Housing affordability is widely recognized as one of the most important issues facing households today. However, before we can assess the extent of the problem or propose solutions, we need to be clear about how affordability should be measured. Perhaps the most important principle is that any metric needs to be relevant to, and reflect the circumstances of, groups widely thought to experience affordability problems, particularly low-income households and first-time buyers. Therefore, the measure should capture the distribution of outcomes across households rather than concentrating simply on averages; rising house prices, for example, have different effects on different groups. This paper critically examines the measures of affordability most commonly employed internationally, before proposing two modifications: one for low-income renters and one for potential first-time buyers.

Most regularly used measures of affordability concentrate primarily on housing demand and pay less attention to the supply of homes available to the lowest income groups or to the imbalance between demand and supply. But, in principle, measures can be constructed that incorporate both demand and supply elements by, for example, examining vacancy rates or by comparing the distribution of available housing by costs with the distribution of household incomes; this attempts to relate the number of housing units potentially affordable by different income groups to the total number of households in each income group. In practice, this fourth approach has been used less widely internationally.