Income Distribution and Housing Expenses in Flanders and the Netherlands

Transcription

1 Income Distribution and Housing Expenses in Flanders and the Netherlands Paper to be presented at the ISA International Housing Conference in Glasgow August 2009 Kristof Heylen & Marietta Haffner Kristof Heylen, Higher Institute for Labour Studies (HIVA), Catholic University of Leuven, Parkstraat 47, 3000 Leuven, Tel , Marietta Haffner, TU Delft, OTB Research Institute for Housing, Urban and Mobility Studies, Jaffalaan 9, 2628 BX Delft, , Income Distribution and Housing Expenses in Flanders and the Netherlands 1

2 Abstract This study explores the role of housing in income inequality and poverty in Flanders (northern part of Belgium) and the Netherlands in It analyses the distribution of disposable income before and after housing expenses by comparing disposable income with equivalent residual income. The Gini coefficient was used to measure income inequality, wile a poverty threshold was set at 50% of the median equivalent income. The most significant conclusion is that income inequality and poverty increase in both countries when equivalent disposable income is corrected for housing expenses. The results for Flanders and the Netherlands differ according to tenure. In the Netherlands, after deduction of housing expenses, the rise in poverty rate and income inequality was found to be greater among homeowners than among tenants, whereas in Flanders the opposite applied. In both countries the percentage of owner-occupiers on or below the poverty threshold, after deduction of housing expenses, was lower for outright homeowners. The housing allowance, which is generally granted to low-income households in the rental sector, plays a greater role as a subsidy mechanism in the Netherlands than in Flanders. Accordingly, the inequality gap after deduction of housing expenses turned out to be relatively small in the Netherlands compared with Flanders. In the case of tax benefits stemming from, say, mortgage interest relief the situation was reversed, i.e. the inequality gap was wider in the Netherlands than in Flanders. These conclusions also applied to the households on or below the poverty threshold. Key words: income inequality, poverty, housing, Flanders, the Netherlands 1. Introduction National and regional governments need clear insight into income distribution. This not only provides policymakers with a current picture of income inequality, it can also help them to judge the effectiveness of the wealth redistribution policy, which normally operates via the tax and social system. Secondly, a clearer understanding of the size of the group living on and below the poverty line provides an idea of the relative prosperity at the lower end of the income ladder. International 2

3 analyses enable wealth redistribution policies to be assessed across a broad geographical and temporal spectrum, but they can only be truly meaningful if the methodology is consistent. Income distribution in society is usually measured in terms of the income that remains after deduction of tax and social insurance contributions and the addition of supplementary payments, such as child benefit. This approach delivers a picture of living standards on the basis of household expenditure on consumer goods and services. In this paper we focus primarily on the role of the housing situation expenditure on a rented or owner-occupied dwelling, calculated with the housing expenses concept in income distribution. Needless to say, outright homeowners are in a far more advantageous position than tenants and mortgagors as they no longer have to cope with possibly high monthly housing costs. Tenants in the social rented sector are also at an advantage if they pay below-market rents. Studies that analyse only disposable income take no account of these advantages. This is why our study is based on after-housing expenses or residual income. We used two indicators to sketch out the relationship between income distribution and the housing situation: one for income inequality and one for poverty. The aim of this study was therefore, first of all, to show clearly how and the extent to which income inequality and poverty figures are influenced by the housing situation. For instance, what do poverty and income inequality mean in the context of tenancy or owner-occupation? We also examined the role of the in the expenditure approach visible subsidy mechanisms housing allowances and mortgage interest relief in income inequality. It should be noted that these mechanisms relate to only part of the government subsidy system, viz. the housing cash flows to and from households. A different approach would be needed for a full picture of the redistribution of government resources in matters of housing policy. Tenure distribution, which is partly determined by institutional factors, differs significantly from country to country. So, to ensure consistency in comparative international analyses, it is essential to correct disposable income for housing (Fahey, 2004; Ritakallio, 2003). The comparison between Flanders and the Netherlands the second aim of this study is an interesting case in point, given the striking differences in the housing profile, particularly in the organisation of the sectors of the housing market. At the end of the twentieth century a large ownership sector emerged in Flanders. From a European perspective the private rental sector in Flanders is medium-sized and the social rental sector is small. In the Netherlands, on the other hand, the owner-occupier sector, though the largest sector in the housing market, is fairly average by European standards. The Netherlands has the largest social rental sector in the world and a small private rental sector. This study elaborates on research by Heylen & Haffner (2008) which was conducted under the auspices of Steunpunt Ruimte en Wonen (space and housing research centre), an initiative of the Ministry of the Flemish Community. 3

