Affordability of Housing: Concepts, Measurement and Evidence

The “Affordability of Housing” has become a pressing issue in many countries, garnering widespread public debate and media attention. This paper aims to delve into the concept of housing affordability, examine the various approaches used to measure it, and document the aggregate evidence for New Zealand over the last twenty years. By analyzing data from the Household Economic Survey conducted by Statistics New Zealand, we seek to understand the trends and challenges related to housing affordability.

Housing affordability is a multifaceted issue that affects individuals, families, and communities. It refers to the ability of households to secure adequate housing without facing undue financial strain. The concept is not only about the cost of purchasing or renting a home but also encompasses the broader economic and social implications of housing costs. For instance, high housing costs can limit access to employment opportunities, education, and essential services, thereby affecting economic mobility and quality of life.

Measuring housing affordability is a complex task due to the various factors involved. One common approach is to assess the ratio of housing expenditure to income. For example, a household is considered cost-burdened if it spends more than 30% of its gross income on housing. However, this traditional measure has its limitations, as it does not account for other essential expenses or the quality of housing. Alternative measures, such as residual income burden, have been proposed to provide a more comprehensive understanding of affordability.

Using data from the Household Economic Survey, we examined the trends in housing affordability in New Zealand over the past twenty years. Our analysis reveals that affordability has fluctuated over time, showing no clear long-term trend when considering all measures. Different measures of affordability have shown varying movements, with some indicating periods of improved affordability while others suggest the opposite. For instance, while the percentage of cost-burdened households may have decreased in certain periods, the overall housing costs relative to income have remained a significant concern.

Our data indicate that housing affordability in New Zealand has moved in cycles over the last two decades. These cycles are influenced by a range of factors, including economic conditions, housing supply and demand dynamics, and policy changes. During periods of economic growth, housing demand often increases, leading to higher prices and reduced affordability. Conversely, economic downturns can temporarily ease affordability pressures as housing demand decreases. However, the long-term trend suggests that housing supply has not kept pace with demand, resulting in persistent affordability of housing challenges.

The issue of housing affordability is not unique to New Zealand. In the United States, for example, affordability of housing has also emerged as a key concern, with 69% of Americans reporting that they are “very concerned” about the cost of housing. Various measures are used to track affordability, such as the Housing Affordability Index (HAI), which reflects the relationship between median home prices, median family income, and mortgage rates. The HAI indicates that affordability of housing hit a record low in 2023, with an index of 98.2, suggesting that the average American family earns less than the income needed to purchase the median-priced home.

Traditional measures of affordability of housing, such as the ratio of housing expenditure to income, have been criticized for their limitations. Michael Stone at the University of Massachusetts in Boston proposed an alternative approach, known as the residual income measure, which considers the disposable income left after accounting for housing costs and other essential expenses. This approach provides a more nuanced understanding of affordability of housing by recognizing that households with the same housing expenditure-to-income ratio may face different levels of financial strain depending on their overall income and expenses.

Addressing affordability of housing requires a multifaceted approach that includes increasing the supply of affordable housing, improving access to financing, and reducing other living costs. McKinsey’s report underscores the importance of unlocking urban land through smart, transit-oriented development and increasing the density of land to create affordable housing. Additionally, adopting an industrial approach to housing production can deliver homes quickly and at scale, thereby reducing costs. Expanding access to lending and reducing financing costs are also crucial steps in narrowing the affordability gap.

The “Affordability of Housing” remains a complex and evolving issue. While there is no consensus on the best way to measure affordability, various approaches provide valuable insights into the trends and challenges faced by households. Our analysis of New Zealand’s housing market over the past twenty years highlights the cyclical nature of affordability and the need for comprehensive policies to address the underlying supply and demand imbalances. By understanding these dynamics, policymakers can develop more effective strategies to ensure that housing remains affordable for all.