Is renting unaffordable in the Netherlands? 1

Transcription

1 ENHR 2013 Conference Overcoming the crisis. Integrating the Urban Environment Is renting unaffordable in the Netherlands? 1 Authors: Marietta Haffner 1,2 and Harry Boumeester 1 1 OTB Research Institute for the Built Environment, Delft University of Technology, Jaffalaan 9, 2628 BX Delft, , m.e.a.haffner@tudelft.nl, h.j.f.m.boumeester@tudelft.nl. 2 College of Design and Social Context, AHURI at RMIT University, Melbourne; CCHPR, Department of Land Economy, Cambridge University. Abstract Tenants in the Netherlands not only pay relatively more for their housing consumption than owneroccupiers but also appear to be subject to Schwabe s law on rent. This law states that households with a lower income are confronted with higher rent-to-income ratios for the purchase of necessary goods, e.g. rental housing. As the Netherlands has a large social rental sector that provides dwellings at below-market rents and with housing allowances, the hypothesis would be that a social rental dwelling with a regulated rent and for which housing allowance is paid to the tenant will be affordable. The aim of this paper is two-pronged. First, it seeks to determine whether renting is affordable for households. Second, it seeks to determine the impact of housing policy on the affordability of rental housing consumption. The usual way to represent affordability in the Netherlands is with the expenditure-to-income ratio. It is shown that with this ratio one cannot say whether housing consumption is affordable for households or not. Therefore, the residual income approach is applied here. If social norms for the relationship between the ongoing housing expenses (e.g., rent) and household income are posited, the residual income approach adequately measures the affordability of rental housing consumption, as the case of the Netherlands shows. This approach to measuring housing affordability also allows us to test the above hypothesis taking the space consumption of households into account. Keywords: Affordability, Expenditure-to-income ratio, Rent-to-income ratio, Residual income, The Netherlands 1 We would like to thank Gust Mariën for making the calculations. 1

2 Introduction The issue of decreasing affordability in housing is back on the agenda in many countries (Gabriel et al., 2005; Haffner and Heylen, 2011; Moore and Skaburskis, 2004; Quigley and Raphael, 2004; Whitehead and Yates, 2007). In the Netherlands, the fact that house prices had been rising for more than two decades has been the topic of numerous discussions (Haffner and De Vries, 2010). This also applies to the decrease in prices since the end of the 2008, when the effects of the Global Financial Crisis showed up on the Dutch housing market. A more detailed picture emerges when affordability is expressed as an expenditure-toincome ratio the ongoing housing expenditures (also called out-of-pocket expenses or cash flows) are then presented as a share of disposable income. As Haffner and Boumeester (2010) concluded for the period , several developments have led to an expenditure-to-income ratio that is much higher, on average, for tenants than for owner-occupiers. This conclusion also applies to 2009 (the latest year for which these data are available), as shown in Table 1. There we see that net rent (gross rent minus housing allowances) came out to less (383 Euro per month) than the net housing expenses for owner-occupiers (mortgage financing expenses minus the income tax effect, amounting to 493 Euro per month). Nonetheless, the net rent-to-income ratio (henceforth called net rent ratio) is on average much higher (23%) for a tenant than for an owner-occupier (16%). Taking local taxes and energy expenses into account, the difference between these tenures is even greater: 36% compared to 26%. The key to the explanation is household income, which was much lower among renters than among homeowners. Its key role should not come as a surprise. For decades, policy instruments rent regulation, housing allowances, and the allocation of social rental housing did and still do predispose the entry of low-income groups into the rental sector (Haffner and Boumeester, 2010). Our aim here therefore is twofold. First, we seek to determine whether renting consumption can be considered affordable for households. Second, we seek to determine the impact of housing instruments on the affordability of rental housing consumption. We do so by testing whether the beneficiaries of housing policy are able to pay an affordable rent. To simplify matters, we focus on the rental sector and exclude expenditure on energy and local taxes, thereby highlighting housing policy. Those excluded expenses should not be overlooked when considering the bigger picture of affordability, however. Their relation to income might vary less than rent does and would thus be less affordable to lower-income households. Rental housing policy instruments that are intended to make housing affordable will be discussed first. Then, in the next section, the net rent ratio will be analyzed by income group and household type. On the grounds of our assumption that the ratio is not useful to determine whether rental housing is affordable, we take recourse to the concept of residual income as a measure of affordability. The methodology section explains how budgets/norms are being used to determine how much income households would need in order to satisfy their consumption needs. That section also presents a norm for housing quality (later in this contribution operationalized as amount of space). In light of both norms, the analysis will show whether a socially acceptable standard of housing quality will be affordable on the basis of an acceptable or reasonable norm for the relationship between rent and income, assuming that a household has received all of the housing subsidies. Rental housing policy The Netherlands has the largest social rental sector of any country in the European Union (32% in 2008; Dol and Haffner, 2010). To do that legacy justice, the Dutch government has been striving to ensure good-quality and affordable dwellings for those who cannot afford to consume housing on market terms (Social Sector Management Order; BBSH). Social housing is thus classified as a public task, although nowadays it is operated by private non-profit housing associations. Bricks-and-mortar 2