4 We begin by explaining why we opted for an approach based on after-housing-costs or residual income. We then discuss the application of the concepts of residual income, income inequality and poverty indicator. In the third section we address the ownership sectors, and in the fourth, the housing policy situation in Flanders and the Netherlands. The paper ends with outcomes and conclusions. 2. Housing in relation to income distribution and poverty There is no standard international method (like the National Accounts which calculates national income) to assess income distribution in society at specific moments or over periods of time. Various choices need to be made (Smeeding, 2000). First, one has to decide whether to measure income or consumption and whether or not to include direct and indirect subsidies. A choice always has to be made in the distribution of disposable income across households or persons. Some authors, such as Krueger & Perri (2002), regard consumption as a better indicator than income for inequality and living standards, the idea being that income volatility at least in theory is ironed out via the capital market, thereby leading to even consumption through time. Other authors (Smeeding et al., 1993; Gardiner et al., 1995) argue that the results of research based on the relative distribution of disposable household income may be misleading since living standards are also influenced by non-cash or in-kind benefits or income from housing, education, childcare and healthcare. There are two ways to take account of the role these provisions play, e.g. benefits from housing in the household income (Frick & Grabka, 2003; Gardiner et al., 1995; Saunders & Siminski, 2005; Fahey, 2004; Ritakallio, 2003). First, non-cash income can be added to the disposable income. Ownership of a home constitutes noncash income for owner-occupiers while below-market rents constitute non-cash income for tenants in the social rental sector. Omission of this non-cash housing income can distort the results of comparisons of income at national and international level. The national standard of living will be affected if, for example, the higher income groups profit more, in relative terms, from in-kind income. There is absolutely no reason to assume that in-kind income is distributed in the same way as disposable income in any part of society. Non-cash income can be measured by an economic concept known as comprehensive income. When applied to housing, comprehensive income embraces the disposable cash income from, say, earnings as well as the non-cash or in-kind income that owner-occupiers enjoy by virtue of the fact that they pay no rent. In-kind income for owner-occupiers can be calculated by, for example, fixing an imputed rent, by converting home equity into an annuity flow, or by calculating the user costs of capital for the home (Van den Bosch, 1998; Chotikapanich et al., 2003; Gardiner et al., 1995). Imputed rent is calculated on the basis of the commercial rent that would be paid for an identical dwelling on the private rental market minus repair and maintenance costs. A fictitious annuity is calculated by making 4

5 assumptions about interest rates and the remaining lifespan of the dwelling. It is important when applying comprehensive income to take account of appreciation in the value of the dwelling, as this will contribute to changes in the future consumption options of the owners. In the case of tenants living in a social dwelling or a dwelling with a below-market rent the difference between the paid rent and the market rent is added to the income. Comprehensive income also includes personal subsidies. Finally, user costs of capital are also based on comprehensive income and are expressed as a return on equity that is invested in the home (Haffner, 1999; Yates, 1994). The second method is to convert non-cash income to lower household expenditure on housing consumption. Again, the favourable position of outright owners springs to mind (Van den Bosch & Van Dam, 2001). Homeowners with a paid-up mortgage will enjoy a better standard of living than mortgagors and tenants, assuming they all start out with equal incomes in the first place. This similarly applies albeit to a slightly lesser extent to tenants who pay a subsidised rent in the social rental sector. In this method housing expenses make a more or less fixed claim on the income a state of affairs that is not infrequently used to justify a different approach to expenditure on housing than expenditure on, say, food and clothing. A privately owned home is regarded as a sort of insurance against poverty at a later age. The principle is similar to that of a statutory company or private pension: people make investments (contributions) during their active life and enjoy the returns during retirement (Ritakallio, 2003). The approach in which housing expenses are deducted from disposable income ( before-housing-cost income ) is called after-housing-cost income. It is used in the UK (Atkinson, 1993; Johnson & Webb, 1992; DSS, 1993) and Australia (Harding & Szukalska, 2000; Harding et al, 2001) to measure poverty, but it is also used to measure income inequality (Ritakallio, 2003; Dewilde & Raeymaeckers, 2008; Van Dam et al., (2002), De Decker et al., (2008)). In this approach the rent is deducted from the disposable income of tenants and the mortgage interest and repayments are deducted from the disposable income of homeowners. This makes it easier to compare the income situation of mortgagors with the income situation of outright homeowners. It may be assumed that outright homeowners will have more disposable income in relative terms than mortgagors. This approach also takes implicit account of in-kind subsidies for social housing in the income distribution, so that the situation of private tenants can be compared with the situation of social tenants with below-market rents. Subject-based housing allowances are also comparable with the principle of a social rent (Gardiner et al., 1995). Though the purpose of both of these approaches can be the same to paint a picture of income before and after housing costs the way in which they are applied has an effect on the outcomes. Comprehensive income is generally higher than residual income (amounts are added to the disposable income). Though it shows the potential cash and non-cash income at a household s disposal, it does 5

