Measuring housing affordablity

Creation Date: Thu, 01 Dec 2011 GMT

Measuring housing affordablity

The traditional method of calculating housing affordability is outdated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.

That's the finding of a new study from the Australian Housing and Urban Research Institute, which also concluded that some households could afford to spend more than half of their income on mortgages or rents, while others struggled when housing ate up 30 per cent or less of their gross earnings.

"Some household types can easily afford 50 to 60 per cent of their household income going on rents or mortgages and still have enough left over," says Terry Burke, lead author of The residual income method: a new lens on housing affordability and market behavior.

Burke is the director of the AHURI Swinburne-Monash Research Centre and also a professor of housing studies at Swinburne University of Technology's Institute for Social Research.

"Thirty per cent of your income going on housing for a low-income earner is very different from 30 per cent for a higher income earner," he says.

Housing expenditures that exceed 30 per cent of household income have historically been viewed as flagging housing affordability problems.

According to a paper from the United States Census Bureau, the rule that households can devote 30 per cent of their income to accommodation costs before the household is said to be "burdened" evolved from the United States National Housing Act of 1937. Times have changed a lot since then – DINKS (double-income no kids) and SINKS (single-income no kids) have entered the vernacular, for one.

Burke and his fellow researchers, Michael Stone and Liss Ralston, used the residual income method, calculating how much is left over for housing rents or mortgages after relevant expenditure for different household types was taken into account.

Under the residual income method, about one-third of households have an affordability problem.

"For the lowest 40 per cent of household income earners, the [30 per cent rule] actually understates the affordability problem," the study notes. "If we already thought it was bad, it is actually worse, with the residual method showing 31 per cent of all Australian households having an affordability problem."

While the trio found there were some households who could easily afford high housing costs, they tended not to have children.

"If you take a $100,000 income, a family is going to have less to spend on housing than a $100,000 single person," Burke says. That might not be news to families struggling on one or one and a bit incomes to bring up small kids, but the residual income method at least allows researchers and policymakers to take into account some of the additional costs families bear.

In addition to the income polarisation that's emerging in Australian cities, we are going to get a household-type polarisation as well, says Burke.

"More and more of the properties in the inner and urban areas of cities are only affordable essentially by singles and childless couples because the costs are so high that families can't access them," says Burke. "And the families are therefore being increasingly pushed to the urban fringe because that's the only area that they can actually afford to buy."

Burke says the research provided some insight into the downturn in retail spending.

"One of the major reasons for lack of spending is high housing costs," he argues. "What this method shows is after meeting certain essentials ... households just do not just have enough money to spend on luxuries.

"[There] is quite a sizeable percentage of people who are really pushed to the margins where they actually can't even afford housing costs."

SOURCE: http://smh.domain.com.au/blogs/talking-property/measuring-housing-affordablity-20111129-1o4ff.html