Housing costs weigh on low-income populations
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Housing costs weigh on low-income populations

Housing costs are a perennial issue. However, that worry about rising rents is increasing now in particular requires an explanation and steers the discussion towards the importance of housing and the different problems depending on the income class.

For the first time ever, housing costs were among the top ten worries of Swiss voters – in eighth place – with 17% of respondents naming increased housing costs or rising rents as one of their five main worries. The result reflects the high importance that housing has always had in society. The coronavirus pandemic pushed the importance of one's own home to a whole new level, since people spent a lot of time at home during the lockdowns. Housing will likely continue to be more important in the post-COVID-19 world, due to the widespread trend of working from home. However, why the issue of housing costs is now so widely at the forefront still raises questions because housing costs have undergone periods in the past in which they increased much more sharply than they have recently.

What does the data say?

For private households that have not moved in recent years, rent has remained stagnant or has even decreased, provided the tenant has filed a request for reduction due to the lower reference interest rates. For private households that have moved, the data is less clear. Out of the four available time series that track both rental prices indicated on housing portals (advertised rents) and rents arising from newly concluded rental agreements (agreed rents), two show a slight increase, and the other two a decrease. On average, we can assume a sideways trend in rents over the past few years. This is plausible since rental housing vacancies have increased significantly since 2014 and there are now over 70,000 vacant rental apartments across Switzerland. Rising rents were a bigger problem, especially until around 2015, as all four time series illustrate through sharp increases in the years leading up to 2015. Housing costs have only recently been included as a response option in the Worry Barometer, which explains why housing costs were not named as a main worry then.

Does the dwindling dream of homeownership also play a role?

Out-of-control property prices may also be responsible for worries regarding high housing costs. In the wake of ongoing rock-bottom interest rates and growing scarcity because not enough single-family dwellings and condominiums are being built, residential property prices are once again rising rapidly. Since the regulation of the mortgage market additionally imposes greater financial requirements for potential borrowers, few households still manage to make the leap to ownership. This is frustrating and worrying for many households willing to buy, especially since residential property is currently the clearly more advantageous form of housing in terms of costs.

Strong willingness to pay for housing

Let's take another look at rents. The fact that rents do not significantly decrease – even in times of high vacancies – ultimately has to do with our willingness to pay. Housing is important to us. With growing wealth or income, we are prepared to spend more for housing. Therefore, the share of housing costs in Switzerland has remained at a constant 14% to 18% of the household budget for over 70 years, even though income has significantly increased during this period. When we earn more, we treat ourselves to bigger and better housing. Another important factor is the scarcity of land, meaning that land prices continue to increase as long as Switzerland grows and prospers. As a result, rents tend to fluctuate roughly proportionally to changes in income. This was also the case over the past ten years, during which the nominal salary increased by 0.70% per year on average. A similar annual increase of 0.71% appears when we calculate an average of the aforementioned four rent price series.

A problem of major urban centers

However, the above considerations do not take into account the fact that neither rent prices nor income increase evenly everywhere. Especially in major urban centers, where most of the demand has been concentrated due to reurbanization trends and where, accordingly, there are considerably fewer vacancies, rent prices have increased more in recent years.

For urban tenants, housing costs are therefore a more important topic. This is compounded by the fact that, in most cities, densification is difficult to implement and not nearly enough housing is being built. Housing scarcity can ultimately only be resolved to everyone's satisfaction through an expansion of the offering – a principle that urban policy often does not take to heart, relying instead on rationing. Only a few can then acquire discounted apartments or spots in a cooperative, while the rest of the population is exposed to scarce and therefore expensive housing.

Rent burden mainly problematic for lower income brackets

Housing costs are mainly problematic for the bottom income quintile of households. Because while households in Switzerland currently have to spend 14.7% of their budget on housing costs on average, this percentage is 36.2% for tenant households in the bottom income quintile. This violates the rule that no more than a third of income should be dedicated to housing purposes. In this regard, the situation has continuously worsened for the bottom income quintile over the past 20 years, while the burden has decreased for other tenants. Accordingly, policy should focus on rental households with very low incomes and offer targeted support to such households instead of generally reducing the price of apartments.