3 subsidies for new construction of social rental housing had been available to any landlord (social or private), but these came to an end in the mid-1990s. Then the government made a deal: the annual management subsidies that it owed for 50 years after the construction of a subsidized dwelling were swapped for the government loans that the landlords had to repay. Consequently, any forthcoming subsidies were paid to the landlords as a lump sum in the mid-1990s, thereby allowing the associations to pay back their construction loans early. This operation means that the state is no longer paying any bricks-and-mortar subsidies that would allow rents to be set at below-market gross levels; thus, it implies that the landlords decide about subsidizing rent levels at their discretion (Ouwehand and Van Daalen, 2002; Romijn and Besseling, 2008; Schilder and Conijn, 2012). Table 1 Average housing expenses for tenants and owner-occupiers, all households, in Euro per month and as share of disposable household income, 2009 Tenants Owner-occupiers Gross rent per month* 441 Gross housing expenditure* per 692 month -/-Housing allowances 58 -/-Income tax effect 199 Net rent 383 Net housing expenditure 493 Net rent ratio = net rent / disposable household income 23.0% Net ratio = net housing expenditure / disposable household income +Necessary incidental 212 +Necessary incidental 314 expenditure** expenditure** Total housing expenditure 595 Total housing expenditure 808 Total ratio = 36.1% Total ratio = total housing expenditure total housing expenditure / / disposable household disposable household income income 15.6% 26.0% Annual disposable household 23,220 Annual disposable household 43,580 income*** income*** Number and share of households 2,725, % Number and share of households 4,072, % *) Gross rent and gross housing expenditure includes financing costs, property tax and other property-owner expenditure, such as home insurance fees and ground lease charges. In owner-occupation it excludes owner s maintenance. **) Necessary incidental expenditure includes expenditure on energy and local levies including local property tax which is to be paid by the owner of the dwelling. ***) Net disposable household income, including income from business activities, social benefits and social insurance, child benefit, contractual savings, holiday allowance, sickness funds premiums (employer and employee) or sickness insurance premiums, bonuses. The net disposable household income, which is corrected for rent allowances and income tax effect, for each month is the annual income registered with the tax administration divided by twelve. Source: CBS, WoON 2009; calculations by TU Delft/OTB. Another instrument with the potential to keep gross rents below market levels in most of the rental sector, and sometimes even below cost-price rents, is rent control, which is applicable to the regulated rental stock (Haffner et al., 2009). Ownership of the property (social versus private landlords) has no bearing on whether a particular unit is subject to rent control; that depends on the quality of the dwelling. The rent level at the start of the tenancy contract determines whether or not that unit falls under rent control. Important dates are 1 July 1994 for existing dwellings and 1 July 1989 for newly built dwellings. For contracts after these dates, rents of dwellings with a rent below or at the liberalization threshold are regulated; rents of more expensive dwellings are deregulated or liberalized. On 1 January 2009, rent was regulated up to the amount of Euro per month. Some of these contracts (and consequently the rent levels) may not have been renewed since 1 July 1994 and 1989, respectively. If the assumption is that all contracts have been renewed since those 3

