Understanding the 30:40 indicator of housing affordability stress

While there are many ways of comparing a household's income with their housing costs, not all measures provide comparisons that are useful for policy-makers. Indeed, concern about levels of housing affordability is not about whether house prices are going up per se but rather the changes in the relationship between housing costs and household incomes. Housing stress, when households have to pay too large a proportion of their income in housing costs (and thereby reduce spending on other essentials such as food and health), is the result when housing costs rise too far above household incomes.

Policy-makers and researchers need to be clear about which indicator of housing affordability stress they are using (and why) and that the indicator used is fit for purpose.

AHURI research commonly uses the 30:40 indicator of housing affordability stress.

What is the 30:40 indicator?

The 30:40 indicator identifies households as being in housing affordability stress when the household has an income level in the bottom 40 per cent of Australia's income distribution and is paying more than 30 per cent of its income in housing costs. The underlying assumption is that those on higher incomes who pay more than 30 percent of their income for housing do so as a choice and that such housing costs have little or no impact on the household's ability to buy life's necessities (such as food, health care, education etc.).

The '30' in the 30:40 indicator refers to the maximum percentage of housing costs (in relation to the household's income) a household can have before they are considered to be in housing stress. Housing costs include rent, mortgage payments (including both the principal and interest), rates, taxes, household insurance, repairs and maintenance, as well as interest payments on loans for alterations and levies on strata-titled dwellings.

Although the repayment of the actual house cost (i.e. the principal) could be seen as a form of enforced saving for home buyers, it is a cost that burdens households, often for decades, and is therefore included as a housing cost.

The '40' means the indicator only considers households with an income in the bottom 40 per cent of the Australian household income distribution (defined in this context as 'lower income' households). For example, in 2015–16, Australia's 40 per cent equivalised disposable household income level cut off was $737 per week ($38 324 p.a.). In the same years Australia's 40 per cent gross household income level cut off was $1258 per week ($65 416 p.a.).

The 30:40 indicator might consider household income in one of two ways: gross income (income before tax is paid) and equivalised disposable income (income after tax is paid adjusted for the number and ages of people in the household).

To explain how each of these income measurement methods works, consider the different housing affordability stress permutations for a household with a gross income of $70 000 in the 2015–16 tax year. Each section uses one of the measurement methods to determine which households are in housing affordability stress and which are not.

Measuring using gross income

Using the gross income method (i.e. $70 000 per year or $1346 per week), the household would not be in housing affordability stress as it earns more than 40 per cent of Australia's gross household income, which was $1258 per week ($65,416 p.a. in $2015).

However if the household earned $1258 per week ($65,416 p.a. in $2015)—being at the 40 per cent level of Australia's gross household income distribution—and paid more than $377.40 per week ($19,624 p.a.) in housing costs, regardless of the number of people in the household, it would be in housing affordabilitry stress using the 30:40 indicator.

The gross income method is easiest to gather information for, as people generally know their income before tax.

Table 1: Housing stress based on household gross income in 2015–16

Household demographics	Household gross income (before tax)	30% of gross income (housing costs to be in housing stress)
One or more income earner in household	$70 000 ($1346 per week)	Not in Q1/Q2 income range, therefore can't be in housing affordability stress under 30:40 indicator
One or more income earner in household	$65,416 ($1258 per week)	In 30:40 housing affordability stress if paying more than $377.40 per week ($19,624 p.a.) in housing costs

Measuring using equivalised disposable income

The equivalised disposable income method leads to a more nuanced understanding of housing affordability stress, although a lot of information about the makeup of the household is required (which is not always available). The ‘modified OECD’ equivalence scale assigns 1 point to the first adult in the household, 0.5 points to each additional person aged 15 years or older and 0.3 points to each child under the age of 15. Equivalised household disposable income is then worked out by dividing total household income (after tax) by the total equivalence points allocated to the household members.

The following table shows how a simple gross household income of $70 000 per year can lead to different indicators of housing stress.

Using Australia's 40 per cent distribution of equivalised household income level of $737 per week ($38,324 p.a.) in 2015–16, households H2, H3 and H5 would be considered as being in housing affordability stress using the 30:40 indicator if they paid more than 30 per cent of their equivalised disposable income in housing costs.

