Study Finds Uneven Impact of Social, Fiscal Housing Policies on Household Income

On Tuesday 1 February 2022, Luxembourg's Minister of Housing, Henri Kox, presented the impact of taxation and social assistance on household income in Luxembourg.

The results, taken from note 30 of the Habitat Observatory at the Luxembourg Institute of Socio-Economic Research (LISER), reveal large disparities in these measures according to the standard of living of households, as well as between tenants and owners. According to the Minister, this study should contribute to the preparations for the debate on tax policies planned by the Chamber of Deputies (Luxembourg's Parliament).

The aim of the study is to deepen knowledge on the effects of social and fiscal policies related to housing for the case of Luxembourg and to place these results in a European context. Note 30 shows in particular a tax advantage in favor of owners compared to tenants. This "homeownership bias", by breaking tax neutrality, can have perverse effects. For example, by encouraging households to overinvest in the real estate sector, it can create a crowding-out effect for other types of investment and thus contribute to an increase in the volatility of real estate prices.

Fiscal and social measures in the area of ​​housing largely benefit homeowners, and among them, the wealthiest homeowners. Thus, the owners of the two upper quintiles, which represent 33% of households in Luxembourg, benefit from 56% of the gains resulting from the current socio-fiscal measures linked to housing. The owners of the two lower quintiles, who represent 20% of households in Luxembourg, benefit from 18.5% of the gains resulting from the current socio-fiscal measures.

However, the tenants of the two lower quintiles, which represent 20% of households, only benefit from 6.6% of the gains linked to the current socio-fiscal measures.

"This observation confirms my housing strategy to better target public aid for the realization of the right to housing. This is the whole objective of the measures we have put in place so far. On one hand, we have launched a targeted offensive for the creation of affordable public housing – with the Housing Pact 2.0, the creation of the special fund, the financing laws for major large-scale projects, and recently the reform of housing aid with affordable housing bill. On the other hand, through the reform of individual aid, we also aim to strengthen the housing aid measures that reach the households that need it the most: whether for tenants or for first-time homeowners", underlined Minister Kox. "In addition, this study by the Observatory of Habitat provides important information to feed the next debate in the Chamber of Deputies on taxation".

A study covering all the tax and social provisions relating to housing

The study assessed the average gains or average losses of income of the different measures according to the standard of living and the occupation status of the households (renters and owners) by comparing the financial impact of these measures. To do this, the LISER researchers applied a microsimulation model using data provided by European statistics agency Eurostat, National statistics agency Statec and various other Luxembourg administrations.

Note 30 from the Housing Observatory analysed three types of housing-related aid:

• Rental assistance (affordable or moderate housing, rent subsidy);
• Aid for first-time buyers and owners (interest subsidy and tax deduction on loan interest for a main residence, Bëllegen Akt, acquisition or construction bonus, housing VAT, tax exemption for rent imputed, property tax and the deduction of contributions to a housing savings contract);
• Aid for investors (costs of obtaining rental income).

Note 30 results show in detail that:

• The vast majority of households are impacted by the various measures. This is the case for all landlords and some tenants, in particular the less well-off tenants. However, the extent of the gains and losses linked to the devices varies greatly according to the standard of living of the household, and between tenants and owners.
• For owners:
  • Property tax has a very marginal effect in Luxembourg given its low level;
  • The non-taxation of imputed rents (imputed rent = the fictitious income obtained by an owner-occupant for the housing service that he provides to himself) strongly benefits the wealthiest households who are more often owners of their main residence;
  • Deductions on rental income allow a significant gain for wealthier households that have rental accommodation(s).
• For tenants:
  • Less well-off tenant households benefit from rent subsidy and subsidised rental housing;
  • Subsidised rental housing is particularly well targeted at less well-off households and represents significant assistance for beneficiary households. However, the share of households benefiting from this housing is very limited to date due to the limited supply of this type of housing. It is estimated that only 2% of housing is affordable housing.