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.