4 dates, the regulated rental stock will amount to 92% of the rental stock at most; that share was higher for stock owned by social landlords (96%) and lower for stock owned by private landlords (about 70%). Dwellings with a regulated rent are subject to the dwelling valuation system. They are allocated points on the basis of their quality characteristics and to some extent the accessibility of local amenities (trains, shops, etc.). The number of points assigned (142 at most) is used to calculate a maximum rent per dwelling. For one with 143 points or more, the rent will be liberalized if it exceeds the liberalization threshold, in cases where the contract had been renewed after 1994 or 1989, respectively. However, rents need not to be set at this maximum (landlords often charge less, thereby essentially subsidizing the rents). They can be set at the maximum at the start of each new contract, i.e., when a new tenant moves in. Landlords do not usually take this option, as demonstrated by the fact that, on average, rents in the private sector were set at almost 85% of the maximum allowed in 2010; in the social sector, they averaged almost 70% of the maximum rent allowed (Companen, 2010). During the contract period, which is indefinite, a maximum rent increase is determined annually by the central government, in accordance with a decision of Parliament (Haffner et al., 2009). This increase is applied on 1 July of each year. Since 2001, the rate of the rent increase per dwelling has been applicable to both the private and the social rental sectors, while the maximum average rent increase is imposed in the social rental sector only (Elsinga and Van Bortel, 2011). Dwellings with a rent above the liberalization threshold are not subject to regulation. Neither the initial level at the start of the rental agreement nor the annual rent increase is regulated; the only applicable rule is that the rent can be increased once a year, on July 1. The liberalization rent level is crucial to housing policy in several other ways. Any subsidies that still exist (e.g., land subsidies and guarantees; see Haffner et al., 2009) will go to dwellings with a regulated rent, most likely properties owned by social landlords. And housing allowances will be available to those in need in the rental sector who live in dwellings with a regulated rent. On average, housing allowances have lowered the gross rent by 13 percentage points, as can be derived from Table 1. In the 1980s, housing allowances became an important instrument of housing policy (Priemus and Elsinga, 2007). In 1997, alongside the policy of keeping rents affordable in a general sense, a second housing allowance policy was launched with the objective of preventing social segregation. The levels of the allowance were increased across the board so that new neighborhoods and new dwellings in regenerated urban areas would be accessible to low-income households in both rental sectors. Housing allowances thus became the core housing policy instrument. About one-third of all tenants received a housing allowance in 2010 (Van den Brakel and Moonen, 2012). The amount of the benefit depends on the rent, on a household s income, age and composition. All tenants who are considered to be in need according to these criteria and who live in rental dwellings with a monthly rent up to the liberalization threshold can get a housing allowance, in principle. The amount will depend on the tenant's age (classified as: up to 23 years; 23-65; 65 plus) and the household composition (one or more persons). Furthermore, the system works on two assumptions: that everyone pays a basic rent (yet three percent of all tenants paid a rent below this basic amount in 2009); and that the amount above the basic rent is subsidized fully up to a certain level (which only applies to 22% of all tenants). Above that rent level, quality discounts are given: a maximum of half or three-quarters of the rent was subsidized in 2009, depending on the tenant's age, household composition, and rent level (accruing to 50% of all tenants). A rent level between these caps and the liberalization threshold permitted a subsidy of 50% for singles and the elderly (benefiting 17% of all tenants; Ministerie van Binnenlandse Zaken en Koninkrijksrelaties, 2013: 114). The shares shown in parentheses imply that the majority of tenants are housed in more expensive rental dwellings, being units exceeding the quality discount rent. 4

5 Housing affordability based on net rent ratio As set forth in the previous section, gross rents are influenced by regulation as well as the choices that landlords make when setting the rents. These gross rents may be lowered by providing housing allowances to eligible tenants. Accordingly, the average net rent ratio amounted to 23% in 2009 (Table 1). An average may turn out to be elusive and irrelevant with respect to individual households, so the average net rent ratio is broken down in Table 2. There, the average for each of the first five income deciles is differentiated according to tenancy in a dwelling with either a regulated or a deregulated rent. The first five deciles consist of the 50% of the households with the lowest income (whereby negative incomes are excluded from the analysis), ranked from lowest to highest. Each group consists of 10% of the households. The income levels associated with the upper limits of the deciles are shown in Table A1 of the Appendix. Tenants are overrepresented in the first five income deciles. As shown in Table 2, the majority of all tenants (about 80%, a little over 2.1 million of the 2.7 million tenants shown in Table 1) live on less than the median disposable household income for all Dutch households. These are the tenants on which the analyses in this contribution are focused. According to Table 2, the lower the disposable income, the higher the expenditure-to-income ratios, implying that Schwabe s law on renting holds true (Hulchanski, 1995). The net rent ratio decreases gradually from about 32% for tenants in the first decile to about 18% in the fifth decile in a regulated rental dwelling; for tenants in one with a deregulated rent, it decreases from about 80% to 34%. On average, the difference between the rental segments is about a factor of two. Accordingly, the regulation of rents will be effective (by producing lower ratios) as opposed to the situation where rents are deregulated. In part, the difference also reflects the fact that households with temporary financial problems are more likely to live in the deregulated rental sector, while those with housing allowances live in the regulated rental sector. Table 2 Average net rent ratio of tenants in the first five income deciles*, according to type of rent, 2009 Renting a dwelling with regulated rent Net rent Number of ratio households Renting a dwelling with a liberalized or deregulated rent Net rent ratio Number of households 1st decile , ,315 2nd decile , ,675 3rd decile , ,632 4th decile , ,386 5th decile , ,899 Single, younger than , ,300 Single, 65 or older , ,900 Single-parent family, younger than , ,100 Couple, younger than , ,000 Couple with child(ren), younger than , ,800 Couple, 65 and older , ,900 Total ,014, ,900 *) are determined on the basis of the income of all households. Source: CBS, WoON 2009; calculations by TU Delft/OTB. 5

