What is Housing Affordability? The Case for the Residual Income Approach

Introduction:

What is housing affordability? Most fundamentally, it is an expression of the social and material experiences of people, constituted as households, in relation to their individual housing situations. Affordability expresses the challenge each household faces in balancing the cost of its actual or potential housing, on the one hand, and its non housing expenditures, on the other, within the constraints of its income. However, public policy and the interpretation of individual experiences are mediated through analytical indicators and normative standards of housing affordability that transcend unique individual experiences.

The logic of housing affordability:

Semantic and substantive issues relating to affordability. There are several types of tensions in the literature on housing affordability, including but not necessarily limited to the following:

1. Conceptual rigor versus practical policy implications.

2. Housing affordability versus “affordable housing”.

3. Housing affordability versus housing standards.

4. A normative standard of affordability versus empirical analysis of housing costs in relation to incomes.

Housing affordability:

Housing affordability versus “affordable housing.” In Britain and the United States, affordability is often expressed in terms of “affordable housing.” But affordability is not a characteristic of housing—it is a relationship between housing and people. For some people, all housing is affordable, no matter how expensive it is; for others, no housing is affordable unless it is free. “Affordable” housing can have meaning (and utility) only if three essential questions are answered:

1. Affordable to whom?

2. On what standard of affordability?

3. For how long?

Diverse and incompatible definitions of housing affordability:

Mathematically, the relationship between housing costs and incomes can be computed either as a ratio or as a difference. These two approaches are the formal foundations of the prevailing affordability paradigm and its principal challenger, respectively.

In practice, however, there appears to be a greater variety of different approaches to defining housing affordability or the lack thereof:

1. Relative—changes in the relationship between summary measures of house prices or costs and household incomes.

2. Subjective—whatever individual households are willing to or choose to spend.

3. Family budget—monetary standards based on aggregate housing expenditure patterns.

4. Ratio—maximum acceptable housing cost/income ratios.

5. Residual—normative standards of a minimum income required to meet non housing needs at a basic level after paying for housing.

Relative measures:

The relative approach, used widely by the mortgage lending and real estate industries to assess the affordability of the residential sales market, is based on prototypical housing costs, primarily for potential home buyers. The derived indicators enable two or more points in time to be compared as to whether, on average, dwellings for sale have become relatively more or less affordable, typically either in relation to median income or in constant dollars.

Family budget standards approaches:

The third approach to conceptualizing housing affordability bases standards on summary measures of what households in the aggregate actually spend. In practice, this has formed the basis for the ratio approach. It has also provided the basis for the budget standards approach of a standardized monetary amount for housing. Since the latter can be understood as a purely income-based standard of affordability, it deserves attention here as a distinct approach.

Conclusion:

This article has examined the foundations of the housing affordability concept, debates about the meaning of affordability, and some of the practical tasks and challenges in operationalizing and applying a residual income affordability indicator and standard. The principal purpose has been to build the case for the residual income concept of housing affordability as sound in its own right and as a compelling alternative to the ratio approach.

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