £20million from the housing-related Supporting People Fund), and with only 3200 UK beds, that leaves the organisation in receipt of more than £6200 per bed in annual housing benefit alone, no better than commercial rent, and in some parts of the country, far worse.

Housing benefit arguably represents the most insulting component of the rental farce, with profiteering landlords long-able to charge average local rents for sub-standard properties, safe in the knowledge that taxpayer-backed benefit payments would blindly deliver anything up to that average. Changes from the coalition government, whereby housing benefit will now only cover approximately two thirds of average local rent, are a blanket measure that will reduce the profits available to this practice, but also disadvantage many claimants without wholly eradicating the problem.

The lunacy of the debate reached a zenith with last year’s spat between the government and Boris Johnson. The London Mayor, himself a living wage supporter, voiced concerns about ‘social cleansing’ in areas of the capital where poor people, suffering reduced benefits entitlements, would no longer be able to afford to live. Here we were faced by a disagreement, not about exorbitant rents across significant parts of the capital, but about whether the taxpayer should pay exorbitant rents on behalf of people across significant parts of the capital, one further transfer of public capital to private landlords. At the time, Johnson’s comments were welcomed as a sign of both his supposed progressive tendencies, and his support for social diversity. Stripped to their bones, however, what we see are only the romanticised dribblings of the upper class, a notion that poor people should be funded to live beside the wealthy, like some exotic exhibit in our social zoo, and in denial of the unjust inefficiencies our property-led economy continues to nurture. The problem is not in our paycheques but under our feet, increased wages are a poor antidote to the illness with which we have been stricken.


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