6 Net rent ratio inconclusive on affordability The above observations on the net rent ratio give rise to questions about when housing consumption can be considered affordable. Would it be reasonable to spend up to one-third of one's income on housing, in contrast to more than 35%? And would this be true regardless of the household composition? In fact, singles in the regulated segment spend a larger share of their income on rent (more than 24%) than households with a different composition (Table 2). In the Netherlands, the rent ratio is the oldest and most frequently used method to calculate the expenditure of housing consumption it is easy to calculate and the necessary data are commonly available. Nonetheless, this statistic does not provide a natural or meaningful norm for affordability (Hulchanski, 1995; Heylen and Haffner, published on I-First in 2012). The literature frequently cites two rules-of-thumb based on past experience in support of the claim that rent ratios ranging from 20% to 30% are acceptable. From that perspective, if a household s rent ratio lies above 30%, its housing is seen as unaffordable (Hulchanski, 1995). It is assumed that housing expenditures then account for an unacceptably large share of a tenant's income. If this share increases over time, housing becomes less affordable. However, whether in reality it becomes an unbearable burden remains unclear because the percentage has no clear theoretical justification. One could imagine that a rent ratio of 50% might not be a real problem on a high income, while 25% might be unsustainable on a low income. In recognition of such variations, Australian studies use the 30%-norm only for the 40% of the households with the lowest incomes (Yates and Milligan, 2012). The Australian approach determines the extent of housing stress or the affordability of housing consumption on the basis of norms. Norms (incorporating household composition) relate housing expenses to income. They are usually set by the government to determine a reasonable level of housing expenditure, by standards prevailing in society at large. The often-cited definition of affordability formulated by Maclennan and Williams (1990: 9) brings another element, alongside a price or a rent of housing and the income norm, into the affordability equation: a quality norm. Including this standard would ensure that households do not overconsume i.e., that their dwelling is neither too big for them nor of too high quality, and therefore unaffordable. Likewise, the standard would ensure that housing is not underconsumed i.e., too small or of too low quality and therefore affordable (Freeman et al., 2000; Hancock, 1993; Heylen and Haffner, 2012 and published on I-First; Stone, 2006; Thalmann, 2003). Residual income: housing affordability based on total household consumption The absolute level of consumption by households that is, the total set of goods and services they need to live the life to which they aspire determines whether a ratio is deemed too high. The concept of residual income is widely used when it is considered important for a household to have enough discretionary income to participate adequately in social life. This income allows for a sufficient level of consumption of other goods and services after taxes and after expenditures on necessities (e.g., good housing; Hancock, 1993; Heylen and Haffner, 2012; Ritakallio, 2003; Stone, 1998, 2006; Thalmann, 1999). Residual income is that share of net income that remains after subtracting the net rent. The reason to treat rent differently from other expenses (which in our study include all additional housing costs) lies in its budgetary priority: rent is generally a large budget item and one that cannot be reduced in the short term. The main advantage of the concept of residual income over rent ratio is that it expresses the absolute level of possible consumption. This level can be empirically determined for all types of households and compared to normative amounts. In addition, a norm can be determined per household type for its total package of consumption items, including housing. Although such norms are always partially subjective, they can be established and validated for a given type of society. 6

