Affordable housing

Affordable housing is housing which is deemed affordable to those with a median household income or below[1] as rated by the national government or a local government by a recognized housing affordability index. Most of the literature on affordable housing refers to mortgages and number of forms that exist along a continuum – from emergency shelters, to transitional housing, to non-market rental (also known as social or subsidized housing), to formal and informal rental, indigenous housing, and ending with affordable home ownership.[2][3][4][5]

In Australia, the National Affordable Housing Summit Group developed their definition of affordable housing as housing that is "...reasonably adequate in standard and location for lower or middle income households and does not cost so much that a household is unlikely to be able to meet other basic needs on a sustainable basis."[6] Affordable housing in the United Kingdom includes "social rented and intermediate housing, provided to specified eligible households whose needs are not met by the market."[7]

The notion of housing affordability became widespread in the 1980s in Europe and North America. In the words of Alain Bertaud, of New York University and former principal planner at the World Bank,

"It is time for planners to abandon abstract objectives and to focus their efforts on two measurable outcomes that have always mattered since the growth of large cities during the 19th century’s industrial revolution: workers’ spatial mobility and housing affordability."[8]

Housing choice is a response to an extremely complex set of economic, social, and psychological impulses.[9] For example, some households may choose to spend more on housing because they feel they can afford to, while others may not have a choice.[10]

Measuring housing affordability

Median Multiple

The Median Multiple indicator, recommended by the World Bank and the United Nations, rates affordability of housing by dividing the median house price by gross [before tax] annual median household income).

"A common measure of community-wide affordability is the number of homes that a household with a certain percentage of median income can afford. For example, in a perfectly balanced housing market, the median household (the wealthier half of households) could officially afford the median housing option, while those poorer than the median income could not afford the median home. 50% affordability for the median home indicates a balanced market."[1]

Determining housing affordability is complex and the commonly used housing-expenditure-to-income-ratio tool has been challenged. In the United States[11][12] and Canada,[13] a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household's gross income. Canada, for example, switched to a 25% rule from a 20% rule in the 1950s. In the 1980s this was replaced by a 30% rule.[9] India uses a 40% rule.

Housing Affordability Index (HAI)

One of the greatest strengths of the HAI developed by MIT is its ability to capture the Total Cost of Ownership of individuals' housing choices. In computing the index the obvious cost of rents and mortgage payments are modified by the hidden costs of those choices.[14][15]

Household income and wealth

Income is the primary factor  not price and availability, that determines housing affordability.[16] In a market economy the distribution of income is the key determinant of the quantity and quality of housing obtained. Therefore, understanding affordable housing challenges requires understanding trends and disparities in income and wealth. Housing is often the single biggest expenditure of low and middle income families. For low and middle income families, their house is also the greatest source of wealth.[17]

The most common approach to measure the affordability of housing has been to consider the percentage of income that a household spends on housing expenditures. Another method of studying affordability looks at the regular hourly wage of full-time workers who are paid only the minimum wage (as set by their local, regional, or national government). The hope is that full-time workers will be able to afford at least a small apartment in the area where they work. Some countries look at those living in relative poverty, which is usually defined as making less than 60% of the median household income. In their policy reports, they consider the presence or absence of housing for people making 60% of the median income.

Housing expenditures

Housing affordability can be measured by the changing relationships between house prices and rents, and between house prices and incomes.[18] There has been an increase among policy makers in affordable housing as the price of housing has increased dramatically creating a crisis in affordable housing.[19]

Since 2000 the "world experienced an unprecedented house price boom in terms of magnitude and duration, but also of synchronisation across countries."[20] "Never before had house prices risen so fast, for so long, in so many countries."[18] Prices doubled in many countries and nearly tripled in Ireland.

