A cross-country comparison of the middle-class with income polarisation is commonplace in welfare economics. Using the housing cycle of 2001–2007 and national panels for Australia, the United States, Germany, and Switzerland, this study shows that polarisation is sensitive to housing cycles, affecting the ranking of countries. However, adding imputed rent to income stabilises the cross-sectional ranking. The pattern of change suggests that the middle class in countries with high housing prices tends to be relatively cash poor but rich in housing. In particular, the transition matrices show that, in Australia, up to 25% of middle-income households lose their position in the income distribution if rent is ignored (up to 13%, 15% and 7% in the United States, Germany, and Switzerland, respectively). Under these circumstances, the middle class is harder to detect with conventional income measures. Therefore, cross-regional comparisons of income polarisation may be inaccurate, especially using tax data, as imputed rent is rarely taxed.

Dr Sergey Alexeev works at NHMRC Clinical Trial Centre, the University of Sydney. He is an applied microeconomist with particular experience in risky health. He has particularly strong expertise in formulating a public policy to improve the health of individuals with poor health and self-control. Sergey received a PhD in economics from the University of Technology Sydney in May 2020 with specialised training in econometricians. His experience includes estimating the causal effects of public policies in nonexperimental settings using complex administrative data (including mobile apps) and national household surveys. Sergey has worked with the Swiss tax authorities data, NSW data crime and reoffending data, NSW Department of Education individual-level NAPLAN data, Russian Repository of Judicial Statistics, Factiva, and household surveys from the United States, Germany, Switzerland, Australia, and Switzerland.