Less well-off households, particularly tenants, are more affected by housing costs rising faster than income
The household housing affordability ratio is an indicator of the ability to access and remain in housing. It measures the ratio between the cost of housing (mortgage repayments or rent payments + normal household running costs) and a household’s disposable income (EUROSTAT definition).
As households’ equivalised disposable income increases, their affordability ratios fall
One of the main observations is that for all households, whether they are tenants or owner-occupiers, the higher their equivalised disposable income, the lower their total housing costs as a proportion of their budget. As a result, tenants from the 20% most well-off households have affordability ratios 2-3 times lower compared to tenants from the 20% least well-off households.
The increase in households’ housing affordability ratio is greatest for the least well-off
The increase in affordability ratio varies across the different equivalised disposable income quintiles. While the increase in affordability ratio is highest for the least well-off households, the higher the equivalised disposable income, the smaller the increase is. For example, for owner-occupiers with a mortgage or loan, their affordability ratio has increased by 24% in the least well-off household quintile and by around 6% in the 2nd, 3rd and 4th quintiles, while it has fallen by 16% in the 5th quintile, representing the most well-off households.
The Ministry of Housing commissioned two socio-economic studies from the Housing Observatory in order to obtain reliable data on the affordability of housing for resident households and to better inform the debate on the affordability of housing in Luxembourg*. The indicator presented here is from the first study on changes of the household housing affordability ratio since 2010 by tenure status and equivalised disposable income through an analysis of affordability ratios (cf. Affordability ratio (%) of resident households by tenure status (2010 – 2018)). The aim in particular is to identify differences across affordability ratio levels and trends based on whether households are more or less well-off. For this analysis, equivalised disposable income quintiles were calculated, from the first quintile, which represents the 20% least well-off households, to the fifth quintile, which is formed of the 20% most well-off households. Two main observations emerge from this indicator.
The first is that as households’ equivalised disposable income increases, the proportion that all housing costs (mortgage repayments/rent payments and household running costs) represent of their overall budget falls, regardless of tenure status. For example, from year to year, affordability ratios for tenant households in the first equivalised disposable income quintile (the 20% least well-off households) are between 2 and 3 times higher than the affordability ratios for tenant households in the fifth equivalised disposable income quintile (the 20% most well-off households). In 2018, tenant households in the first equivalised disposable income quintile had a housing affordability ratio of 51.8%. This drops to 32.5% for those in the second equivalised disposable income quintile, then falls to 16.9% for those in the fifth quintile. For owner-occupied households with a mortgage or loan, the affordability ratio falls by more than half between the first and last quintiles: it drops from 50.2% for these households in the first quintile to 21.1% for those in the fifth quintile in 2018. The same observation can be made for owner-occupiers with no outstanding mortgage or housing loan: between the least well-off and the most well-off households, the affordability ratio is reduced by a factor of five.
The second observation is that the increase in households’ housing affordability ratio appears greater for the least well-off households and that this increase reduces as equivalised disposable income rises. Thus, for tenant households, the increase in the proportion of housing costs is greatest for households in the least well-off quintile. While the affordability ratio increases by 29% between 2010 and 2018 in the first equivalised disposable income quintile, it increases by 13-25% in the 2nd, 3rd and 4th quintiles, and by just 5% in the last quintile, which includes the most well-off households. The same observation can be made for owner-occupiers with a mortgage or loan: their affordability ratio has increased by 24% in the least well-off household quintile and by around 6% in the 2nd, 3rd and 4th quintiles, while it has fallen by 16% in the 5th quintile, representing the most well-off households. One of the explanations for this more sustained growth among the least well-off households is that while the cost of housing has increased approximately equally across all households, the income of the least well-off households has increased more slowly compared to other households. This difference therefore has a direct impact on changes of the affordability ratios.
This indicator has demonstrated that the increase in affordability ratios has not impacted Luxembourg’s population equally and that the least well-off households seem to be most affected by this increase. Owner-occupied households with mortgages or loans face significant affordability ratios, regularly rising above 30%, except for those among the 20% most well-off households. Regarding private market tenants, those belonging to the 20% least well-off households demonstrate very high affordability ratios (over 50%), with a continuous increase since 2010.
* The main results were presented during the Ministry of Housing’s press conference: The Housing Observatory notes the increasingly urgent need for ‘affordable’ housing for low-income households, 2.07.2020 (link)
All private households and their current members residing in Luxembourg at the time of the data collection, except tenants renting at a reduced price or free.
EU-SILC, 2010-2018, transversal data, version of March 2020
A break in series took place in 2016. It influenced the housing data in the sense that the calculation of housing expenses has changed. In 2015 and previous years, variables for housing expenses that specifically concern housing insurance, several taxes, garbage removal, water, gas, electricity and home maintenance costs were fully imputed. From 2016, the method of imputation of all these variables changed and the amount + rhythm of each of the housing expenses began to be surveyed. Since the amounts are requested, the amount of housing expenses are more accurate from 2016.
In 2018, tenants (renting at the market prices) belonging to the 20% of the poorest households recorded an affordability ration of 51.8%, while for tenants (renting at the market prices) in the group of the better-off households the rate was 16.9%.