Op-Ed; Opinion

Housing prices are an obstacle to universal income

By SB

There is a fear that a disproportionate part of Universal Basic Income would be paid to housing. Under current circumstances, a large portion of the income is paid to rent. A person UK in 2019, if receiving benefits only, in many cases is paying over fifty percent of their income for housing. If UBI was to come into effect, it is possible the same problem would occur. On the minimum wage in the UK (currently £8.21 per hour), over 43 percent of the income of a person living in a city will go to renting a single room.

If UBI becomes a transfer of funds from everybody in the economy to the landlords in the economy, then it cannot be progressive. These landlords are not particularly in need or poor. Therefore, the campaign for UBI must be approached keeping in mind where that income ends up.

Looking at rent rises in the last 29 years, one can see that that inflation between 1989 and 2019 makes everything roughly two and half times more expensive. So, anything that is £1 will be £2.50 today. Another way to put it is that £1 in 1989 is equal to £2.50 today. In the same time, the lowest wage rose from about £3.00 to £8.21 and tax on the minimum full-time wage decreases from twelve percent to five percent.

The biggest difference is rent. In terms of rent, £1 is equal to £10.50, or what was a £50 per calendar month is now £550.00 pcm.  In buying terms, the lowest-priced homes cost about £35,000 in 1989 or six times the minimum wage annual income. In 2019, the average price of a two-bedroom flat varies widely. However, it is not uncommon to see a two-bedroom flat priced at £200,000 or twelve times the minimum wage. This would indicate that buying a house takes a similar trajectory as rent. In 1989, a person could have obtained a secure home, and put aside some money that comprises the state pension. If the property prices and rent had not risen and had stayed at about 9 percent of minimum income wages today, then this would be the case too. Even If there was a shortage of housing, they would have been able to initiate a build via a housing association or even through their own income.

Table 1 Wage falls as rent rises

Year Monthly  Annual Rent Annual Disposable Income (after rent, tax and national insurance) % of Minimum Wage for rent (After Tax and NI) % of Minimum Wage paid for tax factoring in tax free allowance
1990  £40.00  £480.00 £4,658.75 9.34% 12.16%
1995  £62.85  £754.26 £5,113.24 12.85% 9%
2000  £98.77  £1,185.21 £5,562.40 17.56% 6%
2005  £155.20  £1,862.40 £7,100.89 20.78% 9%
2010  £243.88  £2,926.51 £7,565.72 27.89% 9%
2015  £383.22  £4,598.62 £7,923.37 36.72% 4%
2019  £550.13  £6,601.60 £8,632.19 43.34% 4%
2020  £602.18  £7,226.11 £8,629.68 45.57% 4%
2021  £659.14  £7,909.70 £8,595.00 47.92% 5%

However, the rent and property price rise that took place meant that each time the minimum wage was raised (in line with inflation) to keep somebody at the same standard of living on minimum wage, the rent rise took a larger and larger portion of their income. In the beginning, the rent rise takes 25 percent of their pay rise, then taking about 50% of their pay rise, and in many years is a 100 percent or near 100 percent. In a few cases, it was more than 100 percent.

Since the minimum wage increase to keep up with inflation and they are handing over above the calculated inflation for rent to their landlords, they are no longer gaining the additional money to stay at the same standard of living. Their wage is dropping and their ability to save and prepare for the future is dropping. For example, in 1989, for every £1 a person gives 9 percent or 9p to rent. In 2019, for every £2.50 roughly equal to £1 then, a person gives £1.07 to their landlord or 43 percent.

If we look at rent increment per year and pay increment per year, taking the actual rises in the minimum wage from government records, and factoring the rent rise equally distributed over the full twenty-nine years. In order to get from a monthly rent of £50pcm to £550pcm. If equally distribute, then from about 1990 to 1999, the pay rise would have been higher than the rent rise. Some years all of the pay rise is transferred to the landlord.

In 1990, about a quarter of the pay rise is a transfer to the landlord. In 1999, 2008, 2011, 2012, 2014 and 2019, the full pay rise is transferred to the landlord. In most other years about 40 percent to 98 percent is transferred to the landlord except for five years.

