Are we getting housing affordability wrong? Part II
The Week in Housing 24/02/23
Last week we looked at some of the issues around the ‘30% rule’ for measuring housing affordability, focusing on the absence of any logical or theoretical basis for this figure. This week we will delve further in to this issue, focusing especially on why ratio approaches may miss their mark in terms of capturing the experience of housing stress.
First, the ratio approach implies that the lower the income of a given household, the lower the amount (in absolute terms) they need for non-shelter needs/expenditure. Obviously, a low income household spending 30% of its income on housing costs will have much less money left over for non-housing expenditure than a rich household, even if they are both spending the same proportion of their income on housing.
Second, the ratio approach affords no way to assess whether households are able to achieve some minimum standard either of housing (i.e. it doesn’t tell us anything about the type of housing that is accessed for a given proportion of income) or of non-housing expenditures. The first part of this is particularly crucial, as there are great variations across housing. As such, two households could be in the same position in terms of affordability but be accessing very different forms of housing, e.g. one could be in overcrowded, poor quality housing in a troubled neighbourhood, while another could be in much more desirable housing. According to the 30% rule, if they are spending the same proportion of their income on housing costs, they are experiencing the same level of housing stress, which is obviously not true. In other words, housing varies hugely in many factors beyond cost and this variation is central to housing’s impact on wellbeing.
Third, just as housing varies, so households vary. As such, different households have different needs in terms of housing and in terms of non-housing costs, and these are not captured by ratio approaches. Stone gives the following example:
If we consider, for example, two households with comparable disposable incomes and suppose that one consists of a single person while the other consists of a couple with three children, obviously the larger household would have to spend substantially more for its nonshelter necessities than the small household to achieve a comparable quality of life. This implies that the larger household can afford to spend less for housing than the small household with the same income. Now if we compare two households of the same size and composition, but with different after-tax incomes, both would need to spend about the same amount to achieve a comparable standard of living for nonshelter items. The higher-income household could thus afford to spend more for housing, both as a percentage of income and in monetary terms.
As Baer notes, ‘[g]iven the variety of circumstances facing different households, rules of thumb about the percent of income to be devoted to housing can be extremely misleading in individual cases and therefore in aggregate data as well.
The issue of the variation across household characteristics and housing situations is discussed by AHURI in terms of the complex ‘trade offs’ associated with housing consumption choices:
The 30/40 rule does not distinguish between those who fall into housing stress as a result of financial constraints and those who choose to take on higher cost burdens in order to enjoy better quality housing or locations.
Moreover, it does not capture the fact that housing affordability may be obtained at the expense of decent housing. For example:
[A] household may take on a housing cost burden that does not place them within a situation of financial stress, but they may have had to make a compromise in terms of a location that adds to travel costs, is a considerable distance from their existing community, or the housing is of poor quality. The consequence of their decision may not have major financial implications but imposes other costs on that household.
As such, one of the main limitations of affordability measures in general, and ratio approaches in particular, is that they do not ‘quantify those would-be households unable to form; those forced to move outside their existing communities to access appropriate accommodation; or those living in poor quality but cheap housing” (AHURI again).
Summing up, the ratio approach suffers from (a) its arbitrary nature and the lack of a theoretically sound normative standard of housing or housing costs (discussed last week); and (b) an inability to capture the diversity of ways in which the relationship between housing, costs and wellbeing is configured, as well as the diverse characteristics and needs of households. Ratio approaches are therefore generally challenged in the housing affordability literature as being a poor indicator of housing stress.
These critiques are conceptual nature. However, the validity of ratio approaches to affordability can also be assessed empirically. This is done by examining housing cost/income ratios in conjunction with other indicators of housing stress, such as whether a household feels financially comfortable (a subjective measure) or whether they have been in arrears (an objective measure).
The AHURI research mentioned above examined the validity of ratio approaches using Australian data, and found that 45% of households deemed to be in housing stress according to the 30/40 rule, in fact regarded themselves as financially ‘reasonably comfortable’ or ‘very comfortable’:
“This supports the proposition that a significant proportion of low–moderate-income households can sustain housing cost burdens exceeding 30 per cent of their income and still be in a financially sustainable position”.
In the Irish case, the most authoritative research using a ratio approach is by Corrigan et al. (2019). They use both a simple 30% benchmark and the 30/40 rule. It finds that:
· On average households were paying one-fifth of their income on housing costs in 2016;
· Households in the bottom 25 per cent of the income distribution were spending on average between two-fifths to more than one half of their income on housing costs, depending on tenure;
· Using the 30 per cent rule, 16 per cent of households had housing payment-to-income ratios greater than 30 per cent in 2015-2016, but that this figure was double for private renter households, and increased to 75 per cent for private renter and mortgaged households in the lowest quarter of the income distribution;
· Using the 30/40 rule, the majority of these households were private renters, with very low residual incomes after paying their housing payment costs.
The ESRI use a number of other indicators to assess the suitability of the residual income approach in terms of measuring housing stress. They find that “using the simple 30% rule, households defined as having high housing costs had higher levels of economic strain; they had higher rates of mortgage or other payment arrears, higher rates of consistent poverty, and a lower level of residual income”. Meen, looking at England, comes to a similar conclusion.
There is thus not a consensus about how robust ratio approaches are empirically. Nevertheless, I think the key point is that, as discussed above, these approaches tell us very little about the actual housing that is consumed, i.e. the only tell us about the impact of the cost, but not the nature or impact of the housing per se.
If the 30/40 rule is so roundly critiqued in the literature, why is it so widely used, not just in Ireland, but internationally. This seems to be a case of pragmatism: data on housing costs and household incomes is widely available and easily compared over time and between countries. The availability of the data appears to be the main reason for the popularity of the approach . The approach favoured in most of the academic literature appears to the ‘residual income approach’, which looks at the amount of money (in absolute terms) households have left after housing costs, and whether this is sufficient to access a minimum standard of living. But it is more difficult to apply this approach using readily available data and even more difficult to use this approach to make comparisons (this is the reason the Corrigan et al. paper gives for not using a residual income approach, for example).
The 30/40 rule has a ‘rough and ready’ character that can help us ‘take the temperature’ of the housing systems, and in particular give us an indication of the impact of housing costs on household finances and how this is developing over time. That being said, greater awareness of the limitations of the approach, and especially its weak conceptual/theoretical foundations, is salutary, especially if it is going to evolve from a measure of housing stress to a normative a standard of what is socially and politically acceptable in the world of housing costs.
Events
Details of the next FEANTSA European conference on homelessness research have been announced. I don’t seem to be finding out about as many housing related events, which I believe is due changes in how Twitter works. If your holding a relevant event be sure to let me know so I can share here. The Conference of Irish Geographers, which is always a great conference in my experience, is taking place in Wexford this year. Abstract submission is still open.
What I’m reading
A very important new publication using the ‘Growing up in Ireland’ data looks at poor housing and health outcomes for children. Savills latest investment market bulletin makes for interesting reading, especially in the context of rising interest rates. The latest Daft rental report has also been published, making for grim PRS news.