Measuring housing affordability: Looking beyond the median

• Published in: Journal of housing economics Vol. 18; no. 2; pp. 115 - 125
• Main Authors: Gan, Quan, Hill, Robert J.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.06.2009; Elsevier
• Series: Journal of Housing Economics
• Subjects: Affordability at risk; Affordable limit; Borrowing; Credit systems; Households; Housing affordability; Housing affordability Affordability at risk Affordable limit Mortgage market Housing boom Price-to-income ratio Skewness; Housing boom; Housing prices; Income; Measurement; Mortgage market; Mortgage markets; Price-to-income ratio; Real estate; Skewness; Housing affordability; R31; E64; C43; Housing boom; Skewness; E25; Price-to-income ratio; Affordable limit; Mortgage market; Affordability at risk
• ISSN: 1051-1377; 1096-0791
• DOI: 10.1016/j.jhe.2009.04.003

We draw a distinction between the concepts of purchase affordability (whether a household is able to borrow enough funds to purchase a house) and repayment affordability (the burden imposed on a household of repaying the mortgage). We operationalize this distinction in the context of a new methodology for constructing affordability measures that draws on the value-at-risk concept and takes account of the whole distribution of household income and house prices rather than just the median. Empirically we find that the distinction between purchase and repayment affordability can be pronounced. In the Sydney prime mortgage market over the period 1996–2006, repayment affordability deteriorated very significantly while purchase affordability remained quite stable. This difference can be attributed to the loosening of credit constraints in the mortgage market which it seems has carried through primarily into higher house prices rather than an improvement in purchase affordability. We also show how median house-price-to-income ratio measures of affordability can be extended to take account of the whole distribution of income and house prices, and how as a result of differential skewness in the house price and income distributions the housing affordability problem may be significantly worse for lower income households than suggested by standard median measures.