No. 15
2 May 2016
Tilburg University www.tilburguniversity.edu/howcome
Funded by the
European Research Council
Grant Agreement No. 283615

Abstract
This paper integrates different strands of research which are in some way or another concerned with (increased) inequality in housing outcomes, and provides for an empirical illustration of the relevance of such an endeavor. Our main focus concerns the association between housing market financialization and the increase of housing affordability problems for lower-income private renters, and how such an association has come about across 12 Western-European countries. We incorporate a spatial dimension by distinguishing between ‘urban’ and ‘rural’ regions. We argue that housing market financialization adversely affects households with less economic and political power through housing market dynamics arising from the strategic behavior of higher-income households and other housing market actors, e.g. landlords. Our findings support such arguments: In particular in countries with strong financialization
(Ireland, Netherlands, Spain and Portugal) decreasing affordability arises from the fact that during the period 1995-2007 private rent increases were not compensated for sufficiently by the growth of household incomes, controlling for changes in the age and socio-economic composition of our group of interest. Changes after the Great Financial Crisis (up to 2013) were more limited and diverse. Other than expected, our findings do not indicate large differences between urban and rural settings.
Keywords
Financialization, housing affordability, private renting, comparative research, lower-income households
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Introduction and theoretical background
This paper integrates different strands of research which are in some way or another concerned with (increased) inequality in housing outcomes, and provides for an empirical illustration of the relevance of such an endeavor. Our main focus is on the concern in both academic and policy-making circles for the decreased affordability of housing. Such a trend was already evident in the period before the Great Financial Crisis (GFC), and has been linked to house price inflation (particularly for poorer households and entrants into homeownership) and the shift of public support for lower-income households away from social housing to more privatized housing arrangements. The problem is furthermore likely to have intensified in the aftermath of the economic crisis. Increases in unemployment and flexible labor market conditions, as well as cuts in social benefits, negatively impact on households’ ability to pay for housing. The ‘Right to Adequate Housing’, [1] which can be traced back to the 1948
Universal Declaration of Human Rights and the 1966 International Covenant on Economic,
Social and Cultural Rights (UN-HABITAT, 2014), is therefore increasingly compromised.
Housing (un)affordability has recently attracted the attention of institutions such as the
Organization for Economic Co-operation and Development (OECD, see Salvi del Pero et al.
(2016)) and the European Union (EU). The Social Protection Committee on the social situation in the EU identifies the increasing housing cost overburden rate as a ‘social trend to watch’
(also see Pittini et al., 2015). Policy briefs however tend to report on aggregate statistics across countries, but do not provide for a systematic analysis of trends over time.
The emerging literature on the financialization of housing and other real estate forms the theoretical backdrop of this paper. Financialization is strongly linked to economic globalization, deregulation and the rise of neo-liberalism, and refers to the transformation of local and tangible assets into liquid, globally tradeable financial commodities (i.e. derivatives), resulting in an increasingly autonomous realm of ‘global finance’ (e.g. Fainstein, 2016; van
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der Zwan, 2014). Financialization can therefore be defined as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and
commodity production” (Krippner, 2005, cited in Aalbers (2008: 148) and van der Zwan (2014:
103)). It is characterized by the growth of complex financial products and intermediation (made possible by advances in ICT and computing), the rise of institutional investors (e.g. pension funds), the redistribution of power from labor to capital (linked to the emergence of shareholder value ideology), the shift from public to privatized debt, and the rise of investive, selfeconomized orientations of middle-class citizens (who are often small-scale shareholders themselves, i.e. through pension funds) (for an overview, see Engelen et al., 2010: 56-57;
Crouch, 2009; Mau, 2015; van der Zwan, 2014). Financialization is therefore not only a macrolevel or top-down process, but also results from individual agency.
In recent years, there have been several efforts to specify the extent and forms of financialization according to the variegated institutional blueprint of countries, and to broaden the concept in order to incorporate housing and other real estate, which is seen not only as a bearer, but also as a driver of further financialization (Fernandez and Aalbers, 2016; Aalbers and Christophers, 2014). As a new strategy for capital accumulation, since the 1990s national housing finance systems became more strongly integrated in the global economy, which in turn became more reliant on the performance of housing markets. In several countries, banks entered into foreign mortgage lending markets through securitization – the bundling of lessrisky and risky mortgages into investment products. As demand for such products grew, mortgage risks were passed on to investors, while mortgage-lending became the business of intermediaries, whose main incentive was to sell more (subprime) mortgages (e.g. Bratt,
2012b). Overpriced housing served as a collateral for further debt take-up and/or leveraged transactions. Demand for mortgage lending and credit, homeownership and house prices therefore kept rising, leading to speculative bubbles in the United States (US), Ireland, Spain,
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Portugal and the United Kingdom (UK). In this process, households became more strongly exposed to housing market risks such as indebtedness, interest rate fluctuations, and house price booms and busts (e.g. Stephens, 2007; OECD, 2011). Housing-induced financialization
– measured by the accessibility of mortgage credit – is however a geographically uneven process. Mortgage securitization, equity withdrawal and refinancing are restricted in several countries (e.g. France, Austria, Belgium, Germany); house prices and mortgage debts in those countries have risen far less compared to countries with a less rigid regulatory approach
(Fernandez and Aalbers, 2016).