For rent to rise from 9 percent to 43 percent of the minimum wage, the rent must have risen in some years higher than their pay rises. This would have been reflected differently in different accommodations. However, everybody who was renting would have observed the change at some point. In the following example, the rent rise is assumed to be equally distributed across the years, to show how the rent could have moved from £40pcm to £550pcm.

What about tax, during the same period the tax goes from 12 percent of the minimum wage to about 5 percent. Comparing tax and rent, the tax amount starts out higher than rent. By 1992 tax and rent are about equal outgoings, and then slowly rent increases tenfold, and tax decreases to about half the share it was in 1989. The rent doubles tax in 1998, trebles in the early 2000s and by 2015 it is ten times the rent, as an annual outgoing for a person on the minimum wage.

Disposable income moves in the reverse direction. In 1990, a person on minimum wage has almost ten times the disposable income than they pay on rent. Disposable income after rent, tax, and national insurance contributions are £4,658.75, while rent is £480 per year. In 1996 it is six times, in 2002 it is four times and so on. By 2018 it is less than 1.5 times, and if the trend continues by 2022, rent will be higher than disposable income.

If house prices and all other items had increased in-line with inflation and the minimum wage pay rise was the same, then a person would have the potential of savings to purchase a home or build a home with about half their accumulated life’s income. When they sold that home, they would regain the total value, less depreciation of the same home.

Table 2 shows a scenario of house prices had not risen.

Year  Monthly rent went from £40 to 550pcm in 29 years. Annual Tax for the year  Annual Rent (12 Months) After RENT and Tax, NI per year % of Minimum Wage for Rent (After Tax and NI) % of Minimum Wage paid for tax factoring in tax free allowance
1990  £40.00 £711.25  £480.00 £4,658.75 9.34% 12.16%
2000  £49.35 £440.20  £592.22 £6,155.38 8.78% 6%
2010  £73.34 £1,017.70  £880.13 £9,612.11 8.39% 9%
2019  £101.53 £701.90  £1,218.31 £14,015.47 8.00% 4%

However, they would not have been able to set aside enough money to raise one or two children. The calculation for a child would be half the cost of living between age 0 to age 18, at half the cost of an adult. However, testing of goods and services for children are actually coming to a price of roughly half the cost of living, as they are assumed to have done in the past.

So, to reiterate, the minimum wage over a lifetime will not deliver to either a one- or two-income household, the returns for a home, investment in education to give higher wage opportunity, and a pension or putting aside money first to have children, plus the cost of bringing up children. Therefore, there is no choice for people on the minimum wage but to look for further state support. However, the truth of the matter much denied is, who is taking the subsidy, the person on minimum wage or precarious jobs, the end customers that are being given a lower price based on a low wage. The landlord is taking 43 percent of the income in real terms whether sourced in benefits or wage, or the hiring organizations who are saving a larger percentage of their budget for others who are paid more. Finally, that subsidy goes to shareholders whether it ends up mostly in the pocket of a small set of people, or a retirement fund which funds a large set of people. What is clear, people on minimum wage should not be blamed or made to feel guilty because of their poverty.

And the Universal Basic Income is an idea that can only be realized if each of the key areas of expense for a human being to live takes a reasonable proportion of the income. Otherwise, Universal Basic Income is just a guaranteed income for landlords today and maybe another industry tomorrow, and will fail to supply the basic set of goods and services it is designed to guarantee.