6 not show what families actually spend. Hence, it maps out the risks for owner-occupiers as investors as opposed to tenants. Changes in the value of the dwelling (equity) will cause changes in comprehensive income, while the mortgage interest and repayments and the residual income remain the same. Ritakallio (2003) argues that adding the full imputed rent to the income creates a risk that the standard of living of mortgagors will be overestimated. They do, after all, face considerable housing expenses as they still have to pay off a loan. Neither potential income nor residual income can indicate whether households run into problems when financing other consumption. A poverty indicator will be a way to provide clarification. 3. Applying the concepts of residual income and inequality Our study revolves around income before and after housing expenses because the required data are readily available. We regard homeownership as a source of expenditure rather than a source of income. In doing that in the correction for the housing situation we do not take account of the quality of the dwellings or the preferences of households. Hence, we cannot distinguish between families that have a relatively low residual income because they choose to spend a large part of their income on a dwelling and families who have a low residual income simply because they have a low disposable income. Nor can we ascertain whether families with the same composition enjoy different housing comfort in exchange for the same residual income (Gardiner et al., 1995; Ritakallio, 2003; Thalmann, 2003). When we compare different sectors of the housing market, we do however know that there are differences in the quality of dwellings. Recent research has shown that, in Flanders, external structural quality, physical condition and level of comfort are significantly lower in the private than in the social rental sector. The privately owned dwellings score, on average, the highest on these counts. But there are also clear differences in quality and comfort in the homeownership sector itself (Heylen at al., 2007). This also applies to the Netherlands (Meijer & Thomsen, 2006). The highest average repair costs in 2000 were run up by pre-war single-family dwellings in the owner-occupier sector and pre-war private rental dwellings. Most of the problems relating to the state of the dwelling occurred in pre-war private rental housing, but the differences were small compared with similar dwellings in other sectors. No great differences in comfort were found between social and private rented dwellings (Haffner et al., 2009). There were more dwellings of relatively low and relatively high quality in the private rental sector than in the social rental sector. Our approach does not take account of these differences in comfort. Another shortcoming in the before- and after-housing-cost approach is that, if two or more countries are being compared, a problem may emerge regarding the way in which dwellings are financed. In some regions, e.g. Southern Europe, people resort far less to debt capital (mortgages) to finance 6

7 homeownership. The proportion of outright homeowners is over 60% in Greece, Italy and Spain and below 30% in France, the UK and Germany (Dol & Haffner, 2001). In Flanders and the Netherlands the figure is 41% and 7% respectively. Fahey (2004) maintains that the mortgage payment burden does not present a clear picture of the percentage of available resources that is spent on the purchase of the home Applying the concept of housing expenses and residual income Before we can determine residual income we need to define disposal income. In this study disposable income is the average monthly household income that remains after deduction of tax and social insurance contributions and the addition of any income-replacement, supplementary social insurance benefits and welfare payments. Table 1 shows the different constituents of residual income: housing expenses, visible state support for housing, and disposable household income. In the rental sector gross housing expenses consist of the gross rent. The net rent is calculated by deducting any housing allowance. In the owner-occupier sector net housing expenses are determined by the mortgage burden, which consists of interest payments including tax relief (1), mortgage repayments and/or endowment premiums. To maximise comparability the extra costs that a landlord incorporates in the rent are included in the gross housing expenses of the owner-occupier. Typical examples are building insurance (the Netherlands), the owner s share of maintenance, ground rent (the Netherlands), and the property tax that the owner pays (Flanders and the Netherlands). The residual income is calculated by deducting the net rent or net housing expenses from the disposable household income. Table 1: Composition of after-housing costs* income for tenants and owner-occupiers 1 Tenant Owner-occupier Gross rent** Gross housing expenses*** - Housing allowances - Fiscal effect = Net rent = Net housing expenses Disposable income Disposable income - Net rent - Net housing expenses = Residual income = Residual income See Appendix 1 for a breakdown of the items. *) Technically this concept should be called income after housing-expenses income, as it relates to expenses that are not necessarily economic costs, i.e. offers expressed in cash terms. **) Gross rent includes any costs that the landlord incorporates in the rent, such as maintenance, property tax, etc. Gross rent could be set lower than the market rent as a result of subsidy, rent regulation or acceptance of a loss (social landlord). ***) Gross housing expenses include the amounts required to finance the dwelling, property tax and other homeowner expenses, such as insurance, ground lease and the owner s share of maintenance. 7