Empirical research on the financialization of housing and housing-induced financialization has so far been mainly concerned with demonstrating its origins and variegated existence. Financialization of housing has however also been linked to broader trends in stratification and inequality. As property is foundational to power and wealth and housing market financialization boosts the circulation of capital, preferences and incentives for institutions and households are thought to have altered and opportunities for rent extraction increased (Aalbers and Christophers, 2014; Forrest and Hirayama, 2014). According to
Schwartz and Seabrooke (2008: 238), “home equity and social equity are often at odds”, and mortgage market deregulation created strong possibilities for stratification. For instance, the distribution of housing wealth does not reflect need, and strong house price inflation tends to advantage housing market insiders and wealthier households, exacerbating existing inequalities. Rolnik (2013: 1059) argues that the increased use of housing as an investment asset “has profoundly affected the enjoyment of the right to adequate housing around the
world”, through processes such as privatization of the public housing stock, new urban strategies aimed at enabling the mobilization and circulation of global capital, and welfare cuts as a response to the GFC. For the UK, Kennett et al. (2013: 15) point out that “access to
affordable housing had clearly already emerged as a pressing issue prior to 2008”, but is likely
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to become more problematic following the economic downturn and the socialization of its costs through austerity measures and broader (housing) policy changes. These mostly theoretical claims are often supported by case studies, anecdotal evidence and illustrative figures. In this paper, the main focus lies with the financialization of housing, its consequences for trends in housing affordability of lower-income households across Western Europe, and how such changes have come about before and after the GFC. To this end, we decompose affordability trends by looking at changes in incomes and housing costs.
Housing market financialization and related trends – e.g. house price inflation before the GFC, restricted access to mortgage credit afterwards – have mainly been associated with worsened housing outcomes in terms of access and affordability for young people aspiring or entering homeownership. Young people’s homeownership has become more strongly dependent on resources such as having a stable job or parental wealth (Searle and McCollum,
2014; McKee, 2012; Lersch and Dewilde, 2015; Forrest, 2013). Young people are staying at home longer or spend more time in transitional tenures, in particular the private rental sector
(PRS). The PRS is however not only a transitional home for the young; it is also a permanent home – often by constraint – for many households in weaker socio-economic positions. Across countries problematic housing outcomes, including affordability and quality, are most severe among private renters.
The roles and dynamics of the private rental market – the latter referring to the mobility of dwellings and households in and out of the sector – [2] are affected by institutions, policies and developments in the housing market and in the wider political economy (Crook and Kemp,
2014a). For instance, the size and nature of the PRS depend on the nature of social housing provision. In countries with a small social housing sector, the PRS tends to house more lowerincome and disadvantaged households (e.g. immigrants). Cuts in social housing and stricter targeting have pushed those social renters unable to acquire homeownership into private
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renting (e.g. Hulse, 2014). Demand for private renting has also grown as socio-demographic changes entail that the number of lower-income people looking for (temporary) housing solutions has simply increased over time (i.e. immigrants, singles, divorced or separated people). PRS-dynamics also relate to the homeownership segment. The secular increase in homeownership was partly realized by the conversion of private rental dwellings and renters into owner-occupied houses and homeowners. In some countries, in particular the UK, this trend has now reversed as homeownership rates have declined and wealthy (outright) homeowners actively invest in additional property in order to safeguard retirement income
(Ronald et al., 2015; Kemp, 2010). Further, private rental homes are owned by landlords, and investment strategies not only depend on the long-run profitability of the sector itself, but also on the yield of other investments. Financialization of housing has turned rental homes into a different type of investment product, for individual and institutional landlords alike. Some institutional investors are however not so much interested in rental yield and tenants, as in the value of the underlying land or in using portfolios of rental properties for capital leveraging, particularly in urban settings/world cities (e.g. Fields and Uffer, 2014; Rolnik, 2013; Kemp and
Kofner, 2014) (see next section).
In sum, although cross-country variation remains considerable, in most countries the
PRS is a significant housing provider, and increasingly – for the first time after a century-long decline – caters for the needs of a wider range of households in a more-than-residual fashion
(e.g. Hulse, 2014; Crook and Kemp, 2014b; Salvi del Pero et al., 2016). While access to homeownership has become more selective and public support has shifted away from social housing to income-related housing allowances (which are under pressure in the current economic climate), the PRS plays an ever more important role in ensuring access to affordable housing. Tenant protection and rent regulation are therefore crucial. For the UK however,
Kennett et al. (2013: 23) argue that policy responses to the GFC are not dealing with its
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underlying causes, but instead focus on the ‘easy’ target of lower-income renters, “circulating
them around the rental housing carousel ever faster”. Policy measures include flexible tenancies for social housing, curtailing of housing allowances (an important tool for poverty prevention in the UK), and reduced security of tenure. Poorer renters lack economic and political power, and are thus vulnerable for housing market financialization, exogenous changes (e.g. declining wages, unemployment, benefit cuts) or pressures arising from housing market dynamics caused by such wider trends (Dewilde and Lancee, 2013; Leishman and
Rowley, 2012; Rothenberg et al., 1991). Our main research question hence concerns the association between housing market financialization and trends in housing affordability for lower-income households in the PRS in urban and rural regions across Western-European
countries, and how such an association has come about. To this end we decompose affordability trends in terms of rents and incomes, controlling for changes in the age and social composition of lower-income private renters.
