What determines local housing affordability? A decomposition analysis of residual income distributions in Germany 2002-2018

Marco Schmandt

ERES from European Real Estate Society (ERES)

Abstract: Using detailed survey data from the German microcensus, I analyze changes in the distributions of housing affordability for renters in three local housing markets (Berlin, Cologne, Ruhr area). Despite (strong) real increases in rents, housing affordability, measured as the income net of housing expenditures (residual income), increased between 2002 and 2018 along the entire distributions in two of the three markets. I document that at the same time the socio-demographic (education, age, household size) and housing market compositions (locational quality, living space per person, mobility) changed in all housing markets and propose that these compositional changes could contribute to the observed increases of residual incomes. To assess the impact of compositional changes on local housing affordability, I apply a decomposition method based on recentered influence function regressions (Firpo, Fortin & Lemieux 2018) to decompose changes in residual incomes along the local affordability distributions into a part that can be attributed to compositional changes and a residual that must be attributed to changes in preferences and implicit prices. I show that at the local level and along the whole distributions, a major part of the increases of residual incomes is explained by changes in the composition of socio-demographic characteristics.

Keywords: Housing Affordability; housing expenditures; residual income; RIF-decomposition (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2024-01-01
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