3.3 Relaxing the Accommodation Costs Specification

We now focus on the relationship between material well-being and accommodation costs. Our re-analysis of this relationship begins by replacing the accommodation cost measure used in the original report, which excludes property rates, with what we refer to as “true” accommodation costs, which includes rates as well as the other components of accommodation costs. To examine the effect of this change, column (1) of Table 4 reproduces the results of our attempted replication of the baseline model, reported in column (2) of Table 3, using the measure of accommodation costs excluding rates, while column (2) contains the results from the corresponding regression using “true” accommodation cost measure. The effect of including rates in accommodation costs is to lower the estimated accommodation costs’ coefficient from -1.04 to -0.86, although this change is not statistically significant at conventional levels.

Notes: Estimated standard errors are in parentheses. The number of observations used in all regressions is 2,986. All table entries are based on weighted calculations.

Next we re-estimate the specification from Table 3, column (4), which includes the fractions of income from earnings, capital and benefit allowances, and again uses the “true” accommodation costs measure. The results for this specification are contained in column (3) of Table 4. The impact of using “true” accommodation costs is again similar to that between columns (1) and (2): the accommodation costs’ coefficient falls from -0.95 to -0.76, although this change is again not statistically significant.

Building on the specification reported in column (3), we next control for the type of accommodation tenure, by including dummy variables for whether the CEU is a home owner with a mortgage, a renter, or has zero accommodation costs. (Note that the omitted tenure type here is freehold home ownership.) The results for this model are presented in column (4). First, the estimated coefficient on the log(true accommodation cost) variable in this model falls to -0.56 from -0.76 in column (3). Although this point difference is again not statistically significant, the difference between this estimate (-0.56) and the originally reported estimate of accommodation costs (-1.04) is both statistically significant and sizeable, representing roughly a 40% drop in the coefficient value. Other factors equal, this specification implies that 10% higher “accommodation costs” is associated with about a 0.06 point drop in material well-being score, compared to a 0.10 drop based on the original specification.

Second, the material well-being scores of both “mortgaged home-owner” and “renter” CEUs are significantly lower than those of “freehold home-owner” CEUs. For example, controlling for the level of accommodation costs (and other factors), having a mortgage is associated with a 4.7 point lower material well-being score on average; while being a “renter” is associated with a 2.6 point lower material well-being score. For those with no accommodation costs, we find a smaller and statistically insignificant, negative association with material well-being compared to freehold home-ownership.

An alternative specification to that adopted in column (4), to allow for different tenure effects of accommodation, is to interact the log(accommodation costs) with the tenure-type dummy variables. This hypothesises that there is a tenure effect on material well-being that is proportional to accommodation costs, rather than being a fixed size effect. We present the results for this specification in column (5). Although the precise interpretation of this specification differs from the dummy level-effects specification in column (4), the basic intuition for the results remains the same. After controlling for other factors, the coefficient on the log(true accommodation costs) variable (-0.20) is now relatively small and statistically insignificant. This coefficient represents the relationship between material well-being and accommodation costs of freehold home-owners.[18] This coefficient plus the coefficient on the interaction term between accommodation costs and the relevant tenure-type dummy variable provides the estimated association between accommodation costs of that tenure-type and material well-being. We find that higher accommodation costs for mortgaged home-owners and for renters are associated with significantly lower material well-being than for freehold home-owners, and again the effect is stronger for those with a mortgage than those renting. For example, other factors being equal, 10% higher accommodation costs is associated with lower material well-being scores of about 0.02 points for freeholders, 0.14 points for those with a mortgage, and 0.10 points for renters.

The final specification we present in Table 4, presented in column (6), combines the previous dummy variable and interaction specifications. In other words, tenure is hypothesised to have both fixed and variable effects on material well-being. The large standard errors on the coefficient estimates in this model compared to those in columns (4) and (5) implies there is quite strong collinearity between the dummy variables and the interaction terms, which makes interpreting the results from this model difficult. However, that the estimated coefficients on the log(accommodation costs) and interaction variables are broadly similar to those in column (5),[19] whereas the dummy variable coefficients are generally substantially smaller than in column (4), suggests the “interaction” specification is perhaps the dominant specification. This conclusion is supported by tests of the joint statistical significance of the dummy variables (F-statistic=0.31, p-value=0.82), versus the joint significance of the interactions (F-statistic=2.55, p-value=0.08).

The results presented here on the relationship between accommodation costs and material well-being demonstrate that a coherent understanding of the relationship needs to allow for differences across types of accommodation tenure. Although it could be argued that the specification in the original report did this by restricting accommodation costs to exclude property rates, which will directly affect freehold home-owners and, to a lesser extent, those with mortgages, this does not seem a satisfactory approach to us, at least under the guise of “accommodation costs”. This aside, the results here are largely consistent with the footnote 26 comment in the original report (quoted above) that the (negative) association between accommodation costs and material well-being is stronger for those with mortgage and/or rent obligations. However, the more important issue is whether this result is due to a direct effect of such accommodation costs on material well-being, or reflects the impact of other factors. Perhaps the most obvious factor is, again, a wealth effect that isn’t adequately captured by either the savings/investment variable or the income specification adopted, although there may be other explanations for this finding.