We explore trends over time for lower-income private renters, using data from the
European Community Household Panel (ECHP, 1994-2001) and the EU-Statistics on Income and Living Conditions (EU-SILC, 2004-2013). The sample of households and individuals is representative of the population in each year and each country. Cross-national comparability is guaranteed through a standardized design and common procedures. We include 12 Western-
European countries: Belgium (BE), Finland (FIN), France (FR), United Kingdom (UK),
Ireland (IE), Austria (AT), Germany (DE), the Netherlands (NL), Spain (ES), Greece (GR),
Italy (IT) and Portugal (PT). Due to data limitations, Denmark is not included. We distinguish between urban and rural regions (see section on Definitions and Indicators).
We focus on individuals (adults and children) living in households with a reference person ≤ 60 years of age, because we expect that in most countries elderly households – who are more often in social housing or long-term protected tenancies – have remained less affected
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by housing market financialization. As students in higher education in different countries have different propensities to live away from their parents, we also remove individuals in a household with a reference person still at school. While in housing studies the unit of analysis is the dwelling or the household, in research on poverty and inequality the analytical focus is on the individual within the context of her household. Larger households are generally less wealthy (per capita) than smaller households. Using the individual as unit of analysis ensures that the welfare of each person is weighted equally. Unless otherwise stated, figures in this paper are based on this sample selection.
Our time frame captures the period in which the financialization of housing markets has intensified. For clarity of presentation, we mainly focus on three years: 1995 (about 10 years before the culmination of house price inflation), 2007 (right before the GFC) and 2013
(latest available). In the next section, a number of hypotheses with regard to the association between housing market financialization and trends in housing affordability of lower-income private renters are developed, followed by information on indicators and definitions. We then turn to a decomposition of trends in terms of household income and private sector rents for lower-income tenants in urban and rural regions across countries. We conclude with a discussion of results.
Financialization and housing affordability for private renters
Table 1 presents some descriptive figures regarding the extent of housing market financialization – measured in terms of the increase in Residential Mortgage Debt (RMD) to
GDP – [3] and some basic characteristic of housing markets. Countries are grouped according to their level of financialization. These aggregate statistics reveal some systematic patterns.
Between 1995 and 2007, homeownership rates increased in seven countries, but decreased in
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six. [4] After the GFC, there was stabilization or decline, except for France (+4,7%). There were strong increases in outright homeownership before the crisis in some countries, and again more stability or decline afterwards, except for the UK (+7,1%). The PRS grew in eight of 13 countries. The large increase in Germany (+14,4%) can be explained by a sustained conversion of social into private rentals, although the distinction between both sectors is less clear-cut here.
Apart from Germany (-21,8%), the size of the social rental stock has remained fairly stable, but there was an increase in France (+4,9%) and a decrease in the UK (-6,4%). Although these figures provide a preliminary picture and confirm the idea that supply of and demand for private renting has increased in recent times, trends in tenure shares do not provide much additional information with regard to the balance between supply and demand, and affordability of housing across tenures.
[Table 1 about here]
Previous research across 11 Western-European countries (Dewilde and De Decker,
2016) found that housing market financialization is strongly and positively associated with an increasing gap over time between low- and middle-income owners and private renters with regard to housing affordability problems. This increasing gap could mainly be attributed to a worsening of ‘unaffordable’ housing cost ratios at the low end of the income distribution.
Declining affordability for lower-income owners and private renters has furthermore not been compensated by improved housing conditions. It was argued that housing market financialization adversely affects the housing outcomes of lower-income households – not only owners but also private renters – through a range of housing market dynamics induced by the housing market behavior of higher-income households and other actors affecting house prices
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and rents at the lower end of the market (e.g. Rothenberg et al., 1991; Leishman and Rowley,
2012). Although results were in line with such an argument, it was not explicitly tested.
Increased financialization of housing – allowing more households to take out more mortgage credit – was underpinned by an ideological preference of governments for homeownership. Homeownership would encourage lower-income households to save, allow them to partake in the benefits of rising asset prices and to accumulate assets, improve housing standards and neighborhood involvement, and even result in social mobility (e.g. Bratt, 2012a).
OECD-analyses have shown that more lower-income households were able to enter homeownership through easier access to credit and product innovation aimed at lowering the cost of housing finance. Such liberalization however also resulted in a noticeable increase in demand pressure and consequently in increasing house prices and house price volatility
(Andrews et al., 2011; OECD, 2011). House price inflation encouraged investment in second homes or buy-to-let properties, spurring on further price increases. Vastmans et al. (2013) find that increasing house prices across Europe are largely explained by increasing affluence and purchasing power, decreasing interest rates and (changes in) the fiscal treatment of homeownership. The long-run affordability of homeownership (for those who manage to acquire a dwelling) has therefore remained fairly constant. Although house price increases were indeed partly offset (and caused) by lower interest rates, increased affluence and mortgage market innovations, inequality with regard to access to affordable homeownership did increase, affecting those at the fringes of the segment, i.e. the younger and poorer households.
There is also evidence that innovative use of tax subsidization of homeownership in some countries (e.g. the Netherlands) has capitalized into real house prices, and because of its regressive nature [5] favors high-income households to the detriment of housing affordability for lower-income households (Andrews et al., 2011; Salvi del Pero et al., 2016).