8 In order to facilitate comparisons between different types of households, disposable income and residual income were corrected for household size on the basis of the OECD equivalence scale. Though the OECD scale is basically designed for corrections to disposable household income, we used it also to correct residual income because there was no better alternative. One may, however, safely assume that housing offers greater economies of scale than many other goods and services. For example, every household needs a bathroom whether it is used by the whole family or only one person. A correction performed with the OECD scale therefore results in an underestimation of the residual equivalent income. Finally, it is important to remember that the concept of housing expenses was applied to cash flows that households need to generate in order to fund their housing consumption, minus direct (housing allowance) or indirect (mortgage interest relief) state support. The lowering of the gross housing expenses was treated in the analysis as a tax benefit or as fiscal support for owner-occupiers. This approach also takes account of implicit subsidies, but it cannot distinguish them as in the case of, benefits, allowances etc. (Haffner, 1999) Application of the concepts of income inequality and poverty Income inequality was mapped out with the Gini coefficient, the most commonly used method for measuring income inequality. The Gini coefficient can be graphically interpreted with the aid of the Lorenz curve. The value always lies between 0 and 1, in which 0 stands for total equality and 1 stands for total inequality. The higher the Gini value, the greater the income inequality. The numerator is the sum of the absolute values of the income differences between individual households and all other households. This sum is divided by 2, because the income difference between every two households is calculated twice (2). The numerator a dispersion measure is also divided by the average income, thus making the Gini coefficient scale-independent. As a result, the Gini value remains the same whenever an income is multiplied by a constant. Scale-independence is regarded as an essential factor in obtaining an accurate measure of independence (Allison, 1978). The Gini coefficient was preferred above other popular methods for measuring inequality such as the 80/20 ratio and the relative interquartile range (3), because the first covers the entire population whereas the other two cover only a part thereof (Allison, 1978; van den Brakel-Hofmans, 2007; see also Frick & Grabka, 2003). We used the 50% norm for the poverty threshold. This norm is used in many poverty studies (Saunders et al., 2002; Harding et al., 2001). A household is deemed to live in poverty if its equivalent income is lower than 50% of the median equivalent income. This definition is in line with the Eurostat norm, which is used in the EU to monitor poverty and compare countries. According to 8

9 the Eurostat norm, families are at risk of poverty when the equivalent income is lower than 60% of the median income Databases We used the Housing Survey 2005 of the Kenniscentrum voor Duurzaam Woonbeleid (knowledge centre for sustainable housing policy) to calculate the distribution and poverty measures for Flanders. This survey covers 5,216 Flemish households. A weighting factor was applied for the distribution of dwelling types and districts. If the housing market is split according to tenure, the numbers are still high enough to deliver accurate and reliable results. For the Netherlands we used the WoON 2006 Housing Survey, conducted by the Department of Housing. The income data from the tax records for 2005 were linked to the survey data. About 64,000 households were interviewed, approximately 54,000 of whom lived in independent units (4). Weighting factors were applied to the sample to obtain results for all Dutch households (almost seven million). 4. Sectors of the housing market Before we discuss housing policy relevant to housing expenses, we shall take a brief look at some trends in the homeownership sector in Flanders and the Netherlands. In 2005 the tenure in almost three out of every four Flemish households was owner-occupier, reflecting a distinct upward trend. In % of households were owner-occupiers. By 2001 this figure had risen to 73%. At the same time, 18.5% of Flemish households lived in the private rental sector and 5.6% in the by European standards small social rental sector. Compared with 2001 the social rental sector was growing and the private rental sector was shrinking accordingly. In 2006 the owner-occupier sector, with a market share of almost 56% was the largest sector in the Netherlands (see Elsinga et al, 2007). The rental sector was dominated by social landlords, the housing associations, whose market share dropped from almost 37% in 2002 to just over 35% in Dutch housing associations are private government-sanctioned institutions with a social remit, viz.: to provide affordable housing for households with limited means. The private rental sector, which dominated the housing market in the first half of the twentieth century, has become the smallest sector in 2006, with a market share of 9%. The main players in this sector are small private landlords offering cheap dwellings and institutional investors offering expensive dwellings. Figure 1 shows the distribution of the income groups in the housing market sectors according to tertiles of equivalent disposable income. In the case of Flanders outright homeowners are 9

10 overrepresented in the first tertile. This might be explained by the fact that 61% of the people in this group are retired. As might be expected, the largest proportion of social tenants is in the first tertile. Private tenants are more or less equally spread across all three tertiles and mortgagors are clearly in the majority in the third. In the Netherlands mortgagors, at 71%, are also overrepresented in the third tertile, while the spread for private tenants, at around ten percent, is more or less even. The percentage of mortgagors is higher in all tertiles for the Netherlands than for Flanders. The situation is entirely different for outright homeowners with an even spread of between six and eight percent in the Netherlands as opposed to a steady decline in Flanders. As in Flanders, households in the social rental sector are overrepresented in the first tertile. The share is lower in the second tertile, but it still stands at a substantial thirteen percent in the third. Hence even in the third tertile there are more tenants in the social sector than in the private sector. Figure 1 Housing market sectors (in %) according to tertiles of equivalent income in Flanders (2005) and the Netherlands (2006) 100% 80% 60% 40% Outright homeowners Mortgagers Social rental sector Private rental sector 20% 0% Tertile 1 Tertile 2 Tertile 3 Total Tertile 1 Tertile 2 Tertile 3 Total Flanders The Netherlands Source: Housing Survey 2005; WoON 2006/ OTB Research Institute calculations 5. Housing expenses policy Housing expenses are largely determined by government policy. We shall now turn our attention to the relevant housing policy instruments in each country. 10