7 Methodology Our calculations to establish a norm for the net rent ratio are based on data provided by the Nibud, a budget research institute (Nibud, 2008; compare Bradshaw and Mayhew, 2010a, b). The Nibud distinguishes between basic and comparative expenditures. Basic expenditures are the minimum amounts required for a certain expenditure item. While reflecting household composition, the level of basic expenditure is independent of the level of household income, as these expenditure are for basic necessities. Comparative (or actual) expenditures are the average amounts that similar households with a similar income spend on particular budget items. Being derived from the Budget Survey carried out by the national bureau of statistics, Statistics Netherlands (CBS), the latter amounts reflect both household composition and income. The Nibud annually updates its recommended net rent ratios for tenants and its net ratios for owner-occupiers. The advised levels are established on the principle that the households having the lowest incomes and paying the maximum amounts for housing (here, the net rent) should still have the means to cover other basic expenditures. For higher-income groups, the level of these other expenses should lie somewhere between the basic and the comparative expenditures so they could put some income into savings. For these higher-income groups, the norm for their maximum rent then equals the average amount of the basic and comparative. In this case, that refers to the level of net rent, given the socially acceptable (instead of minimum) pattern of expenditure for other goods and services. Although this calculation is based on the normative advice of the Nibud, we decided to use this norm in our analyses for lack of other objective standards. We have applied this latter procedure when calculating all income levels above the welfare eligibility norm, which reflects the consensus that households with an average income should be able to participate fully in society. This implies that one should be able to bear the costs. For households with an income up to the welfare eligibility norm the lowest income groups the net rent norm took into account all expenditure at the basic level, with the exception of net rent, as the level in between basic and comparative expenditure was not achievable at that income. The remaining income the difference between income and basic expenditure was then used to calculate the scope for rent. Deriving that amount from the level of household income, we get the norm for the net rent ratio. Note that for households with an income below the ceiling for social welfare, allowing for basic levels of expenditure results in very low rent ratio norms. This procedure has been applied to calculations for all income levels that correspond to the lower limits of the income deciles for all households. All renters in any given decile were subsequently allocated the same rent ratio norm that had been calculated for the households situated at its lowest level. The norm ratio calculated on the basis of the lowest budget in the Nibud classification was used for the households in the first (lowest) decile (or lower if their income was below the maximum level to qualify for welfare benefits, as explained above). The calculated norms can subsequently be compared with the observed rent ratios of the tenants. This comparison has been carried out with data from the WoON 2009, which was the most recent database available when conducting the analyses. The WoON 2009 is the Dutch crosssectional Housing Survey for which more than 60,000 households were interviewed. Weighting factors were applied to the sample to make the results valid for all Dutch households, of which there are almost seven million. The income data in the database were derived from the Dutch tax administration and were coupled to the survey data. Unaffordable rent for low-income subsidy recipients The socially acceptable norm for the net rent ratio per household was confronted with the actual net rent ratio from the WoON 2009 database, and the results are shown in Table 3. The comparison suggests that rent regulation is associated with better affordability (1 January 2009). While for 46% of the tenants in the first five (in fact, the first four) income deciles the rent is unaffordable, according to the socially acceptable standard, in the regulated rental segment, by contrast, 68% of 7

8 the tenants in the first five income deciles in the deregulated rental sector pay an unaffordable rent. These shares amount to 37% of the tenants in all income deciles in absolute numbers, almost one million tenants (Table 3) versus 2.8 million tenants (Table 1) whose rent can be considered unaffordable when compared to the norm. Apparently, tenants are spending more than the norm on rent and less than the norm on other housing consumption. When the household type is considered, the pattern takes on more detail. It appears that unaffordable rents are paid in the regulated rental segment by more than half of the elderly singles (51%), and more than half of the single-parent households (56%) pay an unaffordable rent. In the deregulated rental segment, unaffordable rents are pronounced among couples younger than 65 years of age, either with (90%) or without children (81%). In sum, rent regulation in itself does not fully address the problem of affordability among lower-income tenants. Table 3 Share of tenants in the first five income deciles* paying an unaffordable net rent (net rent above the income norm), according to type of rent, income decile, and household type, 2009 Renting with a regulated rent Renting with a deregulated rent Number of households 1st decile ,000 2nd decile ,000 3rd decile ,100 4th decile ,700 5th decile ,200 Single, younger than ,500 Single, 65 or older ,800 Single-parent family, younger than ,800 Couple, younger than ,600 Couple with child(ren), younger than ,000 Couple, 65 and older ,300 Total ,000 *) are determined on the basis of the income of all households. Sources: CBS, WoON 2009, and Nibud (2008); calculations by TU Delft/OTB. The effect that other subsidies might have on affordability would need to be covered in the analyses. For the regulated rental segment, Table 4 shows the share of tenants with affordability problems according to the type of landlord (social versus private). With regard to its effects on household income, social renting does not seem to create more affordable housing than rent regulation by itself. However, the pattern across the deciles in both social and private renting is slightly different. In social renting, fewer tenants in the first two income deciles (a four to six percentage-point difference in each decile) have an affordability problem than their counterparts in private renting. This difference suggests a small effect of the subsidization provided by social landlords for households with a very low income. In the third and fourth decile, it is the other way around. When analyzed by household type, social renting mirrors the pattern of the regulated rental segment (Table 2). Indeed, that may be expected, given that the majority of the social rental dwellings have a regulated rent (see above). Another subsidy is housing allowance, which the analysis of the regulated rental segment takes into consideration, though ignoring the distinction between social and private renting (Table 5). It turns out that housing-allowance recipients (about half of the tenants in the first five income deciles) are more likely to be able to afford their housing expenditures (59%) than non-recipients (67%). As with the distinction between social and private landlords, fewer recipients in the first two 8