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In this paper, we are interested in decomposing affordability trends for lower-income households in the PRS. Lower-income private renters are subject to specific housing market dynamics put in motion by the increased demand for owner-occupied homes and investment real estate, both before and after the crisis. As housing markets are generally inelastic, a higher, partly unmet demand for certain types of property (e.g. project developments, buy-to-let) may lead to a conversion of low-quality affordable housing stock for lower-income groups into more expensive housing, which in turn increases competition for cheaper, low-quality housing at the bottom. For the US, Quigley and Raphael (2004) find that decreasing affordability since the
1990s is mainly attributable to higher rents, not to lower incomes. The stock available to renters at the bottom of the income distribution has declined. Quality increases are an important explanatory factor, as are process such as gentrification and urban renewal which tend to remove lower-income housing from the dwelling stock, while adding stock for middle- and high-income households. In urban regions, particularly in world cities (e.g. London,
Amsterdam, Berlin), financialization has entailed the internationalization of investment in private rental housing by global institutional investors and equity traders. Their investment strategies however negatively impact on security of tenure, housing quality and housing affordability. Comparing New York City and Berlin, Fields and Uffer (2014) identify different strategies, depending on the type and location of properties – both aimed at maximizing profits.
The ‘upgrading’ strategy entails speculation on a rising market, exploiting opportunities to extract higher rents through renovation and modernization – lower-income renters tend to be displaced. In New York, systematic harassment through exploitation of the legal system was deployed as a means of achieving (lower-income) tenant attrition in order to secure deregulation and vacancy bonuses. Less attractive housing portfolios are subject to a ‘capital leveraging strategy’, whereby investors speculate on the potential to rapidly flip the property
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or use it as a collateral. The housing and tenants themselves are neglected, and suffer from disrepair and increasing segregation (also see Kemp and Kofner, 2014).
In most countries however, individual landlords dominate the sector. Financialization also affects their strategies. When house prices are high, private landlords – in particular in the low-quality segment – are financially better off selling their property to middle- and lowerincome households aspiring homeownership and willing to buy less attractive but more affordable properties, which consequently transfer to the ownership segment (e.g. Heylen and
Winters, 2008; Crook and Kemp, 2014a). High house prices in the ‘cheaper’ segment of the market reduce the returns to investment in rental properties, compared to the profit that can be made when selling these properties altogether (Albrecht and Van Hoofstat, 2011). Lowerincome renters usually do not have the financial means to allow landlords to upgrade their rents in line with house prices or renovations. The combination of these dynamics leads to an
‘impoverishment’ of the supply of affordable private rental accommodation for a more selective group of lower-income households, both in terms of quality and in terms of the pricequality ratio (the best properties flow into the ownership segment). Such dynamics have been reported for the UK, where landlords in regions with high house prices prefer shorter contracts with younger and richer people, making it easier to increase rents in successive contracts, or to sell the property (e.g. Izuhara and Heywood, 2003).
We thus conclude that for lower-income households, house price inflation and housing market dynamics following from housing market financialization may have reduced the supply of affordable low-quality rental housing, which has consequently become more expensive.
Although it has been shown that housing market financialization might increase the total housing stock available for private renting – as the rich or institutional investors invest their capital/credit in buy-to-let property – this ‘new’ type of rental is usually of higher quality and aimed at e.g. young professionals (e.g. Kemp, 2011, 2010). The recent trend towards private
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landlordism in some countries will hence not necessarily benefit lower-income households, and furthermore comes with pressures to reduce rent regulation and security of tenure. Although there are exceptions, e.g. rural areas which are popular tourist destinations and contain a lot of second homes, we expect that the dynamics discussed above pertain less to rural than to urban regions, as house prices booms and busts are more outspoken in the latter (e.g. Hamnett, 1999).
The same observation might pertain to wages of lower-income households, which tend to be higher but also more volatile in urban settings.
We formulate the following hypotheses:
H1: Across urban and rural regions in Western-European countries, housing market financialization is positively associated with a worsening of housing affordability for lower-income private renters.
H2: This positive association between housing market financialization and housing affordability problems is stronger in urban, rather than rural, settings.
H3: Given the underlying housing market dynamics, this trend can at least partly be explained by rent increases, rather than income declines, controlling for changes in the social and age composition of lower-income private renters.
Definitions and indicators
Our analysis of lower-income private renters is based on data from ECHP and EU-SILC.
Although there are drawbacks (Dewilde, 2015; Haffner, 2015), these data have proven useful for the comparative study of housing (e.g. Lersch and Dewilde, 2015; Borg, 2015; Kemp, 2011;
Dewilde and Raeymaeckers, 2008; Dewilde, 2008).
Households with an equivalent [6] disposable income in the two bottom quintiles are considered ‘lower income’. This demarcation is in line with other research (e.g. Milligan,
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2003). As the poorest tend to be in social housing, the more pressing problems may be located higher up in the income distribution. The 30/40 rule, for instance, is based on the observation that housing affordability problems (defined as housing costs ≥ to 30% of disposable income) mainly affect households in the lower 40% of the income distribution (Leishman and Rowley,
2012). Affordability in this paper is defined in terms of the ratio of housing costs to income, but we apply a variable threshold. A fixed threshold (e.g. 30 or 40%) makes the unjustified assumption that the residual income a household needs to cover non-shelter needs is lower as household income decreases. On the other hand, richer household can and do spend a much higher percentage of their income on housing, while still having sufficient income left (Stone,
2006). When compared with the residual income approach, the ratio-approach defines the situation of lower-income households as too favorable (Heylen and Haffner, 2013). By using a variable threshold, we better accommodate both criticisms. We use a 25%-threshold for quintile 1 and a 30%-threshold for quintile 2. Housing cost ratio’s equal to or above the threshold indicate affordability problems.
