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Exploring the use of residual measures of housing affordability as an alternative to the ratio approach (Essay)

Summary

This Essay argues that new approaches to measuring housing affordability are needed and are possible in Australia. The residual income approach has a key advantage over the more commonly used ratio approach, because it measures household outcomes (such as living standards) rather than inputs to household welfare (such as housing costs and income). This is consistent with wider moves towards output and outcome based measures in social policy research. While this approach requires additional data around household expenditures on goods and services, this is available through Australian budget standards data.

Project Number: 20605
Research Theme: Housing_affordability
Project Leader: Henman, Paul
Funding Year: 2010
Research Centre: Queensland

Description

The intent behind measuring housing affordability is to gauge the extent to which ‘housing costs impose an unreasonable burden on households’ (Maclennan and Williams). However, there has always been a question as to who defines what is unreasonable. Is it governments (who might prefer a common benchmark around affordability for all households that is relevant to setting policy)? Is it housing researchers (who may wish to impose their own values and understandings of affordability)? Or should it be defined by the individual household (whereby affordability becomes a measure of subjective wellbeing)?

Policy-makers and researchers have often been drawn to the ‘ratio measure’, which defines housing affordability stress to occur when a household is paying more than a specified ratio or percentage of its income in housing costs (this benchmark is typically 30%). This approach has the advantage of simplicity, but is criticised as being arbitrary and insensitive to the varied circumstances of different household types.

The residual income approach appears to offer a way forward for policy makers and researchers alike because it takes into account the varied circumstances households face including their different household structures and housing costs. Furthermore, whereas the ratio approach essentially measures inputs to household welfare (housing costs and income), the residual income approach directs attention to the impact of housing costs on household outcomes, including wellbeing and living standards. This parallels more recent developments in poverty and living standards research, which have increasingly focused on outputs and outcomes.

A disadvantage of the residual income approach is that it requires more data and is more complex to calculate. However its potential in Australia has been improved by the availability of Australian budget standards by the Social Policy Research Centre at the University of New South Wales. The Essay outlines an approach to calculating residual income measures, together with the requisite data items needed.

AHURI events involving this project

• Measuring housing stress and its consequences: new AHURI research — Perth, Wed 16 May 2012 
  

More Information

Final Report: No. 180: Exploring the use of residual measures of housing affordability in Australia: methodologies and concepts
565 KB PDF Document