A Measure of Income Poverty Including Housing: Benefits and Limitations for Policy Making

Abstract

Motivated by the increasing importance of housing wealth, the paper reviews the debate about the inclusion of housing in social indicators. The review identifies the availability of two different approaches: the inclusion of imputed rent and the deduction of housing expenses from disposable income. The advantages and disadvantages of different measurement methods are discussed from the point of view of different policy aims (poverty and tax analyses). This study uses 2010 EU-SILC data and provides an assessment of the impact of the housing situation of households on relative poverty and inequality and corresponding transition matrices into and out of poverty, according to the two approaches for measuring the housing situation. The results show that relative income poverty and inequality decrease if imputed rent is taken into account, while they increase if housing expenses are considered. The paper suggests that the deduction of housing expenses provides a better measure of relative poverty, while avoiding most measurement problems. The use of the capital market approach for the estimation of imputed rent would improve the assessment of the redistributive effect of taxes. The analysis and comparison of both approaches provides useful suggestions on the distributional effect of housing in different housing systems. Finally, the paper concludes with some remarks on housing-related variables and measurement issues for the construction of better social indicators.