Differences between ECHP and EU-SILC pertain to the definition of housing costs, and to the measurement of social/private renting in countries with a so-called integrated rental market, where state subsidies are available to all types of providers and strict regulation ensures comparable rents and quality in the public and private sector. While housing costs in ECHP refer to the payable rent for renters and total mortgage costs (principal repayment + interest) for owners, in EU-SILC the main focus is on a concept called ‘total housing costs’ [7], of which the components are not separately available. Utility costs (water, electricity, gas, heating) are also included. Because energy is a separate market, driven by other factors such as liberalization and volatility in world prices, we prefer to exclude utility costs. Instead, we use the ‘original’ ECHP-rental cost variable, which is fortunately also available in EU-SILC.
Amounts are gross of housing allowances (i.e. including housing allowances), but the latter are
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also included in disposable income. This approach is not equivalent to comparing net housing costs to disposable income net of housing allowances, as it will make affordability outcomes worse in countries that rely more on housing allowances. It does however accommodate better for the situation in which housing allowances form an implicit part of other social transfers, and are not allocated as separately identifiable housing allowances (Haffner, 2015). This is for instance the case for Germany and Belgium. Our approach is defensible since our main focus is not on comparing ‘absolute’ affordability outcomes between countries, but on decomposing trends in housing affordability over time within countries. Our theoretical arguments furthermore pertain to payable rent rather than to net rent.
A second comparability issue concerns the measurement of tenure. Rather than distinguishing between social/public renting and private renting (as in ECHP, other surveys and official statistics), in EU-SILC ‘renting at market rate’ is distinguished from ‘renting at reduced rate’ (social housing, renting from employer, actual rent fixed by law). Private renters rent their accommodation ‘at prevailing or market rate’, even when the rent is recovered from housing benefits or other sources – this is in line with ECHP. However, in some countries with a an integrated rental market, where there is no clear distinction between a ‘market rent’ sector and a ‘reduced rent’ sector, all renters are classified in the former category. This is the case for
Denmark and the Netherlands. As our analysis concerns only those in private renting (ECHP) or renting at market rent (EU-SILC), we exclude Denmark. For the Netherlands, private renting in EU-SILC is roughly approximated by reported rents higher than the so-called ‘liberalization threshold’. For the whole period 1995-2013, only 2-3% of Dutch respondents in our sample rent in the ‘private’ or ‘liberalized’ sector.
Information on the regional location of households in both data sources is scarce and comparability is problematic. In ECHP, only NUTS1-regions have been recorded. We classified respondents as ‘urban’ (as opposed to ‘rural’) when living in a region with a least
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250 inhabitants per km² or when living in the capital region. In EU-SILC, NUTS2-regions are available, but not for each country. There is however information on the degree of urbanization.
‘Densely populated’ (at least 1500 inhabitants per km²) and ‘intermediate areas’ (at least 300 inhabitants) are classified as ‘urban’, while ‘thinly populated areas’ are classified as ‘rural’.
Different thresholds for both surveys can be justified by the fact that NUTS1-regions in ECHP are much larger than areas in EU-SILC (Local Administrative Units). Because of the large difference in measurement, there is absolutely no guarantee that respondents in identical localities will be classified in the same category in ECHP as in EU-SILC. Nevertheless, with our approach we achieve fairly similar % of respondents in urban/rural environments in the last wave of ECHP (2001) compared with the first used wave of EU-SILC (2005) (results available). There is no information on regional/spatial location for the Netherlands. For all other countries, we decompose affordability trends of lower-income private renters for ‘urban’ versus ‘rural’ regions.
Decomposing housing affordability trends
Figure 1 (top) displays the % of lower-income private renters with housing affordability problems in 1995, 2007 (before the GFC) and 2013 (after the GFC) – countries are ordered ascendingly based on their level of financialization. A first conclusion is that in most countries
(seven out of 11), trends in housing affordability are fairly comparable for urban versus rural regions. This may however be an artifact caused by the lack of comparability over time when defining ‘urban’ and ‘rural’ regions. Secondly, we see that – with the exception of Finland and
Belgium – higher levels of housing unaffordability and increases in problematic situations over time can be found at the right-hand side of the figure, where the countries with higher levels of financialization are situated. Although experiences before and after the GFC are mixed, in 2/3
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of country-regions housing unaffordability has worsened between 1995 and 2013. Increases were more common in urban settings, while decreases were more common in rural settings. A clear exception is Germany, where housing affordability in both urban and rural regions improved between 1995 and 2007. A tentative explanation is that the influx of private rentals converted from public housing (see earlier) still have comparatively lower rents. In some countries or settings, lower-income private renters experience a more or less steady increase of housing cost unaffordability over time: this is the case for Belgium, Portugal, Spain, urban
Austria and rural Greece. In other settings (rural Finland, Italy, rural UK, urban Greece), housing affordability improved between 1995 and 2007, but suffered following the GFC.
