Chapter Five

Affordability
5.1 Definition of affordability
The research on housing affordability has become popular since the 1980s. Prior to the 1980s, there was
only limited research on housing affordability. Since then the research on affordability is increasing and
at different realm, such as academia, professionals, and government, have been devoted to explore on the
topic of affordability.
 Howenstine defined housing affordability as: ‘The ability of the household to acquire decent
accommodation by the payment of a reasonable amount of its income on shelter’.

 ‘Affordability is concerned with securing some given standard of housing (or different standards)
at a price or rent which does not impose, in the eye of some third party (usually government) as
unreasonable burden on household incomes ’(Maclennan and William, 1990; p.9).

 Despite the clarification of ‘reasonable amount’, the concept of ‘given standard of housing’ and
‘unreasonable burden’ is too vague and should be defined more precisely. Bramley gave a more
specific and precise definition to affordability. He mentioned that:
 ‘Household should be able to occupy housing that meets well-established (social sector) norms of
adequacy (given household type and size) at a net cost which leaves them enough income to live on
without falling below some poverty standard’ (Bramley, 1990;p.16).
 Hancock attempted to incorporate the concept of opportunity cost to affordability. In his
interpretation, affordability is strongly related to opportunity, which means something needs to be
forgone in order to obtain a house.
 He defined that:‘…concerned with the notion of opportunity cost of housing, and clearly this is the
essence of the concept of affordability: what has to be forgone in order to obtain housing and
whether that which is forgone is reasonable or excessive in some sense’ (Hancock, 1993; p.129)

 Thalmann attempted to give a summarized definition and he simplified the affordability as the
comparison between housing expenditure and non-housing expenditure. He wrote that:‘Housing is
not affordable for a household if it excessively crowds out other expenditure’ (Thalmann, 2003).

 Lau defined affordability as: ‘After paying housing costs for staying in housing unit which meets
the socially accepted norms of adequate housing standard, are unable to live on a living standard
of those social security recipients’ (Lau, 2001; p.1).
 Although there are many different definitions of ‘affordability’ offered by different scholars and
consensus are still required to be further established, common elements and considerations could be
found in different definitions.
 Firstly, affordability deals with the user cost of housing of an individual household.
 Secondly, the household should be able to consume housing at some given lowest standard.
 Thirdly, the opportunity cost of non-housing consumption is an important concern of
affordability.
 Fourthly, affordability includes the concept of merit goods. Non-housing goods and services
are regarded as merit goods as many definitions state the importance to keep sufficient
amount of resource for non-housing consumption; while whether housing is regarded as
merit goods is still undergoing debate.

5.2 Measurement of affordability:

To measure the extent of affordability, the concept of affordability must be operationalized. Based on
the previous definition and concept, suggested an excellent framework to present different
measurement of affordability.
The framework summarizes the measurement of affordability into three approaches. They are
namely
I. Normative approach;
II. Behavioral approach and;
III. Subjective approach.

I. Normative approach
 Normative approach refers to the limits or norms of housing affordability in terms of certain
threshold values. A list of benchmarks is set to distinguish whether a household is affordable to
housing.
 There are two different types of norm set to identify the affordability.
 The first is ratio measurement, which means the housing cost of a household should not exceed a
certain proportion of the household income.
 The second type of normative measurement refers to residual income measurement.
Residual income measurement means housing is affordable if, after paying housing cost, it leaves
them enough income to live without falling below the poverty standard.

1. Traditional ratio measurement

 As ratio measurement has a long history of development, there is more than one measurement and
new ratio measurement method is coined to tackle with the limitation of the old method.
 Traditional approach of ratio measurement is simply the same as the definition, i.e. a household is
experiencing unaffordable housing if the ratio of housing cost to income, the affordability ratio,
exceeds a certain threshold ratio.
 2. Quality-based ratio measurement
 Yet, it is criticized that the traditional approach is not comprehensive enough and the quality of
housing is not being covered.
 Affordability is therefore defined as a household is unaffordable to housing if it must spend above a
certain threshold proportion of its income on a minimally adequate house in the locality. It prevents
the case that a household can only occupy a sub-standard accommodation although he is spending
less than the prescribed level of income. It is because more than the target ratio would need to be
spent in order to raise the standard of housing to the minimally adequate level.

3. Core need measurement

 Another different approach to revise the traditional ratio measurement is core need measurement,
which is suggested by Sueke and colleague (1981). This approach also considers the quality aspect,
but it differs with the quality based measurement.
 Core need assessment does not incorporate the quality aspect into the cost of acquisition at the
minimally adequate quality; in contrast, the core need assessment treats housing quality as a separate
dimension which includes physical quality of the dwelling as well as overcrowding.
 Thus, a household is regarded as unaffordable to housing, or in core housing need, if he is occupying
inadequate or unsuitable housing regardless of the proportion of the household income spent on
housing (Yip, 1995; p.60).

