Why do some people have disposable income, but others don’t?

Conventional economics would probably say that this is largely due to a disparity of incomes. Those with higher incomes than what is required to cover their expenses in a given locality will have a higher disposable income than those on lower wages.

But let’s say that we assume that we are assuming two households with the same income. You might also say that the discrepancy is a result of whether they have kids or other dependents so let’s assume that those factors are the same too. Let’s assume they have the same size house, in a similar location, have access to the same shops and live a generally comparable lifestyle. Will they then have the same disposable income?

Conventional economics may well say yes. But I would say no.

The key things we have not yet taken into consideration are the household’s underlying wealth, access to finance, and the randomness inherent within our economic system.

It’s often assumed that if one household can get by on a certain income then any other household ought to be able to too, and that any discrepancy between their household financial situation is a result of their ability or inability to control their money and manage their lifestyle to live within their means. But this simply is not true.

There is one huge factor which varies between households, and that is the cost of housing. There are several factors which have vast consequences on the cost of a household’s housing, that don’t actually relate to the physical nature of the house itself:

  • Whether they bought it or rent it – obviously this is pretty major. For now, I’m going to only address people buying a house, but I’ll come back to renting, perhaps in another post.
  • When they bought it – house prices change, but changes to the price of housing doesn’t affect the cost of housing to those who already own theirs. So someone who bought their house at a time when prices were lower will inevitably be better off financially than someone buying when prices are high. And since prices have continually risen over many years, this manifests itself as an injustice against the younger.
  • Baseline wealth – those who have a high baseline wealth – that is, wealth that is independent of their income – can lower their cost of housing by investing their wealth as a house purchase deposit, lowering, or in extreme cases eliminating, their cost of housing.
  • Access to finance – mortgage rates vary, and access to finance varies based on factors such as credit rating, available deposit, and the biggest variation is probably change over time, which further impacts the variation resulting from when a house was bought, or when the mortgage was last renewed.
  • Energy efficiency – I’m being a bit cheeky here, since the physical nature of the house is something I excluded above, but there is a reason why I’m including it here – because energy efficiency is often not factored into house prices. This can mean that houses which are identical might have significantly different values based not on their actual energy efficiency, but the perception they are regarded by potential buyers. What I mean is, in a market where the location and size of a house has much more of an impact on its market value than its energy efficiency, buyers of houses that are less efficient but in good locations are hit with a double injustice of both having to pay more to buy their house, as well as having higher utility bills. Therefore a nominally equivalent house (from the point of view of market value) may impose a significantly different cost of housing.

Given that such differentials resulting from the factors above can amount to many thousands of pounds, they are likely to have a bigger impact on cost of living than most things which might be perceived to cause differentials in disposable income.

It’s also worth noting that for some, the cost of housing is so onerous that they literally cannot afford it, together with the other costs of living (especially at our current difficult time), i.e. that they have a negative disposable income, and that this is despite them earning an amount which might be a very reasonable income for someone in a different circumstance.