The poorest quarter of the population on average spent 21% of
their household income on housing costs (rent or mortgage
interest) in 2021, compared with only 6% for the richest quarter
of the population. This means that the poorest 25% spent 3.5
times more on housing as a fraction of their income than the
richest 25%. It is therefore not possible to understand income
poverty or inequality without taking account of housing costs.
Indeed in 2021, the relative poverty rate was 17% using incomes
measured before deducting housing costs, but 22% using incomes
measured after deducting housing costs, meaning 3.4 million more
people in relative poverty once you account for housing costs.
And the trends are different too – with poverty falling between
2008 and 2021 by 1.4 percentage points on a measure ignoring
housing costs but by just 0.5 percentage points if you account
for them, a difference equivalent to 550,000 people in terms of
today’s population.
These are some of the findings of a new report released today by
IFS researchers on housing costs and income inequality in the UK.
Other key findings include:
-
Measures of poverty that take account of differences in
housing costs are more closely aligned with measures of
material deprivation and food insecurity. This implies measures
that account for housing costs are better at capturing who is
actually poor. When incorporating housing costs, 45%
of the poorest tenth of the population are materially deprived,
compared with 39% when housing costs are not taken account of.
-
Measuring income without accounting for housing costs
leads to perverse conclusions when looking at the living
standards of housing benefit claimants. This is
because increases in rents over time have led to higher housing
benefit payments, which make low-income households look better
off using poverty measures that disregard housing costs, even
when their living standards are the same or worse. For example,
the rise in rents for private and social rental accommodation
from 1997 to 2010 – and the corresponding increase in housing
benefit to partially cover that rise – would imply an 11%
fall in the number in poverty measured before housing
costs, even though their incomes after adjusting for housing
costs would have been unchanged or reduced.
-
If you don’t take account of housing costs, you
understate the proportion of families with children who are
poor, and overstate the proportion of pensioners – most of whom
are outright owners with very low housing costs – who are
poor. Not accounting for housing costs, the relative
poverty rate for children in 2019 (23%) was only a little above
that for people aged 65+ (20%). But accounting for housing
costs, the relative child poverty rate was 31%, compared with
only 18% for people aged 65+. Regional differences are
important too: if you don’t account for housing costs, the
relative poverty rate in London is 16%, but accounting for
housing costs it is 27%.
Tom Wernham, a Research Economist at IFS and one of the
authors of the report, said:
‘As a fraction of their income, people on lower incomes spend
substantially more on housing costs than richer people. Measures
of income poverty that take housing costs into account provide a
more reliable picture of poverty than those that disregard
housing costs. But the government produces a range of headline
poverty statistics, including ones that account for, and ones
that disregard, housing costs. This can be confusing. Now more
than ever, with rising mortgage interest rates and rising private
rents for new lets, we need to take account of these housing
costs and how they affect people’s disposable incomes. Otherwise,
we will fail to identify which people in which parts of the
country are facing the greatest difficulty regarding their
incomes and material living standards.’