11 5.1. Flanders The primary aim of housing policy in Belgium which dates from the end of the 19th century is to encourage homeownership (Goossens, 1997; Deschamps, 1997). When responsibility for most of the housing policy was transferred from federal to regional (Flemish) level in the 1990 s, a shift occurred in favour of the rental sector. However the federal government still retained important fiscal powers for supporting homeownership (Winters et al., 2007). Mortgages taken out before 2005 fall under the old tax system, dating from 1 January The tax benefits derived from this system may be made up of different constituents, which are determined by certain circumstances and are limited by ceilings. The old system is fairly complicated compared with the new one, which became effective in the tax year 2005 and in which the housing bonus is a flatrate. All in all, the tax benefits are positively related to the size of the mortgage (De Meyer, 2007). The federal government is also responsible for the housing legislation. In contrast with the Netherlands, Belgium has no system for setting rents in the private sector: the landlord is free to set the rent. During the contract period the rent can only be raised accordng to the price index development (Federal Department of Justice, Federale Overheidsdienst Justitie, 2008). In 2005 the social rental sector was the responsibility of Flanders. The current calculations for rent setting and adjustments in the social sector include a link to both quality and affordability. As it costs low-income households much less to rent a dwelling in the social rental sector than in the commercial sector, a subsidy system appears to be in place (Winters et al, 2007). Also, there was a selective system of housing allowances in Flanders in 2005, which targeted a few low-income households and households that moved from unhealthy or overcrowded accommodation to an adequate dwelling (Keulen, 2006). The Housing Survey of 2005 revealed that, in effect, only 2% of tenants were receiving housing allowance (Heylen et al., 2007) The Netherlands Table 1 shows that the different components of housing expenses are influenced at different points. For the tenant this happens at the level of gross rent. In the Netherlands ninety-five percent of rents are regulated by the government. Landlords can fix the rent within certain limits. Social landlords usually set the rent of new-builds with a lower-than-market return on investment (Elsinga et al., 2007; Haffner & Elsinga, 2007; Winters et al., 2007, Ouwehand & van Daalen, 2002). These influences on gross rent, which may be regarded as an implicit subsidy, are not explicitly incorporated in our approach. The tenant s subsidy, which does actually figure in the housing expenses, is the housing allowance which was introduced across the entire rental sector in 1975 (Elsinga et al., 2007) with the primary purpose of making rental housing affordable. A second aim the prevention of social segregation 11

12 was added in The size of the housing allowance is determined by the income, the rent (maximum of euros per month in 2006) and the composition of the household. In 2006 one out of three tenants was receiving housing allowance. The overall average was 148 euros per month (Ministry of Housing, Spatial Planning & the Environment (Ministerie van VROM), 2007). Gross housing expenses in the owner-occupier sector in the Netherlands are dictated principally by the mortgage burden. Most private homes are financed by a thirty-year mortgage with a fixed period of interest (see also Neuteboom, 2002). In recent years, new types of mortgages whereby capital is not redeemed have gained in popularity; at the most, sums of money are set aside in a savings or investment account (endowment mortgages, investment mortgages, interest-only mortgages). Home buyers may also take out mortgages worth 125% of the forced-sale value of the property (5). As the interest is tax-deductible for thirty years, the system, in effect, encourages people to take out interest-only mortgages (Haffner, 2002). This benefit is marginally offset by a tax on imputed rent amounting to less than one percent of the market value of the property in unoccupied state. Since 2005 the tax on imputed rent has been maximised to the amount of deductible interest. This means that when the mortgage is repaid, the owner-occupier is no longer liable for tax on imputed rent. The fiscal effect is included as a separate item in the housing expenses in Table Income distribution 2005/6, before and after housing expenses 6.1. Housing expenses and income according to housing market sectors Before we explore the effect of the housing situation on income distribution, we shall look at housing expenses and disposable and residual incomes in the different sectors of the housing market. We shall show that there are clear differences between Flanders and the Netherlands in this area. Table 2 shows that the average gross rent in Flanders is much higher in the private sector (435 euros) than in the social rental sector (261 euros) with a split of approximately When we compare the number of rooms including kitchens and bathrooms we find no significant differences. So, the difference in rent cannot be explained by differences in the size of dwellings in terms of the number of rooms. The difference is therefore largely attributable to the subsidy granted to social tenants. In both the private and the social rental sector in Flanders the average subject-based housing allowance is no more than one euro. As mentioned earlier, the range of the housing allowance system in Flanders is very limited. The maximum official housing allowance was euros in 2005 and, as such, is in line with the figures in the Housing Survey for The average housing allowance in 2005 was 121 euros per recipient. The equivalent disposable income was, on average, 345 euros 12

