Lower affordability ratios for longer-standing tenants and owner-occupiers with mortgages or loans

The household housing affordability ratio - indicator of households’ living conditions and housing conditions - measures the ratio between a household’s housing costs (including the direct cost, such as rent payments or mortgage repayments, as well as normal additional household running costs such as electricity and water, etc.) and its disposable income (housing aids are excluded).

Owner-occupiers with mortgages or loans and tenants: a continuous increase in the affordability ratio

Accounting for around two thirds of households in Luxembourg, owner-occupied households repaying a mortgage or tenant households paying rent have seen their affordability ratios continuously increase for a number of years. In 2019, the figure stood at 37.3% for tenants and 29.5% for owner-occupiers with mortgages or loans. However, these overall affordability ratios hide disparities based on households’ length of tenure in their housing.

Affordability ratios are higher for recent tenants and owner-occupiers

In 2019, households that had been tenants for less than 5 years had an average affordability ratio of 39.7%, compared to 34.5% for households who had been tenants for over 5 years. The same is true for owners with a mortgage or loan to repay: acquiring ownership in the current year results in a higher affordability ratio than for those who have been owners for longer. For example, for households who moved into their dwellings in 2018 and 2019, their affordability ratio stood at 35.3% in 2019, compared to 29.5% for all owner-occupied households with a mortgage or loan in 2019. However, the difference in affordability ratios for households with short tenures in their homes is not a new phenomenon as it could be observed before 2019.

The household housing affordability ratio measures the ratio between a household’s housing costs and its disposable income. Here, the cost of housing takes into account the monthly mortgage repayments and associated interest (for owner-occupiers with mortgages or loans) or the rent paid each month (for tenants) by the household. In both cases, it includes normal household running costs (electricity, heating, etc.). Disposable income is what is available for households to consume and save, i.e. after taxes and social security contributions.

Accounting for around two thirds of households in Luxembourg, households repaying a mortgage or paying rent have seen their affordability ratios continuously increase for a number of years (cf. affordability ratio (%) of resident households by tenure status (2016 – 2019)). Nonetheless, these overall affordability ratios hide disparities based on households’ length of tenure in their housing.

For tenant households, those who have been paying rent for their housing for less than 5 years are faced with greater average housing costs than households who have been renting for over 5 years. Depending on the year, these costs are between 8% and 16% higher. As disposable income appears almost identical across both groups, the affordability ratios are therefore higher (by between 3% and 16%) for more recent tenants. As such, in 2019, recent tenant households had an affordability ratio of 39. 7%, compared to 34.5% for households who had been tenants for over 5 years. One explanation for this observation lies in the behaviour of the landlords of rental properties. As landlords can use a change in tenant to adjust the rent to the market price, more recent tenants are likely to have been faced with significant rent increases, as has been seen in recent years.

The same observation can be made between recent owner-occupiers and more long-standing owner-occupiers. Acquiring ownership of property in the current year results in a higher affordability ratio than those who have been owners for longer. The affordability ratios for recent owner-occupiers are, depending on the year, 19% to 31% higher than the figure for all owner-occupiers with a mortgage or loan to repay across Luxembourg. For example, for households who moved into their dwellings in 2018 and 2019, their affordability ratio stood at 35.3% in 2019. At almost 6 percentage points less, the affordability ratio for all owner-occupied households with a mortgage or loan to repay stand at 29.5% for the same year. Several hypotheses can explain this phenomenon. Firstly, household income tends to increase with age, so with a relatively constant mortgage repayment amount, the proportion of income spent on this payment falls over time. In addition, the average age of all owner-occupied households with a mortgage or loan is higher (around 45*) than the average age of recently owner-occupied households (around 36-39*). Furthermore, the increase in property prices in Luxembourg in recent years could also increase the burden on households that have recently purchased property: they must borrow more to live in a home that meets their needs or their expectation.

The affordability ratio is an indicator of households’ living conditions and housing conditions, and illustrates the difficulties that households may experience with financing access to housing, but also with paying other expenses. If housing costs become a very significant proportion of a household’s disposable income, the household then runs the risk of no longer being able to meet other essential needs. In Luxembourg, the affordability ratio has increased considerably over the 2016-2019 period, resulting in housing costs taking up an increasing proportion of household budgets and highlighting the growing difficulties faced by the resident population when funding their housing. In particular, it is those households that have recently entered the housing market that are most likely to face these difficulties, whether these are tenants or owner-occupiers with mortgages or loans.

* This is the average age of the main person responsible for the housing (source: EU-SILC, 2016-2019)