Sources of data

1 Minimum Wage 1999 to 2013  Ref [1] https://www.theguardian.com/news/datablog/2013/oct/01/uk-minimum-wage-history-in-numbers
2 National Insurance 1999 to 2019 Ref [2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/709420/Table-a4.pdf
3 Income Tax – Personal Tax Allowance and Reliefs, 1990 to 2019 [3] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/709412/Table-a1.pdf
Notes
There are data gaps in the Rent to Income Ratio, the most Signiant of which are explained below
The starting rent in 1990 of 40pcm is derived from my own personal experience of renting a double room in a shared house. I remember at the time I chose a room that I could be comfortable in, and did not choose the cheapest room. I was moving from a room with relatives, where I paid £30pcm. The common room price in loot the listings paper which was the main source for finding lettings at the time was 30pcm to 50pcm, I believe that the bills were not included. The rent in 2019 was derived from a search for a double room on a website. There are many rooms that are priced over today’s rent of £550, which seem to be most rooms. However, through many searches of different websites, I can see that it is a common rent for a room in that area. This data could be improved by searching through archived copies of listings papers for the time. There are many rooms advertised at about £200 more than the rent I have quoted in some cities.
From starting rent to today’s rent, I am estimating a % increase year on year, equally distributed. This would end up with today’s rent. For future rent, I am taking the same % increase forward for a further twenty years
Minimum Wage: When referring to minimum wage, I am always assuming the full adult minimum wage and not the minimum wage for young adults
Minimum Wage in 1990 to 1998
I have real data from .gov site and from the guardian site from 1999. This is the year the minimum wage came into effect. Prior to this I have a sketchy memory of my take home pay in 1990. Therefore, the start salary £3.00 per hour is pure guess and would be slightly lower if I calculated using the future trend. Tracing back this goes to about £2.70. I feel that this would not be accurate as my take home pay would have been lower.
Future Minimum Wage 2019 to 2039
If I estimate a year on year % increase to take me from £3 to £8.20. The % increase is about 3.5% year on year. I am then using this for future years.
Minimum Wage 1999 to 2019
Data from tables on .gov websites and guardian websites. This data does not take into account which month the change came into effect and assumes a full year at the minimum wage increment for the year. This data could be improved.
Tax Calculations
If the rent year is 1990. The tax is calculated using figures for 1990, and the calculation is done against the full year from 1990 till today, therefore this data does not use the previous tax year for the last three months of the financial year. This would mean that tax would be slightly lower than shown here.   Tax Personal Allowance, and all other calculations involving tax, including salary after tax also ignore the financial year change over. Therefore, this data could be improved. The overall trend of rent rises outstripping pay rises would not change.
National Insurance NI for 1990 to 1998 has been put at zero, because of confusion about the rules at the time. However, I believe it to be quite low for the minimum wage because of the exemptions for low wage at the time. This data could therefore be improved.
Contact Details
Email: sbptime@yahoo.com 

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9 comments

  • Thanks for a very timely article. The hard numbers set out from your work bring clear focus onto the critical problem of housing poverty.

    Linking the challenge to basic income is partly justified, because one key objective of UBI is to eliminate poverty. That said, housing poverty is still going to be a major problem in the UK, with or without Basic Income. I think it may be misleading to imply that UBI would make the housing crisis worse. Perhaps the fairest thing we could say is that UBI will not achieve one of its key goals – to end poverty – unless we at the same time implement real solutions to the chronic problem of house price inflation.

    Like most others, I have been skirting round this problem for a long time, while campaigning for UBI. Your article has inspired me to go back to basics and do some hard thinking about the housing market problem in the UK. . I hope this may lead in time to some new suggestions as to how we should tackle one of our most complex and entrenched challenges in the fight to end poverty.

    Global Goal No1 = No Poverty by 2030

    • Saeeda Bukhari

      1) Robert P Bruce: I agree, we need to go back to basics on rent, and on economics in general. Trying to see if the economic prescriptions and theory are actually stacking up in facts that are practiced around us.

  • Simon Fletcher

    Yes, logic dictates that properly functioning free markets for all essential goods and services (that are not state provided) is a precondition for UBI to be feasible as a social safety net.

    UBI doesn’t increase productivity at all, it doesn’t address the supply side constraints in Housing or Child-care and it doesn’t assure UK competitiveness internationally. It does nothing but move money, so market prices would naturally adjust to much same distribution of consumables.

    State provision of Child-care and a big increase in Child Benefit (not means tested), and a complete overall (liberalisation) in Planning system would be far more sensible approach to addressing UK social imbalances.

  • sb

    I do not believe that there is a housing crisis in the UK, or that UBI would make it worse. I do not think I wrote that anywhere.

    I do make that point that, excessive profit from housing, is an issue, Which means that a before a person paid £40 per calendar month for a room. And now pays £550 pounds per calender month for a room. This is much too high an increase, and far above inflation.

    This would also mean that the money could have gone to a more useful industry. Currently the food budget a person on a Minimum wage is about 18% and utilities about 9%, while tax is about 5%.