13 higher in the private rental sector than in the social rental sector, but the gap narrows down to 247 euros when we factor in the housing expenses and therefore the social rent subsidies. The average gross housing expenses for mortgagors amounted to 549 euros. This works out at an average of 468 euros after deduction of mortgage interest relief. As mentioned previously, outright homeowners are in a favourable position as far as housing expenses are concerned. In Flanders they only need to pay maintenance and property tax, which averages out at 90 euros. As there is a relatively large percentage of retired people in this group, the average equivalent income is significantly lower than that of mortgagors. The differences between the two countries lie in the fiscal effect and by association the gross housing expenses. In Flanders, the monthly tax benefit is limited to an average of 81 euros, but in the Netherlands it can mount to as much as 200 euros. However, the higher tax effect in the Netherlands is offset by a higher average mortgage payment burden than in Flanders (300 euros difference). Net housing expenses in the Netherlands are therefore, on average, around 200 euros higher than in Flanders. Hence, a higher tax advantage is no guarantee for lower housing expenses. 13

14 Table 2: Housing expenses and residual income according to tenure and landlord, averages in euros per month, Flanders/The Netherlands, 2005/2006 Gross housing expenses Housing allowance/ tax relief Net rent or expenses Equivalised disposable income Equivalised residual income Number of rooms* Flanders Rental sector Private Social Owner-occupier sector Mortgagor Outright owner Total households** Netherlands Rental sector Private Social Owner-occupier sector Mortgagor Outright owner 136 6*** Total households** 1: Average for the rental sector differs significantly from the average for the owner-occupier sector, T-test (á=0.05). 2 : Average for the private rental sector differs significantly from the average for the social rental sector, T-test (á=0.05). 3 : Average for mortgagors differs significantly from the average for outright owners, T-test (á=0.05) *: Two rooms have been added to the Dutch averages to take account of the bathroom and kitchen. The T-test was performed on non-enhanced averages, i.e. the numbers without bathroom and kitchen. **: Housing expenses are not shown for all households because the term has a different meaning for tenants and mortgagors (6). ***: Households that have just paid off the mortgage, so that a tax relief is still noted by the tax authorities. Source: Housing Survey 2005; WoON 2006/ OTB Research Institute calculations Secondly, the housing allowance system has a stronger effect in the Netherlands than in Flanders, amounting to an average supplement of 22 euros in the private sector and 53 euros in the social sector. The difference is due mainly to the difference in the number of recipients, given that the total average monthly amount per recipient is 121 euros in Flanders and 148 euros in the Netherlands (see above). 14

15 Finally, as at 1 January 2006, a number of results for the Netherlands can be compared with results for Flanders. To begin with, net rent in the Netherlands is significantly lower in the social rental sector than in the private rental sector, even though, at 85%, the gap is narrower than in Flanders. This finding cannot be explained by differences in the number of rooms between both countries. It is plausible though that some of the difference may be explained by differences in quality. When it comes to the higher average equivalent income, residual income in the Netherlands is also higher for private tenants (1,117 euros per month) than for social tenants (940 euros) Income inequality and poverty and the impact of the housing situation Flanders Table 3 shows the housing expenses, subsidies and (residual) income for Flanders, split according to housing market sector and income tertile. These tertiles were calculated separately for each sector on the basis of equivalent disposable income. The Gini coefficients are also shown to indicate income inequality before and after housing expenses. We can conclude from the table that inequality on the basis of equivalent disposable income in Flanders is highest for outright owners (Gini=0.259) and lowest for tenants in the social rental sector (Gini=0.172). These outcomes are in line with expectations. The income gap is not so wide in social housing because, in this sector, only families with incomes below a certain level are eligible for support. Income inequality is relatively high in the case of outright homeowners. This result is logical as 61% of heads of household are retired and have a lower income than before and 31% are still employed (Housing Survey). Recent studies of the private rental market have identified three segments: elderly people in good, recently built dwellings; young high-income households who are preparing for homeownership; and low-income families in older and poorer dwellings (Le Roy et al, 2008). Given the diversity in the income profiles of these groups, one might logically expect the Gini coefficient to be relatively higher for private tenants (0.23) than for social tenants (0.172). When housing expenses are deducted from disposable income, income inequality increases in each sector. The general Gini coefficient (for all households) rises from to 0.271, indicating that housing expenses, in general, place a heavier burden on the budgets of lower-income households, regardless of the housing market sector. In Flanders, after deduction of housing expenses, income inequality rises far more sharply for tenants than for owner-occupiers. The Gini value for the rental sector rises by 27% to 0.294, and for the owner-occupier sector, by a mere 5% to

