'Can Pay? Won't Pay?' or Economic Principles of 'Affordability'

Abstract

The term 'afford ability' has been gaining currency in housing policy debates, but neither government nor academic researchers have given much consideration to defining it. This paper considers what meanings have been given to the term affordability in practice and suggests a range of analytically more useful definitions. It argues from economic first principles that it is more logical to use some form of residual income definition than one based on a prescribed ratio of housing costs to income. Most researchers have been using a ratio definition. The paper then uses data from a household survey in the Glasgow Travel-to-Work Area in 1988/89 to examine the incidence of 'unaffordability' of housing costs according to a variety of definitions.

Identifying Variables Influencing Tenant Affordability to Pay Rent in Ipoh City Council Public Housing

“…Adult children staying with their families are believed to help the family earn more income [22]. Hence [15] in his study has classified working children under a separate unit from parents in his analysis while dependent children were considered as one unit with the parents [15] reiterated that values for housing and non-housing vary depending on size and age of household group consumption. Larger households require bigger houses and the attendant higher income needed to achieve the same level of wellbeing enjoyed by smaller households [7] found that households headed by women, senior citizens and single mothers bear higher housing cost liabilities [7] also proved that race and ethnicity of households indicated differing housing cost liabilities whereby black and Hispanic households faced housing problems and problematic neighbours.…”

“…Debates on affordability measurement usually centre on accurate measurement of resources obtained by households i.e. whether income should be calculated on gross or after tax deduction to yield net income; and methods of calculation of sources of income [15] theorized that income measurement should be based on household net expendable income after all taxes have been deducted and housing benefits have been factored in as income. Housing benefits are subsidies given to deserving low income households to aid in housing costs and not to be used for other needs.…”

Housing Affordability in Metropolitan Areas. The Application of a Combination of the Ratio Income and Residual Income Approaches to Two Case Studies in Sicily, Italy

“…The general methodology for applying the two approaches is well known, and several studies have examined many particular aspects of its application such as: the income gap between renting and owning [39]; the definition of the cost of housing consumption in the short run or the analysis of affordability in the long run [13,15,48]; the type of households that are vulnerable to housing stress per age, location, composition, etc. [41]; and the housing standard based upon gross household income or disposable income [12].…”

“…An explicit ratio is also specified, although this has gradually shifted up over the Twentieth Century; for example, in Canada, it was 20 percent until the 1950s, 25% until the 1980s, and has been 30% since then. The ratio approach has been criticised because the value of this ratio is not the result of statistical models; it is just a 'rule-of-thumb' and, in any case, tends to apply the same ratio for any household type and consumption standard, so it may be misleading [13,15,30]. Nevertheless, if used in conjunction with other affordability measures, it may provide a useful starting point for examining affordability problems [31].…”

“…The term 'housing affordability' began to be used from the 1980s and may be defined in various ways, among which we can cite: housing affordability refers to the capacity of households to meet housing costs, while maintaining the ability to meet other basic costs of living [14]; a rent is affordable when it leaves the consumer with a socially acceptable standard of both housing and non-housing consumption after rent is paid [15]; a household is said to have a housing affordability problem when it pays more than a certain percentage of its income to obtain adequate and appropriate housing [16].…”