    Tax pays for schools, hospitals, emergency services, pensions, benefits, parks and libraries, recyling and waste removal, and too many others things, and currently is taking about 5% of the Minimum Wage. While the example above shows over 43% goes to renting one room in a four bedroom house. Why would we think its fairly priced, to give 43% to housing and not to some other area of the economy, that people find useful.

  • gespil

    Reading the title of the article “Housing prices are an obstacle to universal income” made me think about “…barking at the wrong tree…”

    Here is how the cycle goes ,
    1) People’s income increases with some predictable amount ( due to UBI …or higher minimum wage …or what not)
    2) All businesses want to harvest that extra Wealth from the people.
    3) However businesses which provide the most essential goods and services have the competitive edge over all other businesses because the human-people must spend for essential goods and services before they spend on anything else.
    4) the market competition to harvest the newly found increase of disposable Wealth of the humans inevitably leads to bigger increase in prices for essential goods and services relative to increase of prices for anything else which is not that essential for dignified existence within a society.

    The solution:
    Exponential (progressive) Increase of taxes on all businesses that provide essential goods and services and then redistributing the revenue evenly among the citizens as UBI
    ( basically, the solution is, perpetually return what is taken back to the those it is taken from.)
    (Tax exponentially, re-distribute evenly , in perpetuity)
    .

  • Saeeda Bukhari

    Gespil,
    I am currently finding that most of the assumptions that I have taken for granted, in reading about the widely distributed and spoken about articles about economics of the poor in recent times, is not as it seems.

    So before I would have said, taxing businesses at a progressive rate (where progressive means higher the tax the higher the income) would work. However now I am not so sure, Because much of the revenue of the business is distributed as income The higher the income difference between the lowest income in a country and the highest income in the country, It seems the more wealth of the country with gather to those with the highest income., but more importantly the lower the ability of the poorest to meet their own needs, Because it seems that prices will begin to stretch upwards but only to be paid out as wage, and that wage may pay out to housing or other expences that are increasing prices.

    The other issue is where the tax is gathered, given the same goods can pass through many businesses. So if I look at wheat, uncleaned straight from the field it can be a under 20p a kilo. Then it gets milled, and refined, and taken to further processing, but is still about £1 a kilo. Then something happens between this and the super market, that £1 a kilo is sold for £5 or £10 a kilo and sometimes higher, even though the main ingrediant is still wheat. If one looks at the prepared food industry the price of wheat being sold as a bun for a burger or potatoes as forzen potatoes is much higher possibly even higher than £20 per kilo, depending on the outlet. This is also a surprise becasue the same industry is known for paying the lowest wage to staff. Especially as waiting staff, with some wage being derived as a portion of tips, given by customers on top of the price of the meal. So somewhere between the farmer wheat went from under 20p a kilo to £5 £10 or even £15 per kilo in a restaurant setting or over £5 in a super market setting

    Understanding how prices are increased between raw materials to what it ends up to be in the home of different incomes, is essential to understand what it will take to make basic income work. Each person in the chain must make a wage, and each piece of equipment must be paid for, how much above this is the price being changed through stages or distribution and production.

    If the cost of production does not increaes, then each of the businesses should not be increasing the price of their goods because basic income has been instated. As the tax is always set to be taken surplus above a reasonable living cost for individuals and as surplus above running costs for businesses.

  • Thomas Oberhäuser

    There is a misconception in the basic income discussion. We always talk about money. And this is wrong. The unconditional basic income are the goods. And that is important to recognize.

    What does this mean?

    When we are talking about basic income, then it is the idea, that all people have the goods they need to stay alive. This is basic income. And when you say, rents are too high, energy costs are too high, then we have as a nation, as a community the duty, to deliver all people those goods unconditional, because they need those goods for their livelihood. This is the main mission of society. Their is no other reason, to have society, than to deliver those goods to the people, though they can stay alive.

    But how can this happen?

    UBI (Unconditional basic income) means, that a nation, a community that the citizen have to think about it, how can it happen, that all people have cheap ore free housing. It must be the same effort and task, as it was in other countries, when people think to solve those problems “for all citizen”. This must be the interest of communities and basic income activists.

    We have too look, that all people have enough energy, rooms, shelter, clothing and food. The emphasis is on “all”. So don’t think like a capitalist, to earn much money for you alone, but try to be a UBI-activist, who has responsibility for all the people. – Try to think like a socialist, to anticipate the situation.

