Many transferees are expressing concern about the increased cost of living due to appreciating housing market values across North America. If a cost-of-living allowance wasn’t initially offered, they are asking for one. If they are receiving an allowance, they’re questioning the amount and even insisting that they need more. What should your company do about this?
Understanding Cost of Living Differentials
While home values are increasing, there are several factors that must be understood when calculating a cost-of-living differential. Those include:
- Housing costs are increasing in almost all markets which tends to mitigate increases in the cost-of-living difference
- Housing is only one of several components in the overall calculation
- Though availability may drive costs up or down, availability itself is not factored into the equitation as a separate component
Values have been increasing in almost all markets. So housing is more expensive in the new location than it was just a few months ago. However, housing prices have likely also risen in the area the transferee is leaving. This means that they will get more for the home they are selling, which can be applied as a down payment on the new home. In a recent S&P/Case-Schiller U.S. National Home Price index, all of the 20 largest housing markets in the United States showed a year–over–year increase. The lowest rose by 8.6% while 18 out of 20 markets increased by double digits between 10-20%.
Cost of Living is More Than Home Value
Remember, housing is only one component of the overall cost of living. Additionally, home cost is not all paid at the time of the move. It’s paid off gradually over the length of a mortgage. What other costs go into cost of living? Transportation costs, the combined goods and services consumed on a daily/monthly/annual basis and income taxes are also part of the calculation.
Certain items in the goods and services market basket are going up this year but these are increasing across the country. Federal taxes will likely go down for an individual moving into a more expensive home as they can deduct more mortgage interest and property taxes (up to limits set by the Tax Cuts & Jobs Act). When combining all of these components, even if housing in the new location goes up 8-10%, with the previous location staying flat, which is doubtful, the overall cost of living may only increase 2-3%.
Appreciating Housing Market Values and Availability Issues
Many markets are seeing reduced inventory and bidding wars on new home listings. While this can make relocating to a new market challenging, “availability” is not measured as a stand-alone component of the cost–of–living calculation; rather, costs are collected and analyzed. Additionally, the “listing” price for homes should not be used to calculate an accurate cost differential. Homeowners can list their home at any price they wish, which doesn’t mean that someone will pay that price. To determine home market values for a cost-of-living calculation, use home values after the offer is accepted and the deal is closed.
Fluctuating Rental Options
Renter markets are also moving in various directions, both up and down. This is due to many factors, including: downward pressure in “downtown” areas over the past 12-18 months due to increased remote work, upward pressure in outlying suburban areas due to people moving out of downtown areas, etc. Using a radius of distance to calculate housing costs around your worksite can mitigate some of these spikes.
Adapting to Changes
The pandemic has changed many things, for companies and homeowners alike. It is more essential now than ever for organizations to:
- Ensure they procure cost-of-living data from a legitimate and accurate source
- Understand the data and methodology used to calculate differentials
- Differentiate between homeowners and renters, as cost differences vary between these profiles
Two Location Comparisons calculate the cost difference between two cities. If costs are increasing at the same rate in both locations, it does not change the result of the calculation. Rather, if costs are increasing everywhere, it can become a national inflationary issue that would most likely need to be addressed by your compensation team as opposed to your relocation team. Interested in learning more about our living cost solutions?