Measuring housing affordability: the two approaches

Abstract

Measuring housing affordability has become an important field of research and an essential step in housing policy response. Through a review of previous studies from the early 1990s, this study provides a description of the two main approaches to measuring affordability – the ratio and the residual income measures. The objective is to present descriptions of the measures from the perspectives of different authors and the ongoing debate on their relative suitability as affordability measures. The review revealed lack of consensus on the most suitable approach. Some researchers advocate replacement of the ratio approach with the residual income approach while some argue for continued use of the ratio approach. Yet others advocate modified measures that account for the short-comings of the two main measures. Some scholars have actually developed and applied such modified measures. By bringing the diverse views of scholars on the subject over a relatively long period to a single platform, the paper has made valuable contribution to the housing affordability literature. The implication for research is the need to develop methodologies for measuring housing affordability which reflect the housing market practices of developing countries.

Keywords: Housing affordability; housing costs; housing expenditure-to-income ratio; ratio approach; residual income approach