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Affordability of Housing: Concepts, Measurement and Evidence - WP 06/03

2  The Concept of Affordability

2.1  The Concept

The term ‘affordability’ is widely used in the English language, with general consensus as to its meaning. Indeed, the term ‘housing affordability’ has come into widespread usage in the last 15 or so years. However affordability as a concept is hard to define. In this context, ‘afford’ is defined as being able to pay without incurring financial difficulties[1]. But how does one decide exactly when they are in financial difficulty? Often things are considered unaffordable even when someone’s income is clearly greater than the cost of an item.

Stone (1994, p.21) states that affordability is not an inherent characteristic of housing, but rather a relationship between incomes and relative prices. Of course, this argument could easily be extended to any good or service.

This is an example of the conceptual problem economists have with housing affordability. Glaser & Gyourko (2003) state that the ability to pay criterion confuses poverty with housing prices, and that income should form no part of affordability considerations. They believe that the physical construction costs of housing are a more sensible benchmark to compare with prices. However this definition does not reconcile with our above definition of ‘afford’, which clearly indicates the relevance of income. We believe that the ability to pay is a crucial element of housing affordability.

When we refer to the affordability of an item, we are usually talking about the amount of financial stress that the purchase would place us under. There are two ways to consider this financial stress. Firstly, how much of our income[2] is going on this purchase? Secondly, how much income do we have left over for other goods? These measures can be applied to housing just as easily as any other good.

However these two measures both have an inherent problem, arising from our lack of a specific definition of the word ‘afford’. Affordability can generally be thought of as a continuum, which is itself a relationship between income and relative prices. At one end is easily affordable, at the other definitely not affordable. But at which point do we say that something that was affordable now becomes unaffordable?

There is very little difference between the concept of affordability as it applies to housing and as it applies to other goods. The obvious variation is that a person might consider a particular house to be quite affordable, while they consider some other good for the same price to be very unaffordable. What makes this possible is that what we really care about is how much money we have left over after a purchase and what we think we might need to spend it on. Since housing accounts for a much greater proportion of a household’s monthly expenditure than most other groups, we need less income left over after housing costs than we do after, say, clothing costs. Also, when purchasing a house the total cost (and benefit) can be spread over several years, more so than most other goods.

A related concept used in the context of housing is accessibility. Accessibility is a reflection of initial conditions facing a potential tenant or owner. It includes the interest rate, house prices, rents, income and the criteria applied by lenders. Accessibility may be further influenced by government housing policy; for example, a grant to first-home buyers may make a purchase more “accessible”.

In contrast affordability typically refers to the ongoing costs of owning or renting. It clearly reflects many of the same factors governing accessibility, and may also be influenced by government policy. For example, the payment of an Accommodation Supplement may make housing more “affordable”, other things being equal. A person for whom housing is unaffordable is in effect lacking access, suggesting that there is no clear demarcation between the two concepts. The issue of accessibility for potential home owners and tenants is addressed in Section 6.1.

2.2  Three Strands of Affordability

Housing affordability can be viewed from three different perspectives: affordability for renters; affordability for would-be home owners; and affordability for existing homeowners (DTZ New Zealand 2004).

These different approaches are appropriate as affordability considerations are likely to differ for different groups of people. There is a difference between the affordability of, say, rental accommodation and of purchasing a house. Someone who is renting doesn’t consider the actual value of the house as much as someone looking to buy it. Similarly, interest rates have only an indirect impact on rental affordability.

The accompanying box offers a selection of definitions of affordability:

Alternative Definitions of Affordability

Some definitions used in practice (policy and academic) are set out below. Most of these definitions include components of adequate accommodation and adequate residual income. As DTZ New Zealand (2004, p.19) point out, “these two components can be considered the core of any definition of housing affordability”.

“Affordability is concerned with securing some given standard of housing (or different standards) at a price or rent which does not impose, in the eye of some third party (usually government) an unreasonable burden on household incomes.” (Maclennan and Williams 1990, p.9)

“The answer is that any rent will be affordable which leaves the consumer with a socially-acceptable standard of both housing and non-housing consumption after rent is paid” (Hancock 1993, p.144)

“A household is said to have a housing affordability problem, in most formulations of the term, when it pays more than a certain percentage of income to obtain adequate and appropriate housing” (Hulchanski 1995, p.471)

“Physically adequate housing that is made available to those who, without some special intervention by government or special arrangement by the providers of housing, could not afford the rent or mortgage payments for such housing.” (Field 1997, p.802)

“Definitions of affordability concentrate on the relationship between housing expenditure and household income and define a standard in terms of that income above which housing is regarded as unaffordable” (Freeman, Chaplin and Whitehead 1997)

“The notion of reasonable housing costs in relation to income: that is, housing costs that leave households with sufficient income to meet other basic needs such as food, clothing, transport, medical care and education” (Australia National Housing Strategy 1991)

“’Housing affordability’ refers to the capacity of households to meet housing costs while maintaining the ability to meet other basic costs of living.” (Burke 2004)

“Affordability is not simply a matter of housing costs and income levels; it is about people’s ability to obtain housing and to stay in it.” (Housing New Zealand Corporation 2005)

2.3  Relative and Absolute Affordability

Using affordability as a relative measure can be very useful. It allows us to document changes in financial stress over time and across populations. However this only gives us information regarding variations in affordability along the continuum, not whether any particular position on the continuum is actually affordable or not.

An absolute measurement of affordability is necessary to give the whole picture. For example, housing may be causing more financial stress than it was 5 years ago, but if it is still ‘affordable’, then the change is of only minor consequence. So, how much financial stress do we need before we say that housing is unaffordable? This requires some sort of benchmark.

2.4  Normative Basis

As outlined above, an inherent problem in defining affordability is the need to invoke some benchmark for which there is no objective definition. What we consider to be ‘adequate accommodation and adequate residual income’ requires some normative decision-making. We need to decide how much money people need, and this often involves arbitrary benchmarking.

The normative basis of affordability definitions has been widely criticised (DTZ New Zealand 2004). For example Bramley (1994) discusses how decisions are made regarding what is considered acceptable under any particular measure. He notes that there is often no explicit basis for these decisions, that they are made in a subjective way and that they may simply refer to past observations.

Yet the literature provides no help in discovering an objective method of benchmarking. Glaeser & Gyourko (2003) compare house prices to their “more sensible benchmark” (p.21) of construction costs over time. Yet they do not provide any useful benchmark for an absolute affordability analysis as they do not state what they believe this ratio should be, but only compare the ratio over time and across areas.

Consequently, it appears that using some sort of normative basis for definition and measurement is inevitable for any analysis into housing affordability.


  • [1]Collins English Dictionary.
  • [2]See later for a discussion of exactly what we mean by ‘income’.
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