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# 3.4  Calculations and Benchmarks

## 3.4.1  Calculations

Calculating these measures is less than straightforward. The key considerations are what exactly we mean by ‘outgoings’ and ‘income’.

Income can be gross or net, all income or only wages/salary, and with or without the Accommodation Supplement.[7] We could look at individual income, or household income. We can also calculate average individual income as that for all people or of only those employed. The latter, which is obviously the average wage, is much larger than the former.

There is also the issue of whether we should use current income, or an alternative such as permanent or expected lifetime income. People consider their expected future income alongside current income when making housing choices. This may be more realistic than current income for affordability purposes. However using this idea in practice becomes difficult. An objective estimate of someone’s future income may be different to their own expectations. Further, it is difficult to ascertain what these income levels might be. Therefore we use current income for our analysis[8].

Outgoings are even more variable. For people currently making payments, we must decide whether housing costs include only rent and mortgage payments, or other costs like rates and repairs. We must also decide whether to deduct the Accommodation Supplement from housing costs. For those where we want to measure what repayments would be if they were to buy a house, many assumptions need to be made. We need to assume things about the size of the deposit and the interest rate. We also have to consider how much the house will cost. In this paper, we use all costs in some cases, while in others only mortgage or rental payments. This is clearly outlined in each case.

## 3.4.2  Household or individual income

Whether individual or household income is used can make a significant difference. The increasing proportion of two-income households, due in part to increases in the female participation rate, has led household income to rise faster than individual income. One could argue that household income is a much better measure for affordability because it is the whole household that pays the housing costs, and a couple may easily be able to afford a house that individually they could not.

But that same advantage can also be to the detriment of household income as a measure. Household income hides changes in household composition that are due to income shortfalls. A lack of sufficient income to pay housing costs may induce people to live with others. Household income is then able to cover the housing costs adequately, but the change in composition hides the decreasing affordability for the individuals. Similarly, it is possible that the increasing participation rate is partly due to couples deciding that they need two incomes to afford their house, rather than some change in underlying preferences.

We believe that household income is the best for our purposes, and consequently we use this in Section 4. We endeavour to use average net household income where possible. This data is for all households, and incorporates all income including the Accommodation Supplement. In some cases we use average gross individual income, due to data limitations.

Housing assistance such as the Accommodation Supplement is based on the concept of the economic unit. Rather than the household, the economic unit more closely corresponds to a family unit where there is a common pool of incomings and outgoings. The distinction is important in cases where there is a composite household; eg, a couple with children and an independent single person (say a widowed mother or border). Each has a responsibility for meeting a share of the housing costs. As a result, there can be two distinct outcomes for affordability for each part of the household.

## 3.4.3  Benchmarks

As discussed earlier, every measure requires a benchmark for an absolute affordability analysis. At what proportion of total income do housing costs become ‘unaffordable’? Organisations in many countries, including Statistics New Zealand[9], use either a 25% or 30% benchmark. That is, they calculate the proportion of households whose housing costs exceed this level.

As for the residual income method, we need to determine how much money we have left over after housing costs have been incurred. We then need some benchmark as to how much is ‘necessary’, and at what point does the residual income become insufficient for an ‘adequate’ lifestyle. Benchmarks are usually derived from poverty measurement, or standard of living exercises. It is also possible to use a relative benchmark. For example, Statistics NZ[10] measures the proportion of houses with residual income below 60% of the median residual income.

Care needs to be taken when comparing information from multiple organisations. Continuing the somewhat arbitrary nature of these benchmarks, often the same benchmark is applied inconsistently. For example, the 30% OTI benchmark is has been applied to both gross and net income data by different organisations. Similarly, when calculating an average OTI, the result is only directly comparable to other figures if they were obtained using the same data definitions[11].

## 3.4.4  Benchmarks used in practice

Some benchmarks used in practice are shown below. The most common benchmarks are OTIs of 25% and 30%. That is, people spending more than this proportion of their income on housing costs. Many organisations concentrate on the lowest 40% of income earners for their analysis. As discussed earlier, often one benchmark can be applied by different organisations to data that is not directly comparable.

### Benchmarks in Practice

“Affordability typically becomes a concern where the housing costs of households in the lower 40% of the income distribution exceed 25% to 30% of their income.” (Housing New Zealand Corporation 2005)

“A household is below its affordability standard if it spends more than 30% of its income on housing costs.” (Canada Mortgage and Housing Corporation; cited in DTZ New Zealand 2004)

“Households in the lower 40% income bracket who pay more than 30% of their gross income on housing costs, whether renting or buying, are said to be in ‘housing stress’.” (Affordable Housing National Research Consortium 2001)

“Housing is considered affordable if households can access suitable and adequate housing by spending a maximum of 30% of their gross income.” This source then notes that this is consistent with a number of other countries, and that the strategy focuses on the bottom four deciles (40%) of household income (Auckland Regional Growth Forum 2003)

### Notes

• [7]The Accommodation Supplement is a non-taxable payment to provide assistance with accommodation costs. Receipt of another benefit is not required. It is payable to New Zealand residents who meet a range of income, assets and other criteria, and whose accommodation costs exceed a certain threshold.  It is available to all tenures, including home owners and boarders, with the exception of people who pay rent for a property owned or managed by Housing New Zealand.
• [8]In a similar vein, the expected inflation rate is potentially relevant to buyers in considering the effect on both future interest and house prices.  Given that there is no straight forward way to measure inflationary expectations we compute real interest rates by deducting the current inflation rate from the nominal rate.
• [9]ibid.
• [10]ibid.
• [11]Care must be taken when comparing our results (Section 4) to figures from other sources
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