16 Figure 1 offers an explanation for the limited rise in income inequality among owner-occupiers. Mortgagors with the greatest income correction have a strong income profile. Outright owners with only a small correction are overrepresented in the lowest tertile. It appears, on average, that more housing expenses are deducted in the transition to residual income for outright owners in higher income groups than for outright owners in lower-income groups. Even so, the Gini coefficient still rises by 5% because housing expenses make a deeper dent in the budget of lower-income households. The increase is most prominent for tenants in the private sector (32%). As rent in the social sector is determined by income, the rise is more limited for social tenants (21%). As one might expect, the Gini coefficient rises by 16% for mortgagors and by a more limited 7% for outright homeowners. The incorporation of subsidies in the analyses has little effect on income inequality for tenants (housing allowance) or homeowners with a mortgage (tax benefits) when considered separately. The incorporation of subsidies by deducting them from the housing expenses has little effect for tenants in the private and social rental sectors because, in absolute terms, there is very little variation in the income tertiles. Though the tax benefit increases considerably between the tertiles in absolute terms, it remains relatively even in relation to disposable income. The equivalent tax benefit amounts to, on average, 3.2%, 3.1% and 2.8% of the equivalent disposable income in the first, second and third tertile respectively. When all incomes are multiplied by more or less the same factor, the Gini value for income distribution remains virtually the same (scale independence) (Allison, 1978). As mortgagors are overrepresented in the higher income groups (see Figure 1), the tax relief enhances inequality for all households. Higher-income groups profit more from tax relief because they tend to buy or build more expensive dwellings. As mentioned earlier, until 2005, the level of tax relief was positively related to the size of the mortgage. It is still positively related to the marginal rate of income tax, which, of course, rises in accordance with the taxable income. 16

17 Table 3: Housing expenses, subsidies and income inequality before and after housing expenses, according to tenure and tertiles of equivalent income, averages in equivalent euros per month, Flanders, 2005 Gross housing expenses Housing allowances/ tax relief* Net rent or expenses Equivalised disposable income Equivalent residual income Private rent Gini coefficient % Social rent Gini coefficient % Rent total Gini coefficient % Owner-occupiers (mortgage holders) (32) (45) (60) Gini coefficient % Owner-occupiers (outright owners) Gini coefficient % Owner-occupier total Gini coefficient % All households Gini coefficient % Source: Housing Survey 2005; N all households=3,821 *: The average equivalent tax relief 17

18 The Netherlands Table 4 is the Dutch equivalent of Table 3. As in Flanders, and in line with expectations, inequality on the basis of equivalent disposable income is highest for outright homeowners (Gini=0.328) and lowest for tenants in the social rental sector (Gini=0.206). Again, as in Flanders, the Gini coefficient for private tenants, at 0.268, lies between the two. One contrast with Flanders is that the Gini coefficient for these groups is higher, indicating a greater diversity in income profiles within each group in the Netherlands. This applies to all households: the Gini coefficient for the Netherlands is compared with for Flanders. When we deduct the housing expenses from disposable income, we see that income inequality in the Netherlands as in Flanders increases in each sector of the housing market. The Gini coefficient for all households rises from to This increase is greater in the Netherlands than in Flanders in absolute and relative terms. The situation in terms of income inequality, before and after deduction of housing expenses, is the reverse of the situation in Flanders: income inequality in the Netherlands rises more sharply for owner-occupiers (23%) than for tenants (17%). Because the relationship between rent and income is stronger in the social sector than in the private rental sector, inequality rises more sharply for private tenants (21%) than for social tenants (17%). As there are fewer private tenants than social tenants, the average rise in inequality in the rental sector (see Figure 1) when housing is taken into account corresponds with the average increase in inequality in the social rental sector. In the owner-occupier sector the strongest increase in inequality occurs among the mortgagors (26%). Outright homeowners face only a limited increase in inequality (6%) because they no longer have a mortgage to pay. Given that this group is fairly limited in the Netherlands with very little variation across the tertiles (see Figure 1), the increase in inequality among all owner-occupiers is still considerable at 23%. The main differences between the Netherlands and Flanders lie in the rental sector. The percentual increase in the Gini values for the Netherlands are lower with the step towards residual income than in Flanders. A similar pattern appears in the social rental sector (17% compared with 21%). The housing allowance in the Netherlands is a levelling factor; as the housing allowance targets tenants from the lowest-income groups, the increase in income inequality will be softened in the rental sectors. Given the overrepresentation of tenants in the lowest tertile, it appears that the increase in income inequality is also softened the housing allowance system. 18

19 19

20 Table 4: Housing expenses, subsidies and income inequality before and after housing expenses, according to tenure and tertiles of equivalent income, averages in euros per month, The Netherlands, 2006 Gross housing expenses Housing allowances/ tax relief** Net rent or expenses Equivalent disposable income Equivalent residual income Private rent (40) (12) (1) Gini coefficient % Social rent (81) (35) (3) Gini coefficient % Rent total Gini coefficient % Owner-occupiers (mortgagors) (65) (115) (193) Gini coefficient % Owner-occupiers (outright owners)* Gini coefficient % Owner-occupier total Gini coefficient % All households Gini coefficient % *: Households which have just paid of the mortgage; so a tax relief is still noted by the tax authorities. **: Equivalent amounts for housing allowance and fiscal effect. Source: WoON 2008/OTB Research Institute calculations; total households (weighted): 6,800,576 20