9 income deciles pay rent at a level they cannot afford than non-recipients do. Compared to those tenants who can afford their rents, those whose rents lie above the norm are more likely to pay a rent below the caps instead of a lower rent being a rent below the quality discount limit (see above for the definitions that are given in the description of the rent allowance system). In other words, the tenants who pay an unaffordable rent are more likely to live in dwellings with a relatively high rent than in low-rent dwellings (not shown in tables). Table 4 Share of tenants in the first five income deciles* in dwellings with a regulated rent paying an affordable or unaffordable net rent, according to type of landlord, income decile, and household type, 2009 Unaffordable Affordable Total number of households SOCIAL RENTING 1st decile ,000 2nd decile ,000 3rd decile ,900 4th decile ,300 5th decile ,400 Single, younger than ,500 Single, 65 or older ,300 Single-parent family, younger than ,300 Couple, younger than ,300 Couple with child(ren), younger than ,100 Couple, 65 and older ,000 Total ,799,6000 PRIVATE RENTING 1st decile ,000 2nd decile ,700 3rd decile ,500 4th decile ,000 5th decile ,400 Single, younger than ,200 Single, 65 or older ,300 Single-parent family, younger than ,100 Couple, younger than ,700 Couple with child(ren), younger than ,900 Couple, 65 and older ,300 Total ,400 *) are determined on the basis of the income of all households. Sources: CBS, WoON 2009, and Nibud (2008); calculations by TU Delft/OTB. Causes of unaffordable rent unraveled The three types of subsidization do not fully redress the issue of unaffordable rents. In that light, it is instructive to examine three possible causes of affordability problems more closely: insufficient income; setting the norm for a socially reasonable level of other consumption too high (resulting in an inadequate budget for rent); and overconsumption of rental housing. 9

10 Table 5 Share of tenants in the first five income deciles* in dwellings with a regulated rent with an affordable or unaffordable net rent ratio, according to housing allowances, income decile, and household type, 2009 Unaffordable Affordable Total number of households RECIPIENT OF HOUSING ALLOWANCE 1st decile ,500 2nd decile ,300 3rd decile ,200 4th decile ,900 5th decile ,000 Single, younger than ,600 Single, 65 or older ,200 Single-parent family, younger than ,800 Couple, younger than ,200 Couple with child(ren), younger than ,700 Couple, 65 and older ,300 Total ,800 NON-RECIPIENT OF HOUSING ALLOWANCE 1st decile ,300 2nd decile ,200 3rd decile ,800 4th decile ,800 5th decile ,200 Single, younger than ,200 Single, 65 or older ,400 Single-parent family, younger than ,600 Couple, younger than ,700 Couple with child(ren), younger than ,300 Couple, 65 and older ,000 Total ,032,200 *) are determined on the basis of the income of all households. Sources: CBS, WoON 2009, and Nibud (2008); calculations by TU Delft/OTB. As Table 6 shows, out of about 255,000 tenants whose income is below the national social minimum (and are thus eligible for welfare benefits), 90% are paying a rent at a level they can ill afford. The corresponding figure for tenants with a minimum income or higher is 39%. Not surprisingly, these tenants are distributed across the first three deciles. These households are considered to live unaffordably because their income is too low by the standards for income support. That observation suggests that they have an income problem rather than a housing problem. The share with an income problem is the highest (94%) among couples with children and the lowest among couples 65 years or older (yet still 81%). Analysis of the sources of income of households living in independent units (not in the table) reveals that the self-employed and students are overrepresented in the group with an income below the minimum, compared to the group with an income of at least the official minimum. There are also pensioners with an income below the minimum. The reason is that to receive a full state (social security) pension, one has to have lived in the Netherlands for the entire 50-year period between the age of 15 and 65. For every year of absence, the social security benefits are reduced by two percent. Last, but not least, there are households with a paid job that earn less than the minimum income or 10

11 are suffering from temporary effects, for instance being without a source of income before receiving wages or benefits. Table 6 Share of tenants in the first five income deciles* in dwellings with a regulated rent with an affordable or unaffordable net rent ratio, according to income level, income decile, and household type, 2009 Unaffordable Affordable Total number of households BELOW MINIMUM INCOME 1st decile ,700 2nd decile ,200 3rd decile ,300 4th decile th decile Single, younger than ,600 Single, 65 or older ,200 Single-parent family, younger than ,300 Couple, younger than ,000 Couple with child(ren), younger than ,500 Couple, 65 and older ,800 Total ,300 MINIMUM INCOME AND ABOVE 1st decile ,000 2nd decile ,300 3rd decile ,600 4th decile ,600 5th decile ,100 Single, younger than ,200 Single, 65 or older ,400 Single-parent family, younger than ,100 Couple, younger than ,000 Couple with child(ren), younger than ,500 Couple, 65 and older ,500 Total ,757,700 *) are determined on the basis of the income of all households. Sources: CBS, WoON 2009, and Nibud (2008); calculations by TU Delft/OTB. When unaffordable rents do not result from an income problem, they might be considered an expense-norm problem, the socially reasonable norm for consumption expenses per household type. Those normative amounts are based on the average between minimum and comparative expenditures per budget item (according to the Budget Survey) per household type, as explained above. When instead of using this socially reasonable norm the socially minimum norm is applied, the share of households that live unaffordably decreases slightly. As shown in Table 7, not 46% but 42% of all tenants in the first five income deciles pay rent at a level they cannot afford. The difference between the application of both norms can be found in deciles 2 and 4, implying that for households in the first decile an expense pattern based on the socially reasonable norms cannot be considered attainable. As their expenses for other consumption items are already at the minimum level, they can in principle not be decreased to create scope for a higher rent within the given household budget/income. The differences in normative amounts are shown in Table A2 in the 11

