What makes housing affordable?

By Lindsey Kreckler, Engagement Strategist

Affordable housing, like so many other things in life, can be very difficult to define, and instead often is determined by normative statements. What constitutes “affordable” housing can vary widely even within a single city, never mind a country or the entire world. Affordable for whom? Affordable where? Many common definitions of affordable housing do not take these differences into account.

The most commonly occurring definition of affordable housing is that used by the United States government, which defines affordable housing as housing and related expenses (mortgages, utility bills, etc.) that do not exceed 30% of a household’s income. If a family’s housing expenses are higher than 30% of their income, they are considered burdened. This standard can generally be applied to households within the United States, and even in comparably developed countries, such as Australia, the United Kingdom, and Canada.

Another recurring definition of affordable housing, one that takes into account the differences between different geographic areas, looks at individual markets. The median multiple system, used in this report from Demographia and recommended by the World Bank and United Nations, determines the price to income ratio of a market by dividing the median house price by median household income. According to this system, a median multiple of 3.0 or less signifies an affordable housing market, while a median multiple of 5.1 or more demonstrates “severely unaffordable” housing. The map here at Numbeo, based on user-reported numbers, shows a similar measure, the Price to Income Ratio, defined as the “ratio of median apartment prices to median familial disposable income, expressed as years of income.” While these data are user-reported and should be taken with a grain of salt, the map provides an interesting visual of how the United States and other developed economies compare to the Global South and similarly developing economies.

There are some challenges to these definitions, especially when looking at housing in other countries that are not so comparable to the United States. In developing countries where incomes are much lower and households don’t have as many expenses, housing costs constitute a larger portion of expenses. Utilities, a cost of housing, are often absent or scarce in rapidly growing cities, and are therefore disproportionately expensive compared to other household costs. This definition, on a global scale, also doesn’t take into account the noncash resources of low-income households, which often constitute a major part of the household’s total value.

While this definition does give very useful insight into the affordability of a market, it unfortunately does not give insight into affordability for specific households. The median multiple system tells us what the market as a whole looks like, without looking at options within that market.

This article from The Atlantic’s City Lab takes local differences to the next step, using research from the Urban Institute’s Housing Finance Policy Center. The Urban Institute looks at the willingness of some populations to spend more on housing and its related costs than others in different geographic areas, which makes “affordability” an extremely relative term. The Urban Institute’s report looks at each metro area’s debt-to-income ratio and average down payments on mortgages, giving us not simply the median income and median home price of an area, but how much of its income the typical household spends on housing costs. This distinction can be key in areas with strong public transit systems and high housing costs, such as San Francisco, New York, and Boston. Yes, residents of these areas pay more for housing, but the reliability of public transportation means that they spend less on cars, gas, and car insurance.

Throughout AHI’s work with global populations, particularly in the global south, we have seen that these rubrics for measuring affordability in countries with developed economies may not apply to developing countries and poorer populations. The 30% measure is useful in stabilized, mature economies with functioning housing ecosystems, but in emerging economies, households can spend higher levels of their income on housing, up to 40%, without being considered burdened, and up to 60% on housing and transportation costs combined. The proportion of income these households spend on food and other family necessities is comparatively minimal, as opposed to those who have more disposable income.

Poor workers may also have to be more flexible with their housing situations, which can lead to immense variability in the proportion of income spent on housing; for example, a very poor person may choose to live on the streets near their workplace during the work week to avoid the high transportation costs that would be incurred by travelling to and from their home. In addition, many statistics referenced in determining housing affordability reference formal systems and the formal sector economy, without considering the informal equivalents that poor populations utilize. These informal systems come with their own problems, but also their own preexisting resources.

Readers, what do you think? Which of these methods is most useful for determining what “affordable” means? What would you consider when determining whether housing is affordable or not?

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2 thoughts on “What makes housing affordable?

  1. vasavi narla

    Transportation should be integral part of measuring affordable housing. Can be in the form of cost+ physical/time distance or only cost including money spent on travelling to work.

    Reply
  2. Olubayo John

    I agree that definitions of what constitues affordable housing requires some localization. Given the lower relative household costs for some countries in global south, it is quite possible for households to easily spend as much as 40% of their income on housing costs.

    Reply

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