Income inequality & the PRS
The Week in Housing 26/04/24
This is Part II of a four part series. You can see Part I here, and the remaining parts will be out over the coming weeks. A full bibliography for today’s piece is presented at the very end of today’s Newsletter.
One of the least researched aspects of inequality as it relates to the PRS is income inequality. Almost all the research examining the relationship between the PRS and economic inequality has focused on wealth inequality (this will be discussed in the next installment of this series). One way to open up this interesting, and novel, research area is by focusing on the impact of rent controls on economic inequality, as Kholodilin & Kohl (2023) do in a fascinating cross-national study. Their research finds that the introduction of ‘hard’ (or first generation) rent controls around the early and mid-20th century is associated with declines in economic inequality. In other words, lower rents means lower economic inequality.
Kholodolin and Kohl (2023) identify three ways in which rent levels effect economic inequality. First, rent levels are linked to house prices, and thus wealth inequality. Second, as landlords are mainly well-off (Hochstenbach, 2022; Ziegelmeyer, 2015), the receipt of rental income adds to income inequality. Third, because housing costs are typically the largest aspect of household expenditure, and because poorer households tend to spend a greater proportion of their income on housing (known as ‘Schwaube’s law’), the payment of rent reduces the non-housing disposable income of tenants. Thus, rent controls limit ‘the incomes and real estate values of generally richer landlords while simultaneously increasing the disposable incomes of generally poorer tenant households’ (Kholodilin & Kohl, 2023). Kholodolin and Kohl (2023) find that rent controls are negatively associated with rent increases, rental expenditure, income inequality and wealth inequality, and that this ‘is mainly because landlords are rich and tenants are poor, such that rent control acts as a channel for redistribution’.
If lowering rents can redistribute rental income away from (richer) landlord households towards (poorer) tenant households, it follows that rent increases over recent years are likely to have redistributed income from tenants to landlords, and thus increased income inequality. Although this is not a widely studied area, recent evidence suggests that this is indeed the case. For example, in the US, where economic inequality is higher than at any point in past four decades, research has shown that income inequality is linked to rental unaffordability. Looking at the period 2008-2012, an increase in the Gini coefficient of 0.1 in a given area was associated with 4.4 percentage points more severely rent-burdened low income households. Similarly, looking at 28 European countries, Dewilde & Lancee (2013) show that increased in income inequality increases the likelihood of affordability issues for low income renters.
The above examples show a correlation between income inequality and rental unaffordability. But recent research from Germany goes beyond this to show more clearly how, and to what extent, the rents tenants pay contribute to income inequality. Dustmann et al. (2022) show that increases in housing costs have amplified income inequality over time. The share of income spent on housing has increased for lower income households, while for high income groups it has declined, such that ‘the increase in… inequality in net household incomes between 1993 and 2013 is almost three times as large once housing expenditure is considered’ (Dustmann et al., 2022:1733). Thus, ‘the increase in real housing expenditure vastly amplified the effect of the loss in real income’ (Dustmann et al., 2022:1710).
Looking more specifically at income inequality between landlords and tenants, Bartels & Schröder (2020) show that the proportion of households who are landlords increased significantly between 2002 and 2017 across Germany (to about 10% of households), and the average annual income from rental property also increased over this period, to €12,000 for landlords (in cities with more than 100,000 population). Therefore ‘the importance of rental income for explaining overall income inequality increased’. While €12,000 may not seem like a large amount of money, consider that the average household disposable income in Germany was €25,000 in 2017 (Bartels & Schröder, 2020). Moreover, households who are landlords are more likely to have high incomes outside of their rental income, and thus we can see that the rental income they receive can make a significant contribution to income inequality, and this contribution increased between 2002 and 2017.
More recent research (Kadelke, 2023) finds that landlords are much more likely to be older (over 50), but more importantly also have higher incomes and more wealth. The household income of landlords, including rental income, is almost twice that of tenants in Germany, and 1.6 times the overall population average, and ‘the odds of landlords being in the wealthiest decile are over 100 times higher than tenants’ odds’. Moreover, on average, tenant households in Germany transfer more than a quarter of their income to their landlords.
Thus far we have focused on the distribution of income and wealth between landlord households and tenant households. There is, however, another channel through which income and wealth inequality is linked to rental housing. Although it has not, to my knowledge, been studied, rental income also flows to wealthier households via their ownership of shares in property companies, REITs or via pensions.
In sum, rental affordability makes it harder for lower income households to access quality housing, thus driving the unequal distribution of housing itself, but it is also part of a much wider story of economic inequality. High rents reduce renters ability to afford their non-housing expenses, thus potentially driving them into poverty. But it is also crucial to recognize that high rents also increase the concentration of income among wealthier households, because the rental spending of renters is a form of income for landlords. In other words, landlords are getting richer because tenants are getting poorer. As Kadelke (2023:67) notes, in the context of rental housing we must ‘emphasise the relational character of inequalities. Landlords and tenants are not just members of different social groups who wave to each other in a friendly way’. From this perspective, the problem of rental unaffordability should be reframed as one of income redistribution.
Events & News
Only one event to share this week - I’ll be doing a presentation on my ‘vision for the private rental sector’ as part of the Simon Talks series at the end of May, details TBC.
What I’m reading
An important new publication in terms of Irish housing came out this week, the Housing Agency’s latest survey on residential satisfaction in Ireland. I haven’t had a chance to take a look yet but there is loads to pour through in there! Also from the Housing Agency, a new issue of their data insights series looking at the very topical issue of residential conversions. Lots of new stuff coming out of the UK doing some big picture thinking on how their housing system needs to change. This new report by Gibbs and Marsh looks especially good. This radical new book, provocatively titled Against Landlords, is another example, and one I am particularly looking forward to reading.
Bibliography
Bartels, C., & Schröder, C. (2020). The role of rental income, real estate and rents for inequality in Germany. Working Papers.
Dewilde, C., & Lancee, B. (2013). Income inequality and access to housing in Europe. European Sociological Review, 29(6), 1189–1200.
Dong, H. (2018). The impact of income inequality on rental affordability: An empirical study in large American metropolitan areas. Urban Studies, 55(10), 2106–2122.
Dustmann, C., Fitzenberger, B., & Zimmermann, M. (2022). Housing expenditure and income inequality. The Economic Journal, 132(645), 1709–1736.
Hochstenbach, C. (2022). Landlord elites on the Dutch housing market: Private landlordism, class, and social inequality. Economic Geography, 98(4), 327–354.
Kadelke, P. (2023). Landlords vs tenants= top vs bottom? Class positions in rental housing in Germany. Critical Housing Analysis, 10(1), 66–76.
Kholodilin, K. A., & Kohl, S. (2023). Rent price control–yet another great equalizer of economic inequalities? Evidence from a century of historical data. Journal of European Social Policy, 33(2), 169–184.
Kindermann, F., & Kohls, S. (2018). Rental markets and wealth inequality in the Euro-area. University of Regensburg, Unpublished. Https://Economics. Unihohenheim. de/Fileadmin/Einrichtungen/Economics/Lecture_Series_Abstracts/Kin Dermann_rental_markets. Pdf.
Ziegelmeyer, M. (2015). Other real estate property in selected euro area countries. Banque centrale du Luxembourg.