    The duty of economy is to serve the people. That’s the main purpose of economy. Everyone needs the basic goods to stay alive. So our job is it, to deliver those goods to the community members. – It is the job of the UBI proponents to explain the situation.

    First step. We have to stop talking about money and start to look into the reality of goods, people need.

  • Good job showing why a rent share is so vastly superior to any BIG. Indeed, rent shares are the only form of “free” extra income to exist big-scale (the few BIG experiments are small and not likely sustainable). Consider Aspen CO, which recovers socially-generated location value then shares it among most residents (even doctors making $100k/p.a. qualify). Also, recover the rents that attach to government-granted privilege such as utility franchises then disburse the revenue, making electricity always affordable for all. Recover the rents that attach to corporate charters and limited liability and you’ll level the playing field for clean, sustainable enterprises vs. wasteful businesses. Further, rent is a surplus, and surpluses open the public’s eyes to what they’re not now receiving. Conversely, BIG proponents go out of their way to remind everyone that so many of us are poor–a tactic that flunks Business Sense 101. They reinforce the notion that scarcity is the nature of reality–a widespread misunderstanding. The BIG argument is based on need, not on right. By right, everyone is owed a share of rent, since it is the presence of society that generates rents. To pass Business 201, call it a Citizen’s Dividend. But to start off, appeal to the huge numbers of any populace stressed out by housing costs. To win their support, call it a Residential Dividend.

  • Saeeda Bukhari

    I have seen two different versions of this news site, with different. So the parallel version had another comment from somebody about the price of rent and my second comment and any responses had disappeared.
    Hopefully the extra responder, will find this site and add their comment.
    Responses below:

    1) Robert P Bruce: I agree, we need to go back to basics on rent, and on economics in general. Trying to see if the economic prescriptions and theory are actually stacking up in facts that are practiced around us.
    2) Simon Fletcher: UBI could possibly increase “needed productivity” (or hamper what I refer to as negative-return-on-investment jobs). E.g. if somebody is going to work for their life’s working time, And that work would not provide them with that part of the funds to give them a secure home for life, a secure pension, a good nutritional diet, and adequate clothing, healthcare and education AT LEAST. Then the job they are in, has a negative return on their life’s time labour investment. If UBI helps people to keep from jobs such as “being a human signboard”, which provides nothing to society or the person who is seen doing the job, then it does a good thing.
    -Where it comes to supply side, at least mid 1800’s where Marx is discussing the over supply and under supply cycle of production of goods, then it may be the activism around the issue can disseminate some solutions about over supply, and under supply of goods and services, which continues to be a problem. A “economically conscious” person in society may be in the direction of solving this problem, and UBI could assist in creating more widespread understanding if it is done well.
    – UK competitiveness ( Creating the exact right about of goods and services, for consumption and in case of future interruption because of disaster is a difficult endevour, therefore it seems that international co-operation is more needed, especially as each newly developed country creates more productive power, and over supply of not-needed goods may become a increasing problem. This could be helped by increasing understanding about access to goods and services for both people in two jurisdictions. Where is the tax gathered and what is spent on. What happens to income on each side of the transaction when exchange rates are factored in.
    3) Thomas Oberhauser – I agree that looking at price of goods, the cost of production and the qty of goods is important part of understanding UBI. (Good example, progress the capacity to create a pin or needle from Adam Smith (1776), again mentioned by Marx (1867) and then look to today, and we can see that we are meeting with ease global capacity. This set of goods are priced, and on what basis to the average person or lowest income person.
    4) Jeoffrey J Smith, I find your idea interesting, I have heard of common resources having a citizen dividend but not a rent dividend. I need to think it through.
    5) Gerspil, I think I was not clear about the point I made about taxes. I was referring to Piketty (2013), Corporation tax is only a small part of progressive tax, if much of the revenue is handed out as above the median wage or ends up as above the median income and wage, which is not taxed progressively enough to distribute income.

    Finally a general economic point. When rent is increased, or the price of a product that is under general consumption, who in real terms pays the “surplus”. In some cases it seems it may be that the price paid is from the worker when she becomes the consumer rather then in the process of production, in the shape of a wage that is below its full productive value.

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