# **2.3 Payment Approach**

Under the payment approach, the cost of housing corresponds to the out-of-pocket expenditures faced by households. Therefore, rent and utilities are part of tenants’ welfare aggregate while mortgage interest payments,<sup>18</sup> taxes, insurance, maintenance and repairs are included in owners’ welfare. This approach could be misleading when measuring poverty (Garner and Short, 2001).<sup>19</sup> For instance, Sierminska et al. (2008) show that in most of the nine developed countries of the study,<sup>20</sup> the median wealth-holdings by age of the household’s head exhibit a hump-shaped pattern. Younger heads have less than older ones. Simultaneously, elderly-headed household have virtually zero median debts which means that these are more likely to have already cancelled their mortgages. Therefore, expenditures on housing for homeowners with very low or no mortgages are not precise proxies of the flow of services received by owners (see also Crossley and Curtis, 2006 and Frick and Grabka, 2003). As a result, the payment approach may understate poverty estimates for elderly-headed households.

Moreover, differences in mortgage payments may reflect differences in interest rates or loan parameters which may not be related to the quantity and quality of housing services. Therefore, there os a risk of overestimating poverty for homeowners with very low or no mortgage and underestimating it for households with high mortgages levels or tenants.

The US Interagency Technical Working Group on Developing a Supplemental Poverty Measure Census (2010) acknowledges the need to adjust poverty thresholds by housing status. Citro and Michael (1995, p.148) state that the shelter component of the poverty line “ _would include actual outlays for mortgage payments, taxes, insurance, and maintenance and repairs, together with an imputed amount for the estimated rental value of the home net of such outlays. Such a definition would treat homeowners with low or no mortgage payments in a comparable manner with other homeowners and renters_ .” However, Crossley and Curtis (2006) question that property taxes are related to the consumption of housing services. Additionally, Garner and Short (2001) argue that taxes, insurance, maintenance and repairs associated to home ownership should not be included but only the part of those expenditures associated to being a potential renter of their own apartment should be considered.

# **2.4 Self-assessment**

This approach is based on data collected in some household surveys about owners’ estimates of a fictitious market rent of their dwellings.<sup>21</sup> For instance, homeowners are asked to estimate how much they would pay if they were renting their home Frick et.al. (2010). This method relies on the expectation that owners _can_ estimate rental equivalences even when there is no comparable rental dwelling in the area if they know of rents in other areas (Gaerner and Kogan, 2007). This should be less problematic in regions where rental market is active and well developed (Lanjouw, 2009). Thus, owner-occupiers are likely to be informed about the value of their dwelling and the amount they would have to pay to rent a home with similar quality and location attributes. Arévalo and Ruiz-Castillo (2004) find self-assessed values to be very similar to the results of a hedonic model on the same dwellings in Spain. Additionally,

> 18 Generally, these include only interests while the main payment is considered as investment.

> 19 Garner and Short refer to the definition of the poverty threshold for the United States.

> 20 Canada, Cyprus, Finland, Germany, Italy, Norway, Sweden, United Kingdom and United States.

> 21See Gillingham (1983) for a discussion on the importance of using this approach in “user-cost” method. To list few papers about other methods such as the rental equivalence approach see: Goodman and Ittner (1992); Garner and Rozaklis (2001); Garner and Short (2001); Garner et al. (2003); Garner et al. (2006); Gaerner and Kogan (2007); Lanjouw (2009); Arévalo and Javier Ruiz-Castillo (2004); Lebow and Rudd (2003); Heston and Nakamura (2009) and Frick et.al. (2010).

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