21 For outright owners the increase of six or seven percent that occurs in the transition from disposable to residual income is more or less the same in both countries but the rise is still higher for mortgagors in the Netherlands (26%) than in Flanders (16%). Clearly, in the Netherlands, the tax benefits in both absolute and relative terms increase strongly with income. In contrast with Flanders, tax benefits enhance income inequality among mortgagors. After all, the equivalent tax benefit is, on average, 5.8% of the equivalent disposable income in the first tertile, compared with 6.9% in the third tertile. As mortgagors are overrepresented in the higher-income groups (Figure 1), the tax relief also enhances income inequality in general Poverty rate before and after deduction of housing expenses Table 5 shows that, when the poverty threshold is set at 50% of the median equivalent income, poverty increases sharply after deduction of housing expenses in both Flanders and the Netherlands. The relative increase is about the same in both cases, with an overall poverty rate of 14.9% for the Netherlands after housing expenses compared with 15.9% for Flanders. The results for the housing sectors correspond with the inequality analysis. Poverty in the private rental market in Flanders increases sharply (151%) after rent deductions. In the Netherlands the increase is much smaller (62%), partly because of the elaborate housing allowance system. The rise in poverty in respect of social housing is also more prominent in Flanders than the Netherlands. In contrast, the rise in poverty rate for mortgagors is relatively higher in the Netherlands than in Flanders (178% compared with 83%). We have already shown that, in the Netherlands, the fiscal benefit is absolutely and relatively higher in the highest income groups than in the lowest income groups. The tax benefit system increases not only inequality but income poverty as well. For Flanders, the tax benefit is relatively even spread across the income groups. Finally, a slight decrease occurs in the poverty rate for outright homeowners when residual income is taken into account. This is a logical result, given that the residual income of this group is also its disposable income and that the 50% poverty threshold is lower for residual income. 21

22 Table 5: Households in poverty* (in %), for equivalent income before and after (equivalent) housing expenses, Flanders/The Netherlands, 2005/2006 % in poverty % in poverty after housing Difference Flanders Total households % Rental sector % Private rental sector % Social rental sector % Owner-occupier sector % Mortgagors % Outright owners % The Netherlands Total households % Rental sector % Private rental sector % Social rental sector % Owner-occupier sector % Mortgagors % Outright owners % *: Poverty threshold is set at 50% of the median equivalent income Sources: Housing Survey 2005, WoON Conclusions It is essential to apply consistent indicators in international comparative analyses on income distribution. Disposable income, the standard approach in analyses of poverty and income inequality, ignores the fact that the consumption options, and hence the living standard of families, are also influenced by in-kind or non-cash provisions connected with the housing situation. These provisions can differ considerably from one country to another. In this study in-kind benefits were addressed by deducting housing expenses from disposable income, thus producing the after-housing-costs income or residual income. In such calculations outright homeowners no longer have housing expenses and therefore have a relatively higher income than mortgagors. The study also considered the situation of social tenants compared with private tenants in view of the fact that the rent for social tenants is below the commercial level. As a result, it was possible to draw a clearer comparison of the different 22

23 sectors in the housing market. This approach further facilitated comparisons by correcting for prominent differences in tenure between the countries. The aim of the study was to analyse how and to what extent the housing situation influences the income distribution, with specific emphasis on the subsidy mechanisms in housing policy. We decided to compare Flanders and the Netherlands, two countries with totally different housing policies and housing market sectors. Income inequality and poverty increase considerably in both countries when equivalent income is corrected for housing expenses. These increases imply that housing expenses place a heavier burden on the budget of lower-income groups than higher income groups. This result is in line with the findings of Fahey (2004), who conducted a European comparative study on the relationship between housing expenses and income poverty. It also emerged that income inequality in the rental and owner-occupied subsectors generally is higher in the Netherlands than in Flanders, for both disposable and residual income. Because of the relatively larger number of social tenants in the rental sector in the Netherlands, income inequality in the Dutch rental sector after taking housing expenses into account, however, turns out lower (0.26) than in Flanders (0.29). Furthermore, an increase in inequality after deduction of housing expenses was found in each sector of the housing market in both countries. This inequality increase is in absolute and relative terms - more prominent for Dutch mortgagors than for the Flemish ones. For tenants the effect is the other way around. In the Netherlands the rise in inequality was found to be greater among homeowners than among tenants, whereas in Flanders the opposite applies. The steeper rise in general inequality in the Netherlands is tied with the fact that there is a lower proportion of outright owners than in Flanders. The overrepresentation of outright owners in the first tertile in Flanders compensates for the deeper impact that housing expenses generally tend to make in the budgets of lower-income groups. As opposed to the inequality analysis, the share of people in poverty according to a relative poverty line of 50% of median disposable income is higher in Flanders (10.5%) than in The Netherlands (9.5%). Also in case of residual income, poverty is higher in Flanders. These results point out that a combination of both poverty and inequality measures can be illuminating. Despite a lower general inequality level, relative more households in Flanders appear to be on the bottom of the income distribution. As was argued before, it turns out that in both countries the share of poor outright owners is lower after deduction of housing expenses. For all other tenures the poverty rate increases with the step from disposable to residual income. 23