12 Appendix. In the third decile a household with a minimum consumption pattern could spend 38% of its income on rent, while the household can spend 29% of income based on the socially reasonable consumption pattern. A few households did move out of the unaffordable group, but that does not show up in the share of 29%. In the fourth decile, this difference in norms shows a clear decrease in the size of the group that is living unaffordably (from 19% to 7%). A household with a minimum consumption pattern could spend more than 40% of its income on rent, while at the level of a socially reasonable consumption pattern, its net rent ratio norm amounts to 30%. The scenario of unaffordability whereby the household pays more rent than the norm allows for, based on a minimal package of other consumption would put these households at risk of social exclusion over time. They would not be able to participate in normal activities. The at-risk groups of households consist especially of single parents (51%), elderly singles (48%), and couples under 65 and couples with children (yet still 44%). Table 7 Share of tenants in the first five income deciles* in dwellings with a regulated rent, paying an unaffordable rent (net rent quote higher than the ratio) based on the socially accepted budget and minimum budget, respectively, according to income decile and household type, 2009 Share of households Compared with ratio based on socially accepted budget Number of households Share of households Compared with ratio based on minimum budget Number of households 1st decile , ,600 2nd decile , ,500 3rd decile , ,000 4th decile 19 62, ,800 5th decile Single, younger than , ,300 Single, 65 or older , ,900 Single-parent family, younger than , ,900 Couple, younger than , ,900 Couple with child(ren), younger than , ,000 Couple, 65 and older 47 81, ,900 Total , ,900 *) are determined on the basis of the income of all households. Sources: CBS, WoON 2009, and Nibud (2008); calculations by TU Delft/OTB. When unaffordable rents cannot be attributed to either an income norm or the socially reasonable expense norm, the cause may lie in overconsumption of rental housing. The results underpinning this assumption are presented in Table 8. More than half of the tenants in the first five income deciles are considered to be overconsuming, that is, living in dwellings with more rooms than the norm. But there is no national norm of maximum housing quality to be consumed. Therefore, we had to design a norm, albeit a rather arbitrary one: it stipulates one living room, one bedroom (for the parent), one family room/study (except for singles), plus one bedroom per child. Of the tenants who overconsume according to this norm, 44% pay a rent that is deemed unaffordable; of those who do not overconsume, 48% pay an unaffordable rent. In other words, those paying an affordable rent are more likely to overconsume, while those paying an unaffordable rent are less likely to do so. By taking income in combination with unaffordable rents, overconsumption is found among the households with a lower income: 76% of those in the first decile and 67% of those in the second. 12

13 Apparently, it is especially the tenants with a lower income who live unaffordably and overconsume. In comparison with the situation of higher-income tenants, this suggests that the housing market does not allow low-income tenants to choose to live in smaller dwellings. Conceivably, the housing object subsidies of the past have subsidized too much space. From the point of view of household types and affordability, especially single parents are likely to overconsume (55%). This would not come as a surprise if the explanation were that a second parent has left the home. Singles 65 years of age or older (50%) and couples younger than 65 years of age with children (48%) are also more likely to overconsume than the average (44%). In the latter case, possibly, the expectation of a growing family may play a role. Table 8 Share of tenants in the first five income deciles* in dwellings with a regulated rent with an affordable or unaffordable net rent ratio, according to number of rooms, income decile, and household type, 2009 Unaffordable Affordable Total number of households NUMBER OF ROOMS ABOVE NORM ( too many rooms) 1st decile ,700 2nd decile ,600 3rd decile ,700 4th decile ,500 5th decile ,700 Single, younger than ,500 Single, 65 or older ,900 Single-parent family, younger than ,400 Couple, younger than ,100 Couple with child(ren), younger than ,500 Couple, 65 and older ,600 Total ,129,200 SUFFICIENT NUMBER OF ROOMS 1st decile ,100 2nd decile ,000 3rd decile ,200 4th decile ,170 5th decile ,500 Single, younger than ,200 Single, 65 or older ,700 Single-parent family, younger than ,900 Couple, younger than ,800 Couple with child(ren), younger than ,500 Couple, 65 and older ,700 Total ,800 *) are determined on the basis of the income of all households. Sources: CBS, WoON 2009, and Nibud (2008); calculations by TU Delft/OTB. Households that are considered to consume more housing quality than the norm may be left out of the analyses. Likewise, households that are considered to have an income problem rather than a housing-expense problem (income below minimum) may also be left out. So doing allows us to identify those tenants in the first five income deciles who are potential recipients of all of the housing subsidies, who do not overconsume housing, and who have a minimum income or above, 13