[Tax calculated using ATO simple tax calculator 2015–16]

Table 2: Housing stress based on household equivalised disposable income in 2015–16

Household demographics	Household gross income (before tax)	Household equivalised disposable income (after tax)	30% of equivalised disposable income
H1 Single person	$70 000 per year	$55 703 p.a. ($1071 per week)	Not in Q1/Q2 income range, therefore can't be in housing affordability stress under 30:40 indicator
H2 Couple, single income earner		$37 135 p.a. ($714 per week), being $55 703 divided by 1.5	In 30:40 housing affordability stress if paying more than $214 per week ($11 140 p.a.) in housing costs
H3 Couple with one child, single income earner		$30 946 p.a. ($595 per week), being $55 703 divided by 1.8	In 30:40 housing affordability stress if paying more than $179 per week ($9284 p.a.) in housing costs
H4 Couple, dual earners (earning equal amount)		$42 411 p.a. ($816 per week), being $63 616 divided by 1.5	Not in Q1/Q2 income range, therefore can't be in housing affordability stress under 30:40 indicator
H5 Couple, dual earners (earning equal amount), with one child		$35 342 p.a. ($680 per week), being $63 616 divided by 1.8	In 30:40 housing affordability stress if paying more than $204 per week ($10 602 p.a.) in housing costs

Differences in measurement approaches

Research finds that using gross income or equivalised disposable income varies the overall numbers of households determined as being in housing affordability stress by a small amount. For example, in 2007–08, 24 per cent of lower income households were in housing affordability stress based on equivalised disposable income, compared with 23 per cent of lower income households based on gross income. However, the different methods do capture different types of households. For example, the gross income method indicates 45 per cent of lower income households in housing affordability stress are lone person households and 18 per cent couples with children, whereas the equivalised disposable income method indicates 38 per cent of households in housing affordability stress are lone person households and 26 per cent are couples with children.

Table 3. Proportions of lower income household types in housing affordability stress: gross income and equivalised disposable income

Household type	Gross income 30:40 indicator	Equivalised disposable income 30:40 indicator
Couple only	15%	15%
Couple and children	18%	26%
One person household	45%	38%
Sole parent	16%	16%
Group household	5%	4%
Other household	2%	2%
All lower income households in housing affordability stress	100%	100%

Benefits of the 30:40 indicator

It is important to note that the 30:40 indicator is an indirect gauge of housing affordability stress for a particular target group and not a scientific measurement or a guide for determining housing affordability in the general housing market.

Nevertheless, for public policy development the 30:40 indicator has several clear advantages in that it relies on few variables so appropriate data can be obtained easily; its logic is easily communicated to non-experts; and it doesn't rely on subjective assumptions about a household's housing and non-housing consumption. In addition, the 30:40 indicator has been used long enough so that researchers and policy-makers can observe housing affordability stress trends over time.

Using a consistent and fit-for-purpose methodology, such as the 30:40 indicator, to calculate housing affordability stress provides policy-makers with a useful tool to assess how housing cost burdens have changed over time. While it's a good indicator for public policy, it is not an accurate measure of household need and is therefore not an appropriate tool for designing housing programs to individual households.

Policy-makers must also be aware that indicators of housing affordability stress are only part of the story of unaffordable housing. The indicators don't measure the number of new households that could have existed if people hadn't stayed in the parental home or shared houses because they couldn't afford mortgage or rental payments.

Relevant AHURI research

Burke, T., Stone, M. and Ralston, L. (2011) The residual income method: a new lens on housing affordability and market behaviour, AHURI Final Report No. 176

Gabriel, M., Jacobs, K., Arthurson, K. and Burke, T. with Yates, J. (2005) Conceptualising and measuring the housing affordability problem. National Research Venture 3: Housing Affordability for Lower Income Australians Research Paper 1

Henman, P. and Jones, A. (2012) Exploring the use of residual measures of housing affordability in Australia: methodologies and concepts, AHURI Final Report No. 180

Rowley, S. and Ong, R. (2012) Housing affordability, housing stress and household wellbeing in Australia, AHURI Final Report No. 192

Yates, J. and Gabriel, M. (2006) Housing affordability in Australia. National Research Venture 3: Housing Affordability for Lower Income Australians. Research Paper 3