Residual income measurement

 The second type of normative measurement refers to residual income measurement. It was firstly
developed in UK in the late 1980s. Residual income measurement means housing is affordable if,
after paying housing cost, it leaves them enough income to live without falling below the poverty
standard (Bramley, 1990).
 The residual income measurement is closely related to the concept of poverty, as assessment of
affordability requires comparing the residual income against poverty line. The most common way to
set the poverty line is appealing to ‘income support’ level or the social security level.
 Hancock (1993) extends the Residual income measurement to include any indication of housing
quality. It considers households with affordability problem to the extent that consumption of housing
and non-housing goods are both below the socially defined minimum level. However, further
information is required to indicate the preference and constraint of the household in order to
determine the affordability position of the household.
 As it is difficult to distinguish preference from constraint, an extended definition of residual income
approach is coined to revise the residual income approach. It defines household with either housing or
non-housing consumption under the socially accepted minimum as experiencing unaffordable
housing (Yip, 1995; p.62).
 In short, Thalmann (2003) gave a clear distinction between ratio measurement and residual
measurement of affordability. For ratio measurement, housing is affordable if housing expenditure
does not exceed a given share of income; while for residual income measurement, housing is
affordable if income minuses housing expenditure is no less than standard non-housing expenditure.
 II. Behavioral approach:
 It is believed that people’s housing consumption behavior can also be used to assess housing
affordability. In order to assess housing affordability, Bramley states that to ‘focus on normal housing
decision, looking at what households with given incomes and characteristics, facing given prices,
choose to spend’ (Bramley, 1994; p.105). Another behavioral approach is to look at the problem of
mortgage arrears and repossessions, so that to investigate the household’s affordability based on their
decision.

III. Subjective approach

 If both normative approach and behavioral approach are regarded as an objective measurement by
scientific research and objective data collection, The study simply required the respondent to answer
the question about affordability in subjective evaluation of their own situation. The respondent was
requested to answer the question in a Likert scale from ‘very difficult to afford’ to ‘very easy to
afford’.
 The qualitative and subjective measurement is checked against their financial position and other
quantitative factors. The data collected are used to determine the threshold level of their housing
affordability with the belief that the individual is the best judge of their own situation

5.3 Factors affecting affordability

 Under different measurement approaches, some factors affected affordability could be identified. The
most obvious one is rent and income. All different approaches largely emphasize on these two
factors.
 Rent is important in affecting affordability, as it determines how much is required to pay for housing.
Income is also playing a fundamental role to affect affordability. It determines a household’s ability
to pay for housing. Few would doubt these two factors are strongly affecting one’s affordability, but
the discussion should not be stopped here. There are other factors affecting one’s affordability in
addition to income and rent.
 In addition to rent and income, housing expenditure also will affect the level of affordability to pay
for housing. No one could avoid housing expenditure if he or she consumes a unit. Housing
expenditure refers to those expenses on housing,
For instance,
 Tax, rate,
 Maintenance fee,
 Management fee.
It is because the amount spent on housing expenditure would at the same time reduce one’s income
available for paying housing rent. Higher housing expenditure would reduce one’s household
affordability.
 While on the other hand, the ‘maintenance fee’ and ‘management fee’ items are two technical but
complicated areas in terms of ‘housing affordability’ which should be further investigated in other
research studies.
 Apart from housing expenditure, residual income measurement puts a lots concern on non-housing
expenditure.
 Non housing expenditure can be operationalized into money spent on basic living, such as food,
education, and healthcare, childcare. They are vital for household to maintain a basic living.
 The supporter of residual income measurement argues that housing is unaffordable if the household
is unable to maintain their basic living after paying certain amount for housing rent.
 Thus, in this point of view, the non-housing expenditure would also strongly determine the
household’s affordability, especially when it comes to apply on the elderly group.
 Quality Based Measurement also emphasizes on the importance of housing quality. It argues that a
household is unaffordable to housing if it consumes a housing unit which is below the socially
acceptable standard, regardless to the rent paid is below certain ratio. Housing quality can be
operationalized into different indicators, such as housing size and household size.