Finally, there are also some instances of a pattern whereby housing affordability worsened between 1995 and 2007, but improved after the GFC (urban Finland, rural France, Netherlands,
Ireland).
[Figure 1 about here]
Based on Figure 1 (bottom), we can confirm Hypothesis 1: Across urban and rural regions in Western-European countries, housing market financialization is indeed positively and significantly associated with a worsening of housing affordability for lower-income private renters. [8] This association was already in place before the GFC, although it is a bit stronger for the period 1995-2013 (R=0,71, p<0,001) than for the period 1995-2007 (R=0,62, p<0,002).
Of course, the countries with the highest increase in mortgage debt are the same countries that were hit particularly hard by the crisis and its fall-out. Hypothesis 2 is however not confirmed: separate analyses for urban versus rural regions do not reveal a significantly stronger positive association between housing market financialization and housing unaffordability of lower-
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income private renters in urban settings. In urban settings, the association for the period 1995-
2013 amounts to 0,78 (p<0,005), while it is even higher in rural settings with R=0,86 (p<0,001)
(graphs available). However, our demarcation of ‘urban’ and ‘rural’ regions is not very consistent across time.
In the next step, we tease out how trends in affordability problems of lower-income private renters come about. Worsening of housing unaffordability arises in different ways: (1) rents in the private sector can increase, (2) household incomes can deteriorate (assuming that the socio-economic profile of private renters remains constant over time), (3) or the composition of the group of lower-income private renters may change over time – given that our demarcation of ‘low income’ is rather broad. In the past (1970-80s) housing affordability of those in the PRS decreased as the better-off renters and dwellings were drawn into the homeownership segment, leaving those with a weaker socio-economic profile behind in the least attractive properties. Private renting and renters were ‘residualized’ (e.g. De Decker and
Geurts, 2005: Belgium; Kemp, 2010: UK; Allen et al., 2004: Southern Europe). However, in the theoretical sections an opposite trend was discussed, as in recent decades the PRS increasingly started to cater for more and/or a wider range of people. We should thus expect a reverse tendency, i.e. influx of people with a more diverse, potentially higher socio-economic profile, which may also be younger. Although such a trend may improve overall affordability
(or not, depending on supply), outcomes for lower-income households traditionally in the sector may be different. Our argument concerning the impact of financialization whereby housing market dynamics lead to increasing inequality in housing outcomes through a worsening of situations at the bottom of the housing market, is only supported when affordability problems arise (partly) from rent increases (1), controlling for income declines
(2) and for changing socio-economic and age profiles (3) – Hypothesis 3.
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Figure 2 shows the evolution over time of median yearly household income and median yearly rent in real prices (both standardized). These graphs illustrate first and foremost that trends over time in incomes, rents and housing affordability are not systematically caused by problematic ‘breaks’ between data from ECHP (1995-2001) and EU-SILC (2005-2013). In most countries, there is positive income growth in the first period, with the clear exception of
Finland, a country that went through an economic downturn. The second period shows real income decline for lower-income private renters following the GFC, [9] particularly in Ireland, the Netherlands, France, the UK, Belgium, Greece and Portugal. With regard to private rents, there seems to be a general increase over time. There is somewhat more fluctuation during the second period (note however that the scale of the graphs differs), in particular for the
Netherlands (but case numbers are very low here), Ireland, the UK and France.
[Figure 2 about here]
Figure 3 illustrates how trends in unaffordable housing come about. For both time periods 1995-2007 and 2007-2013, we calculated the ratio for the different indicators (e.g.
Moore and Skaburskis, 2004). [10] For the countries characterized by strong financialization, results are very clear for the period 1995-2007. In line with Hypothesis 3, housing affordability for lower-income private renters deteriorates, which can be explained by the fact that growth in real private rents is stronger than income growth. This is the case for each country, and across urban and rural regions. Experiences after the GFC are varied, and changes are smaller.
In Portugal, rents further increase, while incomes decline – this leads to more housing affordability problems. In Ireland and the Netherlands, rents decline more than incomes, leading to better affordability. In Spain there is not much change. Changes are a lot less
19

outspoken in countries with moderate financialization. During the period 1995-2007, housing affordability across the UK improves somewhat (be it from a very high level of problematic situations), as incomes rise stronger than rents. This is in line with policy changes by the New
Labour government during this period, which were aimed at combatting child poverty (i.e. increased Income Support) and making work pay for the working poor. Rural regions profit more from this trend, as housing costs increase only marginally. In urban settings, the incomeeffect is dampened by rent increases. In Belgium, deteriorating housing affordability is mainly related to rent increases. This trend is confirmed in other studies using different data (e.g.
Heylen, 2015) and could be explained by a tight housing market (Winters and De Decker,
2009). Again changes are limited after the GFC. The only country standing out is Greece, were income declines are not compensated by rent declines. In the UK, rents decrease more than incomes in the period 2007-2013, but not in rural regions – where consequently housing affordability declines. The least change can be found in countries with weak financialization.
During the period 1995-2007, affordability across Italy improves as incomes increase more than rents (mainly in rural regions), the opposite is true for the period 2007-2013. In Germany, housing affordability improves before the GFC as private rents for lower-income households decline. Earlier we noted that a potential explanation might the influx of former public housing
(with lower rents) into the private rental stock.
[Figure 3 about here]
Changes in the age composition of lower-income private renters?