The bursting of the biggest financial bubble in history in 2008 wreaked havoc globally on the housing market. By 2011 home prices in Ireland had plunged by 45% from their peak in 2007. In the United States prices fell by 34% while foreclosures increased exponentially. In Spain and Denmark home prices dropped by 15%. However, in spite of the bust, home prices continue to be overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden.[18]

Causes and consequences of rise in house prices

Costs are being driven by a number of factors including:

  • demographics shifts
    • the declining number of people per dwelling
    • Growing Density Convergence, Regional Urbanization
    • solid population growth (for example sky-high prices in Australia and Canada as a rising population pushes up demand).[18]
  • supply and demand
    • a shortfall in the number of dwellings to the number of households
      • smaller family size
      • the strong psychological desire for home ownership,[21]
  • shifts in economic policies and innovations in financial instruments
    • reduced profitability of other forms of investment
    • availability of housing finance[20]
    • low interest rates[20]
    • mortgage market innovations[20]
  • public policy
    • deregulation
    • land use zoning
    • significant taxes' levies and fees by Government on new housing (especially in Australia)

Inequality and housing

A number of researchers argue that a shortage of affordable housing – at least in the US – is caused in part by income inequality.[22][23][24] David Rodda noted that from 1984 and 1991, the number of quality rental units decreased as the demand for higher quality housing increased.[22]:148 Through gentrification of older neighbourhoods, for example, in East New York, rental prices increased rapidly as landlords found new residents willing to pay higher market rate for housing and left lower income families without rental units. The ad valorem property tax policy combined with rising prices made it difficult or impossible for low income residents to keep pace.[25]

Other housing expenditures

In measuring affordability of housing there are various expenditures beyond the price of the actual housing stock itself, that are considered depending on the index being used.

Some organizations and agencies consider the cost of purchasing a single-family home; others look exclusively at the cost of renting an apartment.

Many U.S. studies, for example, focus primarily on the median cost of renting a two-bedroom apartment in a large apartment complex for a new tenant. These studies often lump together luxury apartments and slums, as well as desirable and undesirable neighborhoods. While this practice is known to distort the true costs, it is difficult to provide accurate information for the wide variety of situations without the report being unwieldy.

Normally, only legal, permitted, separate housing is considered when calculating the cost of housing. The low rent costs for a room in a single family home, or an illegal garage conversion, or a college dormitory are generally excluded from the calculation, no matter how many people in an area live in such situations. Because of this study methodology, median housing costs tend to be slightly inflated.

Costs are generally considered on a cash (not accrual) basis. Thus a person making the last payment on a large home mortgage might live in officially unaffordable housing one month, and very affordable housing the following month, when the mortgage is paid off. This distortion can be significant in areas where real estate costs are high, even if incomes are similarly high, because a high income allows a higher proportion of the income to be dedicated towards buying an expensive home without endangering the household's ability to buy food or other basic necessities.

Growing density convergence and regional urbanization

The majority of the more than seven billion people on earth now live in cities (UN). There are more than 500 city regions of more than one million inhabitants in the world. Cities become megacities become megalopolitan city regions and even "galaxies" of more than 60 million inhabitants. The Yangtze Delta-Greater Shanghai region now surpasses 80 million. Tokyo-Yokohama adjacent to Osaka-Kobe-Kyoto have a combined population of 100 million. Rapid population growth leads to increased need for affordable housing in most cities. The availability of affordable housing in proximity of mass transit and linked to job distribution has become severely imbalanced in this period of rapid regional urbanization and growing density convergence.

"In addition to the distress it causes families who cannot find a place to live, lack of affordable housing is considered by many urban planners to have negative effects on a community's overall health."[26]

Affordable housing challenges in inner cities range from the homeless who are forced to live on the street to the relative deprivation of vital workers like police officers, firefighters, teachers and nurses unable to find affordable accommodation near their place of work. These workers are forced to live in suburbia, commuting up to two hours each way to work.[27] Lack of affordable housing can make low-cost labour scarcer (as workers travel longer distances) (Pollard and Stanley 2007).[26]


Lack of affordable housing places a particular burden on local economies.

As well, individual consumers are faced with mortgage arrears and excessive debt and therefore cut back on consumption. A combination of high housing costs and high debt levels contributes to a reduction in savings.

