Development of rental housing affordability in the Czech Republic

The indicator approach has been used to measure the development of rental housing affordability in the Czech Republic; the residual approach has also been used in some parts to assess the share of the residual income (i.e., the net income after deducting housing costs) in the living minimum amount which serves to ensure nourishment and other basic needs of household members. The development of the financial affordability of rental housing has been studied in the years 1991, 1993, 1995, 1997, 1999 and 2001. Using the aforementioned method, it has been necessary to make a normative decision and select the limit value of the cost burden (the bearing limit), which - if exceeded - indicates that housing costs are too burdensome for a household. In compliance with the practice customary in EU countries, three limit values of the basic housing cost burden measure have been defined: 20%, 25% and 33%; the burden measure of 25% is considered the most relevant bearing limit in the Czech Republic. With respect to the residual income as a percentage of the total living minimum amount needed to ensure nourishment and other basic needs of household members, the limit value has been defined as a 1.5 factor of living minimum. The values of the burden measure and the percentage of the residual income of the living minimum needed to ensure nourishment and other basic needs of household members are related to the entire rental housing sector (in which we have included rental flats owned by municipalities and private landlords and co-operative flats). When assessing rental housing affordability, we have generally used the basic housing costs, and therefore, unless stated otherwise in the text that follows, the burden measures refer to the burden of basic housing costs.

Due to gaps in the FBS data sets, housing expenditures of households and household income have been adjusted so that the resulting values of the ratios take into account:

Figure 1 captures the development of the average unadjusted housing costs-to-income ratio (marked as "ratio" in the Figure) for the total of all households in the rental housing sector, and at the same time the impact of the above-mentioned adjustments on the resulting difference between the original unadjusted and the resulting adjusted housing ratio (marked as "ratio 5"). The curve marked "ratio 1" shows the development in housing costs-to-income ratio after the regulated rent has been ascribed to households that declared an amount of paid rent higher than the rent ceiling for the given time period. The curve "ratio 2" is after controlling for the rent ceiling and secondary housing costs. The "ratio 3" curve captures the values of the ratio after controlling for the rent ceiling, secondary housing costs and a decrease of housing costs by the amount of the housing allowance. The "ratio 4" curve captures the ratio after controlling for the rent ceiling, secondary housing costs, the housing allowance and the impact of housing overconsumption. Lastly, curve "ratio 5" shows the ratio after controlling for all the aforementioned adjustments and for an increase in the household income by undeclared income from the grey economy sector.

It is clear from the Figure that housing overconsumption and the additional household income from the grey economy sector had the greatest impact on the difference between the values of the original, unadjusted burden and the resulting adjusted burden in individual years. The highest increases in the ratio occurred between 1991 and 1993 and between 1997 and 1999. The average value of the unadjusted ratio increased by 79.5% in nominal terms between 1991 and 2001; the corresponding increase in the average adjusted ratio amounted to 76.3%. As is also clear from Figure 1, that differences in the values of the unadjusted and adjusted ratios increased in the time of period studied. It is largely due to the growing number of households entitled to the housing allowance; interestingly, the impact of grey economy income decreased somewhat. The impact of housing overconsumption on the total difference between the unadjusted and adjusted burden measure was approximately constant in all the years studied, which means that in the course of this period those households that "overconsumed" housing in 1991 did not significantly rationalise their housing consumption till 2001.

Figures 2 and 3 capture the development of the ratio between 1991 and 2001 for various social groups of households. The Figure 2 shows that households of pensioners have a unique position because their ratio clearly reaches the highest values in all the monitored years. Even after the above-mentioned adjustments, households of pensioners are the most endangered group of the population with respect to housing costs (see Figure 3). According to the adjusted ratio, the category of households headed by manual workers was, in all the monitored years, the second most burdened group of households after households of pensioners. If we compare Figures 2 and 3, we can see that the decrease in the ratio as a consequence of the adjustments described above is also quite pronounced among the households of entrepreneurs. If we assess the growth of ratio between 1993 and 2001 by the social category of the head of household, we see that the ratio increased most significantly among households of entrepreneurs (by 42.6%), followed by households of manual workers (by 33%); the smallest increase was among households of farmers (by 21.5 %).

The residual income of a household was determined as the difference between the household total monthly net income and the adjusted amount of the basic housing costs (controlled for all the factors mentioned above). The minimal residual income has been defined as the total amount needed to ensure nourishment and other basic needs of household members (a portion of the living minimum of the household). The residual household income has been compared with the minimal residual income in the form of the "poverty index". The closer the value of the poverty index was to '1' (i.e., the residual income approached the value of the minimal residual income), the closer the household was to the poverty line. If the index value was below '1', the residual household income would be insufficient to cover the costs of a household for nourishment and other basic needs of household members, and in such a case the household would face a state of material poverty. The greater the index value, the richer the household. Unlike the adjusted basic housing cost burden measure, the poverty index disregards the impact of grey economy sector income on the total household income.