Given our broad demarcation of ‘lower income’ (bottom 40% of the income distribution), it is possible that our results are confounded by the fact that there may have been an influx of
20

younger people – who experienced increasing difficulties to enter homeownership but also generally have lower incomes – into the group of lower-income private renters. Such a trend would potentially endanger our argument that housing market financialization compromises housing affordability outcomes of poorer private renters lacking economic and political power, by rendering them more vulnerable for housing market dynamics arising from investment strategies of higher-income households and other actors affecting house prices and rents at the lower end of the market. In Figure 4, we investigate whether there might have been an influx of young people among lower-income private renters. Young people have comparatively low incomes compared to the population in general, but at the same time they may also be able to afford higher rents than the more disadvantaged groups in the PRS, which could explain our over-time trend of increasing rents (3). This is obviously not the case, as in many countries the share of young people among the group of lower-income private renters has actually decreased
(somewhat) over time. On the other hand, the share of households with a reference person older than 45 years has increased somewhat. Hence, we conclude that housing market financialization has not only affected the young, as has been found in other research (e.g.
McKee, 2012; Searle and McCollum, 2014), but also the poor – involving different groups of people and different mechanisms.
[Figure 4 about here]
Changes in the socio-economic profile of lower-income private renters
In order to control for the possibility that decreasing housing affordability for lower-income private renters over time is caused by a changing socio-economic profile rather than ‘real’ trends (mainly rent increases), we recalculate the trends presented in Figure 3 for the period
21

1995-2007. To this end, we perform a so-called shift-share analysis (e.g. Fritzell and Ritakallio,
2010): For each country we reweigh our calculations for 2007 in such a way that the socioeconomic profile of lower-income private renters in 2007 matches that for 1995 exactly.
Because the absolute number of lower-income private renters is not that high in many countries, we constructed a weight-variable that captures the following characteristics: the household reference person is in work (yes/no); number of children < 16 years; number of persons ≥ 16 years. The combination of these variables results in the following weight-variable, consisting of eight categories: 1) single person in work; 2) single person not in work; 3) single-parent household; 4) couple no children reference person in work; 5) couple no children reference person not in work; 6) couple with children reference person not in work; 7) couple with 1-2 children reference person in work; 8) couple with 3 or more children reference person in work.
From Figure 5, we conclude that our previous findings remain largely unaffected. This supports our argument that housing market financialization compromises housing affordability of lowerincome private renters through housing market dynamics impacting on the cost of housing, even if the composition of this social group may have changed over time.
[Figure 5 about here]
Conclusion and discussion
In the conclusion to their edited volume on the PRS, Crook and Kemp (2014a: 245) argue that:
“The impact of the GFC on mortgage lending and public expenditure, the turn to PRS growth in some countries and the increasing internationalization of private rental investment in some cities, are likely to have profound implications for private renting in at least some advanced
economies”. Previous research has mainly focused on the plight of young people, who are
22

disproportionally affected by housing market and labor market conditions before and after the crisis. They have become less able to establish themselves in the homeownership segment early on in the life course, and therefore either stay at home longer or remain in the private sector for an extended period of time. Increased dependency on intergenerational transfers is furthermore likely to exacerbate inequality within generations. This paper has shown that not only the young, but also the poor – in particular the more disadvantaged lower-income households that traditionally find a home in the PRS – have been affected by housing market financialization.
We argued that housing market financialization adversely affects households with less economic and political power through housing market dynamics arising from the strategic behavior of those situated above them – such as higher-income households and other housing market actors. For instance, financialization turns rental housing into a financial and more tradable asset, and affects investment strategies not only of institutional, but also of individual landlords. Such trends tend to reduce the supply of affordable, low-quality housing at the bottom of the housing ladder, and/or negatively affect security of tenure, housing quality and segregation. As these trends are more obvious or perhaps more researched in urban settings, in particular in so-called ‘world cities’, we incorporated a spatial dimension by distinguishing between ‘urban’ and ‘rural’ regions.
Housing market financialization affected most European countries, but some much more than others. Although experiences before and after the GFC are variegated, we found that in 2/3 of country-regions housing affordability of lower-income private renters worsened between 1995 and 2013. Across Western-European country-regions, increases in housing market financialization are furthermore positively associated with worsening affordability of housing for more vulnerable lower-income private renters. Such a trend mainly originates from the time period before the GFC (1995-2007), with smaller changes in housing affordability afterwards (2007-2013). Opposed to our expectations, this positive association was however
23

as strong among rural as among urban regions. This finding may however be due to the fact that our approximation of ‘urban’ and ‘rural’ regions was very rough and not particularly comparable across data sources (ECHP and EU-SILC).
For our arguments to hold, decreasing housing affordability of lower-income private renters should (at least partly) be explained by rent increases, rather than by declining incomes or by changes in the socio-economic and age profile of our group of interest. This proved to be the case. Increasing rents could not be explained by a potential influx of younger, and compared with other lower-income private renters, richer respondents. Also, keeping the socio-economic profile of lower-income private renters constant, we find that in particular in countries with strong financialization (Ireland, Netherlands, Spain and Portugal) decreasing affordability arises from the fact that during the period 1995-2007 private rent increases were not compensated for sufficiently by the growth of household incomes. Such a process was not evident in countries with moderate and weak financialization.