These factors can lead to decreased investment in sectors that are essential to the long-term growth of the economy.

Supply and demand

In some countries, the market has been unable to meet the growing demand to supply housing stock at affordable prices. Although demand for affordable housing, particularly rental housing that is affordable for low and middle income earners, has increased, the supply has not.[28][29][30][31] Potential home buyers are forced to turn to the rental market, which is also under pressure.[32] An inadequate supply of housing stock increases demand on the private and social rented sector, and in worse case scenarios, homelessness.[19]

Some of the factors that affect the supply and demand of housing stock

  • Demographic and behavioural factors
  • Migration (to cities and potential employment)
  • Increased life expectancy
  • Building codes[33]
  • A greater propensity for people to live alone
  • Young adults delaying forming their own household (in advanced economies).
  • Exclusionary zoning

Factors that affect tenure choices (ex. owner occupier, private rented, social rented)

  • Employment rates
    • Rising unemployment rates increase demand for market rentals, social housing and homelessness.
  • Real household incomes
    • Household incomes have not kept up with rising housing prices
  • Affordability of rents and owner occupation
  • Interest rates
  • Availability of mortgages
  • Levels of confidence in the economy and housing market
    • Low confidence decreases demand for owner occupation[19]

Labour market performance

In both large metropolitan areas and regional towns where housing prices are high, a lack of affordable housing places local firms at a competitive disadvantage. They are placed under wage pressures as they attempt to decrease the income/housing price gap. Key workers have fewer housing choices if prices rise to non-affordable levels. Variations in affordability of housing between areas may create labour market impediments.

Potential workers are discouraged from moving to employment in areas of low affordability. They are also discouraged from migrating to areas of high affordability as the low house prices and rents indicate low capital gain potential and poor employment prospects.[34]

Social costs of lack of affordable housing

Housing affordability is more than just a personal trouble experienced by individual households who cannot easily find a place to live. Lack of affordable housing is considered by many urban planners to have negative effects on a community's overall health.[35]

Jobs, transportation, and affordable housing

Lack of affordable housing can make low-cost labor more scarce, and increase demands on transportation systems (as workers travel longer distances between jobs and affordable housing). Housing cost increases in U.S. cities[36][37] have been linked to declines in enrollment at local schools.[38] In Australia, unaffordable housing has been linked to declining fertility. [39]

"Faced with few affordable options, many people attempt to find less expensive housing by buying or renting farther out, but long commutes often result in higher transportation costs that erase any savings on shelter." Pollard (2010) called this the "drive 'til you qualify" approach, which causes far-flung development and forces people to drive longer distances to get to work, to get groceries, to take children to school, or to engage in other activities.[40] A well located dwelling might save significant household travel costs and therefore improve overall family economics, even if the rent is higher than a dwelling in a poorer location.[6]

A household's inhabitants must decide whether to pay more for housing to keep commuting time and expense low, or to accept a long or expensive commute to obtain "better" housing. The absolute availability of housing is not generally considered in the calculation of affordable housing. In a depressed or sparsely settled rural area, for example, the predicted price of the canonical median two-bedroom apartment may be quite easily affordable even to a minimum-wage worker – if only any apartments had ever been built. Some affordable housing prototypes include Nano House and Affordable Green Tiny House Project.

Affordable housing and public policy

Policy makers at all levels – global, national, regional, municipal, community associations – are attempting to respond to the issue of affordable housing, a highly complex crisis of global proportions, with a myriad of policy instruments. These responses range from stop-gap financing tools to long-term intergovernmental[41] infrastructural changes.