14 but are still living unaffordably according to the socially reasonable norm. This yields a group of more than 171,000 tenants who live in a rental dwelling with a regulated rent in the social sector and receive a housing allowance. Thus about 17% of the tenants in the first five income deciles turn out to live unaffordably (compared to the one million in Table 2). This is true of roughly eight percent of all tenants in the first five deciles (compared to two million in Table 2) and about six percent of all tenants (compared to 2.7 million in Table 1). One in three of these tenants with an unaffordable rent is a single parent, most of whom are found in the second and third tertile (not in the table). Nearly one in five is single, younger than 65 years of age, and mostly in the first income decile. This exercise is not intended to define away any affordability problems in the rental sector (from 37% to six percent). Rather, it is meant to show that the affordability problem has diverse causes. In short, tenants may find themselves having to pay a rent they cannot afford in spite of the (potential) subsidies for housing. Conclusion In this paper we have argued that the use of the net rent ratio to indicate the rent burden of households, as is customary in Dutch housing research, does not shed light on the affordability of their housing situation. Instead, we have used the concept of residual income to analyze the affordability of rented housing. As our point of departure we took normative budgets showing residual income, i.e., the expenses for all consumption apart from housing, as calculated by the Nibud, a budget research institute. These budgets are based on a socially acceptable consumption pattern. Whatever amount of household income that remains after deducting the expenditure for these goods and activities is then assumed to be available to spend on rent. Expressed as a percentage of income, this forms the normative rent ratio that can be determined for all of the household types distinguished here. Comparison of these normative amounts (calculated as ratios) with the actual rent ratios yields a disturbing result: 37% of all tenants were paying more than they could afford per 1 January Moreover, especially the lowest-income households had to shoulder the heaviest burdens. When the effects of three types of housing subsidies, overconsumption, and income problems are unraveled, we find a group of tenants who, based on the norms: have sufficient income, do not overconsume, live in a rent-controlled dwelling owned by a social landlord, and receive a housing allowance but still cannot afford their housing costs. About six percent of all tenants fall into that group. This finding is the result of the analyses carried out as part of our second aim: to determine whether housing policy contributes to the affordability of rental housing consumption. The results suggest that it does. But they also suggest that it does not prevent situations in which the tenants cannot afford their housing costs. We expected that this would not be the case, given the structure of the housing stock and the wide range of housing policy instruments. Our first aim concerned how to determine the affordability of rent. As discussed, the residual income method seems to be a sensible one, as it takes into account all consumption expenses. To determine affordability, benchmarks are needed. A norm is needed to ascertain when expenses are too high in relation to income, so that measures can be taken to prevent other consumption from being squeezed. And a norm is also needed to determine which level of quality would be considered reasonable. In any event, the use of norms leaves some scope for subjectivity. Households living unaffordably according to those norms may not necessarily be doing so from their own point of view. However, norms allow us to make estimates of the problem. For instance, we can estimate the size of the group of tenants at risk of living unaffordably, certainly when the norm is based on a minimum package of consumption instead of on one deemed to be socially reasonable. If those households spend more on housing and less on other items, in the long term they will be at risk of poverty, implying an inability to participate in the normal activities comprising a socially acceptable life. It should be recalled that the rapidly increasing energy costs, when included as housing expenses, will magnify the affordability problems that are identified here. 14

15 Once the diagnosis of unaffordable renting has been made, the question arises whether unaffordability comes about because the housing expenses are too high in relation to the socially reasonable norm (a housing problem), because the income is too low (an income problem), or because too much' quality is being consumed (overconsumption). At that point, politics would come into play. To begin with the last problem, it might be difficult to resolve overconsumption, since dwellings come in certain sizes (and possibly have been subsidized too much in the past) and moving costs are rather high. Nonetheless, this is a problem that households confronted with rent levels they cannot afford may be able to solve themselves if their financial situation becomes urgent enough. In the event that expenses are too high or income is too low, the outlook for the Netherlands would be quite gloomy. Indeed, the country has entered its third recession since 2008, which has been met by government austerity plans involving direct or indirect rent increases. One of the proposed measures is an annual increase of rents in the regulated rental sector by more than the inflation rate. Another one is a new levy on landlords, which would force social landlords to raise their rents toward the maximum allowed per level of quality. 15

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