Given the historic reversal of the long-term decline in private renting, with the sector now housing more and a broader variety of households in several countries, it is important to research the impact of broader trends not only on the tenure (i.e. size, financing, public support), but also on its inhabitants, which traditionally have a more vulnerable socio-economic profile. It is well-known that housing-related problems are associated with a host of negative outcomes, particularly for children, e.g. health, educational attainment. A lack of affordable housing in the PRS is furthermore a typical predictor of homelessness. While much of the debate so far has focused on access to decent and affordable housing – in particular homeownership – for the young, this paper calls for more attention to the poor.
24

Acknowledgements
This research was supported by the European Research Council (Grant Agreement No. 283615, www.tilburguniversity.edu/HOWCOME ). ECHP and EU-SILC data were provided by Tilburg
University.
Notes
[1] “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability,
widowhood, old age or other lack of livelihood in circumstances beyond his control” (Article
25, 1).
[2] According to Crook and Kemp (2014a: 239), “New PRS supply has generally come from
existing dwellings transferring into the PRS”.
[3] The correlation between this indicator and the Mortgage Market Liberalization Index compiled by the International Monetary Fund (IMF) – which is not available for different years
– amounts to 0,8 (Fernandez and Aalbers, 2016).
[4] Table 1 also includes Denmark (DK).
[5] Higher-incomes tend to make disproportionate use of tax advantages. In tight housing markets, this pushes house prices upwards.
[6] Using the modified OECD-equivalence scale.
[7] The concept of ‘total housing costs’ refers to all costs connected with households’ right to live in the accommodation. For renters, housing costs include rent payments, gross of housing
25

benefits, structural insurance (if paid by the tenants), services and charges, taxes on the dwelling (if applicable), regular maintenance and repairs.
[8] This confirms results from previous research (Dewilde and De Decker, 2016), where the changing gap between low- and middle-income groups in housing affordability was the dependent variable. Results from this research were robust to alternative operationalizations, e.g. the demarcation of ‘low income’, and to statistical control for trends over time in absolute incomes (change in GDP) and income inequality (change in the P50/P10 measure).
[9] Note that the reference period for the measurement of income in both surveys refers to the previous calendar year.
[10] For the Netherlands, we use 2008 because of a data quirk in 2007. For Finland, 1996 is the first available year.
26

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Tables and figures
Table 1. Trends in European housing markets, 1995-2007-2013 ( ∆ = absolute percentage change)
∆ 1995-2007 a
Weak financialization
DE 2,0
FIN
IT
3,1
8,4
Moderate financialization
FR
BE
AT
13,4
13,5
18,3
UK
GR
21,5
25,8
∆ 1995-2013 a
-1,1
13,4
14,4
22,8
26,6
22,1
22,8
34,9
HO-rate,
∆ 1995-2007
6,5
1,0
-0,5
-0,6
-0,5
1,3
3,6
-8,3 b
HO-rate,
∆ 2007-2013 b
-1,2
0,0
0,1
4,7
-0,4
-2,0
-7,5
0,2
Outright
HO-rate,
∆ 1995-2007
-5,2
-0,9
11,7
1,1
-2,0
5,6
-3,8 b
Strong financialization
PT
DK
ES
39,3
41,5
43,2
44,6
51,4
41,8
11,6
-0,6
1,8
0,6
-4,3
-5,1
-8,5
14,6
-15,3
NL 46,5 53,9 7,9 0,2 0,5
IE 47,9 31,4 -3,6 -7,0 12,0 a : EMF (2015); b : own calculations on ECHP-EU-SILC (all households), c : Balchin (1996), Pittini et al. (2015).
HO-rate,
∆ 2007-2013 b
-0,5
-3,3
-2,8
-5,7
-0,4
7,1
-3,7
-11,8
0,0
0,1
-0,8
-5,5 stock,
∆ 1995-2013 c
-21,8
2
-0,5
4,9
-0,5
-2,9
-6,4
0
-2
2
0,4
-3
-0,7
Private rental stock,
∆ 1995-2013 c
14,4
5
8,3
0,9
-2,5
6,3
7,6
-4,3
-10
5
-2,5
-10
9,5
31

Figure 1 (top). % of low-income private renters with housing affordability problems
(ECHP and EU-SILC, own calculations)
Figure 1 (bottom). Regression plot for change in affordability problems of low-income private renters (ECHP and EU-SILC, own calculations) and change in mortgage debt between 1995 and 2007 (left) and 1995 and 2013 (right)
R = 0,62; p < 0,002 R = 0,71; p < 0,000
32

Figure 2. Evolution of real (2005-prices) median standardized yearly household income (left) and real median standardized yearly rent
(right) (€, low-income private renters, ECHP and EU-SILC, own calculations)
33

Figure 3. Trends in housing affordability problems, private rents and household incomes in countries with different levels of financialization (low-income private renters, ECHP and EU-
SILC, own calculations)
Strong financialization
Moderate financialization
Weak financialization
HA: Housing affordability problems.
34

Figure 4. Age composition of low-income private renters over time (%, ECHP and EU-SILC, own calculations – age household reference person)
35

Figure 5. Trends in housing affordability problems, private rents and household incomes in countries with different levels of financialization, results from shift-share
analysis (low-income private renters, ECHP and EU-SILC, own calculations)
Strong financialization
Moderate financialization
Weak financialization
HA: Housing affordability problems.
36