GINI Policy Paper 2: A supplementary measure of income poverty including housing: advantages and risks, measurement challenges and policy implications

The European Commission set a target for the reduction of poverty and social exclusion by 2020. Progress are monitored with the help of EU social indicators. Although the inclusion of imputed rent has been advocated by experts in the measurement of income, it has not been adopted in standard social EU2020 indicators. This paper considers the inclusion of housing in the concept of disposable income, put forwards measurement challenges and effect of different approaches. The paper shows that: • Housing wealth and expenditures increased in the last decades • EU2020 target and flagship initiative on the reduction of poverty and social exclusion pay partial attention to housing • Although expert advice the inclusion of imputed rent in the concept of disposable income, this is not part of EU social indicators, because of comparability, measurement and theoretical problems • Several methods are available for the inclusion of housing in disposable income: rental equivalence subjective and objective) and capital market method for imputed rent; out of pocket approach for housing expenses • While the inclusion of imputed rent generally reduces income inequality and poverty, the inclusion of housing expenses increases both; however, imputed rent generates considerable re-ranking and its importance diminished in the early phases of the Great Recession • The inclusion of housing expenses (out of pocket approach) seems more suitable for poverty analyses, while the inclusion of imputed rent estimated with the capital market approach seems more appropriate for tax analyses • Further improvement in EUSILC data are need for a correct measurement of housing returns and costs, in particular with reference to mortgage interest payments