Mark Stephens The Meaning and Measurement of Housing Affordability THE URBAN INSTITUTE The Meaning and Measurement of Housing Affordability Mark Stephens Director The Urban Institute Edinburgh

Overview Affordability relatively easy to define Its measurement is much more problematic Ratio measures lack an underlying rationale, but have a strong intuitive appeal and some empirical support Residual income approaches encounter a series of conceptual problems In both cases problems exacerbated by international comparison Outline alternative “consensual” approach Unclear that a single catch-all indicator is possible THE URBAN INSTITUTE

Why housing affordability? Often the largest item of expenditure Highly variable between and within locations Cost is not very flexible (e.g. length of rental or mortgage contract) Patterns over lifecourse THE URBAN INSTITUTE

I. Meaning of affordability Housing is affordable when housing of an acceptable minimum standard can be obtained and retained leaving sufficient income to meet essential non-housing expenditure. THE URBAN INSTITUTE

Elements to affordability Income Housing costs Assessment of adequate income (e.g. poverty line) Assessment of adequate housing (e.g. size, amenities) Evolution of affordability THE URBAN INSTITUTE

II. Ratio measure Widely used (e.g. EU) HP:I or HC:E HP:I indicative of access to mortgage finance But ultimately derived from HC:E THE URBAN INSTITUTE

EU Cost Overburden rate 2015 THE URBAN INSTITUTE

Decisions What to count as housing cost: What to count as income: Direct housing occupancy costs: Rent, mortgage interest… Property specific expenditure: Utilities (esp. energy), property tax… What to count as income: Gross Net (Gross - tax, social insurance + social security) What to do about housing allowances: Add to income or Deduct from rent THE URBAN INSTITUTE

Treatment of Housing Allowances THE URBAN INSTITUTE

Refinements Variable thresholds for different incomes Australian “stress test” Bottom 40% of income distribution Who pay >30% income in housing costs US Section 8 housing vouchers: Targeted on very low income (=<30% area median income) Reduces housing cost to 30% of income. THE URBAN INSTITUTE

Critique and defence Stone (2006): Implies that either the absolute income required to finance non-housing needs diminishes as income falls with no minimum or that the ratio must decrease to zero as income falls. Bramley (2012): “subjective evidence of payment problems and material hardship can be used to validate ratio measures and points to the best thresholds to use.” THE URBAN INSTITUTE

III. Residual income approach Poverty After Housing Costs (AHC) Does not matter whether housing allowance added to income or deducted from rent. Poverty = 60% median equivalised income Poverty line recalculated AHC (so does not necessarily increase poverty) THE URBAN INSTITUTE

THE URBAN INSTITUTE

Refinements Poverty caused by voluntary “overconsumption” of housing: AHC poverty attributable to voluntarily consuming more than minimum standard of housing required. (Kutty, 2005) AHC poverty avoided by “underconsumption” of housing. Estimates by Stephens and Leishman (2017) identified very few cases in UK over 18 years. THE URBAN INSTITUTE

Dynamic approaches Baker et al (2015): “conventional point-in-time measures of housing affordability fail to capture the substantial movement that many individuals make into and out of poor affordability over time…”: Stickers and Slippers. Chen, et al (2010): Point of entry trend: Initial affordability for households who enter market in any given year Cohort trend: How affordability evolves for each cohort of entrants THE URBAN INSTITUTE

Shanghai (bottom 20-40%) 2000-2008 Poverty Gap THE URBAN INSTITUTE Chen, Hao & Stephens, 2010

Shanghai (40-60% income group) 2000-2008 THE URBAN INSTITUTE

60% poverty threshold relative, but arbitrary Poverty threshold, single person, € per day, 2014 THE URBAN INSTITUTE

Overlap with housing deprivation Particularly problematic in international European comparison Absolute (e.g. overcrowding; inside bathroom/WC) Externally derived Lux and Sunega (2016) argue subjective assessments of overcrowding and affordability can be used. THE URBAN INSTITUTE

IV. An Alternative: Consensual indicators Poverty line: Bundle of goods and services that most people consider to be essential. Can be costed (JRF Minimum Income Standard) or predicted (Stephens & Leishman, 2017) Minimum housing standards: Housing standards that are regarded as minimum, e.g. Space standards Dampness/ hard to heat THE URBAN INSTITUTE

Example of analysis from UK (1991-2008) THE URBAN INSTITUTE Stephens & Leishman, 2017

V. Other issues Fuel (or energy) poverty Transport (commuting) costs Is a single catch-all indicator possible? Relevance where informal / self-build common THE URBAN INSTITUTE

THE URBAN INSTITUTE

THE URBAN INSTITUTE THE URBAN INSTITUTE EDINBURGH