Money, money, money: housing costs are annihilating low-income budgets

Housing costs take up three-and-a-half times as much of the budgets of the poor as of the rich, with significant implications for their standard of living, according to a new report.

The report from the Institute for Fiscal Studies (IFS) found that 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%. The IFS said it was therefore not possible to understand income poverty or inequality without taking account of housing costs.

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 there are 3.4 million more people in relative poverty once housing costs are taken into account.

Poverty fell between 2008 and 2021 by 1.4% points on a measure ignoring housing costs but by just 0.5% points when accounting for them, a difference equivalent to 550,000 people in terms of today’s population.

The report said that 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.

The report also warned that ignoring housing costs would lead to underestimates of the proportion of families with children who are poor, and overestimates of the proportion of pensioners – most of whom are outright owners with very low housing costs – who are poor.

Tom Wernham, a research economist at the 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.’

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