 However, apart from that, there are in fact some non-monetary but potential factors that we
should pay attention to decide one’s income ability and hence his/her housing affordability.
 The following emphasizes on the non-monetary factors affecting affordability.
 Nonmonetary factors can be divided into two categories:
Household factors and
Individual factors.
Some hypotheses were set before the investigation of correlation between the variables and
affordability. These are:
1. Fewer the working adult in a household, lower the affordability
2. Higher the age, lower the affordability
3. More the health status deteriorated, lower the affordability
4. Lower the education received, lower the affordability
Affordability from architect’s perspective
Designing Affordability:
 Quicker,
 Smarter,
 More Efficient Housing
Now examines how architects, engineers, planners, policy makers, tenants, and homeowners are crafting
innovative ways to reduce the cost of housing and increase opportunities by rethinking how we build,
maintain, and occupy structures.
Affordable housing is typically focused on ensuring that a family at a certain income can qualify for a
housing unit. Affordability is a broader concept referring to lifestyles, incomes and how housing can be
designed, constructed and managed at a lower cost.
By addressing various elements necessary for the production of housing, the studies, both local and
global, presented in this chapter endeavor to reduce project costs, whether by reimagining public housing,
leveraging land, building simply, deploying technology, rethinking home life, constructing modularly, or
building incrementally. Through these means, the projects are designing affordability.
Life cycle affordability
The designs for affordable houses need to consider affordability in all life cycle of the house and
implement in all phases of the project
 Pre building phase
 Building
 Post building phases
Affordability can be express in production cost, the cost spent for the design and construction process
Occupancy expenses the costs for the life expenditures for a different purpose
The cost of maintenance, by innovate the building design more durable and less maintenance cost
End of life cost (cost of environment) considering the environmental degradation and its rehabilitation
costs because of our buildings side effect on the environment.
How has housing affordability been defined?
 The idea of affordable housing recognizes the needs of households whose incomes are not sufficient
to allow them to access appropriate housing in the market without assistance. Thus, the term
‘affordable housing’ describes housing that assists lower income households in obtaining and paying
for appropriate housing without experiencing undue financial hardship.
 A range of publicly or privately initiated forms of housing may meet this specification. In fact, in
recent years, the term ‘affordable housing’ has been used as an alternative to terms such as ‘public’,
‘social’ or ‘low cost’ housing.
 This is because conceptualizing and measuring affordability is as complex as understanding the
causal factors of the housing affordability problem itself. Indeed, as the discussion of affordability
debates illustrates, many of the conceptual and measurement problems stem from contested
understandings of the problem.
 For example, housing affordability can be understood as the continuing costs of a mortgage or rents
relative to income, problems of accessing affordable housing (e.g., first home ownership), not being
able to afford housing costs after meeting other expenditures, or a problem of too low an income or
too high housing prices.
 Even more problematically, affordability can be experienced by household types in different ways;
that is, through the employment, transport, health, and other consumption trade-offs that have to be
made by singles, sole parents and couples with children as they adapt their circumstances to high
housing costs and/or low income.
 Affordable housing is housing that is appropriate for the needs of a range of low to moderate income
households and priced so that low and moderate incomes are able to meet their other essential basic
living costs.

What are the problems with these definitions?

‘Affordability’ is an easy concept to grasp in general but can be hard to pin down in practice,
especially in terms of the changing circumstances of individuals and households over time. Analyses of
affordability typically adopt a ratio approach by measuring the relationships between household incomes
and housing costs. A ratio approach usually uses a benchmark average or percentile levels of incomes
and costs to assess the extent of variability between places or household types and/or assessing changing
circumstances over time.
Practical definitions of what constitutes affordable housing are usually specific to the policy and
program context in which they are used.
Typically, however, they have common features, such as a notion of what comprises affordability and a
reference to the target group(s) for whom they are intended.
The complexity surrounding affordability means that there is no one measure for assessing the
nature and degree of housing affordability problems. The challenge is therefore to identify the policy
needs around the issues and to devise measures relevant to the policy requirements of identifying the
scale and form of the problem, evaluating housing market trends, informing policy design or
providing guidelines for industry. Quantitative measures can reveal is that there is an affordability
problem but not suggest solutions.
Where is the problem manifest?
Whatever measurement is used, it is clear that housing affordability in Australia for example has
deteriorated substantially in the last twenty years.
The average house price in the capital cities is now equivalent to more than seven years of
average earnings; up from three years in the 1950s to the early 1980s;
Only a one-third of transacted dwellings would have been accessible to the median young
household in 2006/07, compared with a longer-standing past average of around 45 per cent
(Richards 2008) 4;
around two-thirds of households in the lowest 40 per cent of the income distribution with a
mortgage or renting were spending over 30 per cent of their income on housing, the
established benchmark for 'housing stress' (Select Committee 2008, p1);
Despite Australia’s increasing economic prosperity, 1 million households are in housing stress
and around 100,000 people are homeless on any one night (Select Committee 2008, p37).
In the rental market, FaHCSIA's March 2008 report (Making Housing Affordable Again) shows
that in all capital cities, there has been a pronounced fall in the available supply of rental housing
since 2002. Yates et al’s (2004, piii) research into the changes in the supply of and need for low
 rent dwellings found that there is a significant supply shortage of rental dwellings for low-income
households alongside an increase in proportion of low rent dwellings occupied by other than low
income households.

The problem of affordability has been a function of both strong demand and limited
supply. In general, the supply of housing has not kept up with demand. Several factors have
contributed to the strong demand for housing. They include:
• Higher average real incomes and an increase in the number of double income households;
• A decrease in the size of the average household due to later marriage, fewer children and
increased incidence of separation and divorce;
• Relatively strong population growth underpinned by higher immigration rates;
• The decline in standard home loan interest rates from the mid-1990s to early 2002 reflecting
a low inflation environment;
• Greater availability of credit, including from non-bank lenders;
• The taxation system’s incentives which have encouraged investment in second and third
properties (through negative gearing provisions and the 50 per cent capital gains tax
discount) and have benefited owner-occupiers over renters (through the capital gains and
land tax exemptions on owner-occupied housing) (Select Committee 2008, p2).