In the simplest of terms, affordability of housing refers to the amount of capital one has available in relation to the price of the goods to be obtained. Public policies are informed by underlying assumptions about the nature of housing itself. Is housing a basic need, a right,[42][43] an entitlement, or a public good? Or is just another household-level consumer choice, a commodity or an investment within the free market system? "Housing Policies provide a remarkable litmus test for the values of politicians at every level of office and of the varied communities that influence them. Often this test measures simply the warmth or coldness of heart of the more affluent and secure towards families of a lower socio-economic status (Bacher 1993:16)."[44]

Affordable housing needs can be addressed through public policy instruments that focus on the demand side of the market, programs that help households reach financial benchmarks that make housing affordable. This can include approaches that simply promote economic growth in general  in the hope that a stronger economy, higher employment rates, and higher wages will increase the ability of households to acquire housing at market prices. Federal government policies define banking and mortgage lending practices, tax and regulatory measures affecting building materials, professional practices (ex. real estate transactions).[41] The purchasing power of individual households can be enhanced through tax and fiscal policies that result in reducing the cost of mortgages and the cost of borrowing. Public policies may include the implementation of subsidy programs and incentive patterns for average households.[41] For the most vulnerable groups, such as seniors, single-parent families, the disabled, etc. some form of publicly funded allowance strategy can be implemented providing individual households with adequate income to afford housing.

Currently, policies that facilitate production on the supply side include favorable land use policies such as inclusionary zoning, relaxation of environmental regulations, and the enforcement of affordable housing quotas in new developments.

In some countries, such as Canada, municipal governments began to play a greater role in developing and implementing policies regarding form and density of municipal housing in residential districts, as early as the 1950s.[41] At the municipal level recently promoted policy tools include relaxation of prohibitions against accessory dwelling units, and reduction of the amount of parking that must be built for a new structure.

Affordable housing is a controversial reality of contemporary life, for gains in affordability often result from expanding land available for housing or increasing the density of housing units in a given area. Ensuring a steady supply of affordable housing means ensuring that communities weigh real and perceived livability impacts against the sheer necessity of affordability. The process of weighing the impacts of locating affordable housing is quite contentious, and is laden with race and class implications. Recent research, however, suggests that proximity to low-income housing developments generally has a positive impact on neighborhood property conditions.[45]

The growing gap between rich and poor since the 1980s manifests itself in a housing system where public policy decisions privilege the ownership sector to the disadvantage of the rental sector.[41]

Ann Owen wonders if the housing market helped reduced poverty concentration in the National longitudinal data between the years of 1977–2008 with concentration of the 100 largest metropolitan areas in the United States. Data information is to compare or intertwine with the differences of national housing subsidies, the entry, exit, and enhancement of low income housing.[46]

Right to build

An article by libertarian writer Virginia Postrel in the November 2007 issue of Atlantic Monthly reported on a study of the cost of obtaining the "right to build" (i.e. a building permit, red tape, bureaucracy, etc.) in different U.S. cities. The "right to build" cost does not include the cost of the land or the cost of constructing the house. The study was conducted by Harvard economists Edward Glaeser and Kristina Tobio. According to the chart accompanying the article, the cost of obtaining the "right to build" adds approximately $600,000 to the cost of each new house that is built in San Francisco. The study, cited, published by Ed Glaeser and Joe Gyourko, reached its conclusion about the value of right to build in different localities based on a methodology of comparing the cost of single family homes on quarter-acre versus half-acre lots to get a marginal land price and then comparing the selling price of homes to construction costs to get a price for land plus other costs, with the difference between the two being attributed to the cost of zoning and other local government permitting and regulations.[47]

Government restrictions on affordable housing

Many governments put restrictions on the size or cost of a dwelling that people can live in, making it essentially illegal to live permanently in a house that is too small, low-cost or not compliant with other government-defined requirements. Generally, these laws are implemented in an attempt to raise the perceived "standard" of housing across the country. This can lead to thousands of houses across a country being left empty for much of the year even when there is a great need for more affordable housing; such is the case in countries like Sweden, Norway, Finland and Denmark, where there is a common tradition to have a summer house. This sometimes raises concerns for the respect of rights such as the right to utilize one's property.

In the United States, most cities have zoning codes that set the minimum size for a housing unit (often 400 square feet) as well as the number of non-related persons who can live together in one unit, resulting in having "outlawed the bottom end of the private housing market, driving up rents on everything above it." [48]

Affordable housing by country

The challenges of promoting affordable housing varies by location.

See also


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