Implications for poverty rates

Since housing costs represent a charge on disposable income that (arguably) must be met before other expenditure, there is a case for deducting these costs from income before assessing the distribution of purchasing power across society and identifying those whose income falls below a particular level, relative to the median. On the other hand, relatively high housing costs might reflect the choice of the people concerned to have a better-quality house in a more attractive and convenient area, rather than to spend their income in other ways. There is, however, no systematic relationship between costs and the quality and size of housing, and so it cannot be assumed that those people with higher housing costs relative to income also generally live in a better-quality or a larger house.

In practice, there is no compelling evidence to determine whether disposable income should be measured before or after housing costs when we come to assess income distribution and identify the risk of poverty. There may perhaps be an argument for measuring the risk of poverty in both ways, as in the UK.

Since housing costs account, on average, for a larger proportion of disposable income for those with lower incomes than for those with higher levels, the effect of measuring disposable income after housing costs is to increase the proportion of the population in all countries with income below the poverty threshold - whether this is defined as 60%, 50% or 40% of median income. Therefore, while deducting housing costs reduces median income, it reduces the income of those at the lower end of the scale by more.

Accordingly, if disposable income is defined as being after housing costs are deducted, the proportion of people with income below 60% of the (new) median increases, on average, across all countries, from 16% to 22% (Figure 4). The increase is particularly large in countries where housing costs are high, relative to income - in Denmark, Germany, the Netherlands, Sweden and Slovakia (8-9 percentage points in each case). On the other hand, the increase is relatively small in the Southern countries, excluding Greece (but including Cyprus), as well as in Ireland, Estonia, Lithuania and Slovenia, where housing costs are much lower in relation to income.

As a result, once housing costs are deducted, Germany becomes one of the countries with the largest proportion of population with income below the poverty threshold defined in this way - above Portugal and (to a lesser extent) Estonia, Lithuania and Poland, but still below Greece, Spain, Italy, Latvia and the UK.

Figure 4: Proportion of population below at-risk-of-poverty threshold (60% of median) before and after the deduction of housing costs, 2006

The effect of measuring the risk of poverty after deducting housing costs varies between men and women and across broad age groups. In particular, defining income to exclude housing costs tends to result in the proportion of those below the poverty threshold being increased by slightly more among women than among men (Figure 5). This reflects the larger number of women - especially single parents and those aged 65 and over - who live alone and who, accordingly, tend to have high housing costs in relation to income. The larger effect on women is common to all countries, with the exception of Luxembourg and Portugal. It is especially large in Denmark, Sweden and Slovakia, where in each case the poverty rate among women is increased by around 10-11 percentage points if income is measured after housing costs - some 3-4 percentage points more than among men.

Figure 5: Difference in the proportion of the population at risk of poverty before and after the deduction of housing costs, by sex, 2006

Housing costs also tend to have more of an effect on those aged 65 and over than on younger age groups, though the scale of the effect varies greatly from country to country. The proportion of those aged 65 and over at risk of poverty is increased, on average, by around 8.5 percentage points if income is measured after housing costs rather than before - some 3 percentage points more than among those aged 25-64 (Figure 6). There are, however, four countries - Spain, Cyprus, Luxembourg and Portugal - where the effect of excluding housing costs is smaller for the older age group than for the younger one. (In Portugal, the effect of deducting housing costs from income is to reduce the risk of poverty among those aged 65 and over.) Conversely, measuring income after housing costs increases the proportion with income below the poverty threshold substantially more for those aged 65 and over than for those aged 25-64 in Denmark, Sweden and Slovakia - the same countries as were highlighted when we discussed differences between the figures for men and women, and for similar reasons.

Figure 6: Difference in the proportion of the population at risk of poverty before and after the deduction of housing costs, by age, 2006

Overall, housing costs have a similar effect on the risk of poverty among children as among people aged 25-64, the proportion with income below the poverty threshold being increased by 5-6 percentage points, on average, in both cases. The effect, however, varies markedly from country to country: in around half, the risk among children increases by more than among those aged 25-64 (the effect being especially large in Germany and the UK), while in the other half the risk to them increases by less than among those aged 25-64.

From the above, we can see that, when calculating the risk of poverty, the effect of measuring income after housing costs, rather than before, is to increase the risk among:

• women relative to men;
• those aged 65 and over relative to younger age groups; and
• those living alone and single parents, relative to those living in couple households with and without children.

These groups, therefore, would account for a larger proportion of the population with income below the poverty threshold if income were to be defined as after housing costs are deducted. Since the groups concerned already have a relatively high risk of poverty in most countries, the effect of taking explicit account of housing costs when assessing this risk is to widen the differences between population groups distinguished in this way.