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 (excluding housing aids - 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 10% in the two least well-off household quintiles and  stayed stable or decreased in other quintiles, 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 study on changes of the household housing affordability ratio since 2016 by tenure status and equivalised disposable income through an analysis of affordability ratios (cf. affordability ratio (%) of resident households by tenure status (2016 – 2019) ). 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 2019, tenant households in the first equivalised disposable income quintile had a housing affordability ratio of 50%. This drops to 36.6% for those in the second equivalised disposable income quintile, then falls to 19.1% 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 43.8% for these households in the first quintile to 19.1% for those in the fifth quintile in 2019. 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 20-25% between 2016 and 2019 in the three first equivalised disposable income quintile, it increases by only 3 to 11% in the 4th and 5th quintiles, which includes the 40% most well-off households. The same observation can be made for owner-occupiers with a mortgage or loan: their affordability ratio has increased by 10% in the two least well-off household quintiles and decreased or stayed stable in the 3rd, 4th and 5th quintiles. 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 40% most well-off households. Regarding private market tenants, those belonging to the 20% least well-off households demonstrate very high affordability ratios (around 50%), with a continuous increase since 2016.