Rise in housing costs increases inequality

Poor people now spend a much higher proportion of their income on housing. It’s not just the rise in rents to blame.

VChanges in the housing market increase the income differences in Germany considerably. This is shown for the first time by a long-term comparison of real disposable income before and after deduction of housing expenditure between 1993 and 2013. During this period, the income gap in Germany had widened significantly anyway. Housing costs have exacerbated growing inequality. For the lower fifth of income earners, the housing cost burden rose from 27 percent to 39 percent in these years, while it fell for the upper fifth of earners: instead of 16 percent, they only had to spend 14 percent of their net income to cover housing needs.

This is the central finding of what is probably the most comprehensive study to date on the relationship between the development of housing expenditure and income inequality in Germany. To this end, the economists Christian Dustmann from the Center for Research and Analysis (Cream) at the University College in London and Bernd Fitzenberger and Markus Zimmermann from the Humboldt University in Berlin evaluated data from the Socio-Economic Panel, the sample of income and expenditure and the OECD. The analysis was exclusively available to the FAZ and will be published this Monday.

Image: FAZ

Further figures support the result. According to this, the spread of net income between a middle earner (median) and the bottom ten percent increased by 22 percentage points in the period under review. If the housing costs are taken into account, it was almost three times as much. This means that if a person with a middle income had about twice as much money left over after deduction of housing costs in 1993 as a low-wage earner from the bottom tenth, twenty years later they had 2.6 times that amount at their disposal.

Poor Germans are rarely owners

The researchers see several causes for the increased stress on the poor. In the period under review, rents rose faster than the cost of owner-occupied living space, which even fell after 2000 due to falling mortgage rates. Since lower income earners are more likely to be tenants, while there are more owners above, this increases inequality. In Germany, however, this is particularly important, as the home ownership rate is particularly low in the lower income fifth. While in Great Britain almost half of the poorer households live in their own four walls and in the United States more than a third, in Germany not even a quarter of this group are owners.

Image: FAZ

In addition, the number of single-person households, which is rising for demographic reasons, has increased German housing expenditure per capita. This has a bigger impact on the lower income range than on the top. Other negative factors are the migration from East to West Germany during the 1990s and the increased influx of low-wage earners into more expensive cities that has been observed since the turn of the millennium. In addition, the apartments are better equipped today. In contrast, the currently hotly debated decline in social housing in Germany only plays a subordinate role, according to the researchers.

Significant consequences for savings rates

Differences in the burden of housing expenditure can also be seen with regard to the age groups. Accordingly, income inequality among younger people is greater today than it used to be. Younger people spend more of their income on housing and save less, especially those with low incomes. This may have “dramatic consequences in the form of higher wealth inequality in the future,” warn the authors.

They point out that the changes in housing expenditure in Germany are “relatively moderate” in an international comparison. But the sharp rise in inequality after deducting housing costs has significant consequences for savings rates. For the bottom fifth of those earning income, this had fallen from 2 percent in 1993 to minus one percent in 2013. The fact that a large and increasing proportion of low-wage earners are not saving is cause for concern, says Fitzenberger. He emphasizes that people with low incomes in Germany have more difficult access to mortgage loans than in Anglo-Saxon countries. Your ability to build wealth by buying residential property is therefore limited.