Figure 5 captures the development of the poverty index for individual social groups of households in the monitored time period. On average, in each of the monitored years the lowest poverty index values were among households of pensioners; the highest values were found among households of employees and entrepreneurs. It is encouraging to see that the poverty index increased between 1991 and 2001 among all the social groups of households. The most significant increase was among households of employees (1.7 times); the smallest increase was among households of pensioners (1.45 times). However, an interpretation of the growth of the poverty index is not so easy because of how the poverty index is defined; it is influenced by the speed of growth of the total household income compared to the speed of growth of the adjusted basic housing costs and the dynamics of growth of the living minimum amounts needed for ensuring nourishment and other basic needs of household members.

Table 1 shows the unadjusted and adjusted housing cost-to-income ratios according to the type of household. The table clearly shows the significant differences in the value of ratio between two-parent families with respect to the economic activity of their members. In all years the ratio is significantly higher among those households where the head of the household is not economically active; conversely, the burden measure is significantly lower among households where both the head of the household and the spouse are both economically active (or other members in case of mixed families).

Figure 6 captures the values of the unadjusted and adjusted ratios among households with the lowest and highest income during the monitored period. Naturally, in all the monitored years the values of both ratios were significantly higher among households with the lowest income compared to households with the highest income. The difference between the average unadjusted ratio for households with the lowest income and households with the highest income increased from the initial 10.8 percentage points in 1991 to 18.5 percentage points in 2001.

Figure 8 shows the percentages of households whose housing cost-to-income ratio exceeded the normatively defined limit values of 20%, 25% and 33%. While in 1991 the percentage of households with an unadjusted ratio over 20% only reached 6.5% of the total number of households in the rental housing sector, by 2001 this had increased to 42.8%. The percentage of households whose ratio exceeded 33% in 2001 was obviously much lower, coming close to 10%. However, for adjusted ratio there were only 2% of the households in the rental housing sector with ratio over 33%. The ratio of 25 % is the most relevant "bearing" limit in the Czech environment. In 2001, the unadjusted ratio was over 25% among almost one quarter of households; after controlling for the rent ceiling, expenditures for secondary housing, the housing allowance, housing over-consumption and grey economy undeclared income, this fell to 10.4%.

It is clear from Table 3 that the highest percentage of households with a ratio over 25% is among households of singles, especially households of single women. Even after making all the adjustments to the burden measure, almost one third of these households recorded a ratio over 25% in 2001. The situation is similar to households of single men. With respect to the housing cost burden, complete families where the head of the household was economically inactive, and also single-parent families with children, were other endangered groups in 2001.

Table 4 confirms the unique position of households of pensioners (i.e., households with a head of household over 65 years of age); among this group the percentage of households with a ratio (both adjusted and unadjusted) over 25% was the highest in each of the monitored years. At the same time, the table clearly shows that the youngest age category of households (i.e., households with a head between 18 and 24 years of age) is the third most burdened category of households. If we take into account the adjusted values of ratio, then the issue of housing shortage for this group of households practically disappears; this is largely due to the household income of these households being supplemented with income from the grey economy. In the case of these households, the issue of housing overconsumption plays almost no role, unlike households of pensioners (i.e., especially households with a head over 65 years of age). In the case of households with a head over 65 years of age, housing overconsumption has the highest effect on the reduction in the unadjusted ratio (we have assumed that these households do not participate in the grey economy sector).

Summary: Households of pensioners, singles (especially women), and single-parent families without an economically active head of household were the groups of the population most burdened with housing costs during the entire time period (on average, they spent the largest portions of their income on housing). Especially with regard to the households of singles and pensioners, it has been proven that the high ratio is often due to housing overconsumption, i.e., the fact that these households often live in flats that are too large. Provided that appropriate conditions would be created to allow these households to rationalise their housing consumption, the issue of the existing rental housing shortage would largely disappear. In the case of single-parent families with children, a group also spending a relatively large portion of their income on housing, over-consumption is surprisingly rare. It has also been discovered that during the 1990s the difference between the burden measure of groups with the lowest income and the greatest income has widened, and the relationship between the size of the place of residence and the housing cost burden measure has increased (on average, households from larger municipalities spend more on housing than households living in municipalities with a smaller population). Last but not least, it has been proven that young households (with a head under 24 years of age) are, after households of seniors, the households most burdened with housing costs.

Housing Standards 2002/03: Financial Affordability and Attitudes towards Housing

1. Financial affordability of housing in the Czech Republic

1.1 Development of rental housing affordability in the Czech Republic