WHAT DOES HOUSING AFFORDABILITY ACTUALLY MEAN? IT DEPENDS.
The term ‘housing affordability’ has very different meanings and relevance based on the country context and personal circumstances of the occupant. For many low to middle income households impacted by the high cost of housing the term has very tangible meaning and consequences — including limited or no access to quality housing, little money left over for food on the table or other essentials and sometimes emergency housing (if they are fortunate) or sleeping rough. For most politicians around the world the term ‘housing affordability’ is personally intangible and financially inconsequential. Their taxpayer-funded salaries and pensions insulate them from the daily financial challenges many households face.
The OECD measures housing affordability using a variety of metrics such as cost, price, income, quality etc. In relation to housing ‘cost’ it adopts the ‘affordable’ threshold as being ≤30% of household gross disposable income and the ‘overburden’ threshold as ≥40%. At a country level the overburden ‘rate’ is the proportion of households or population exceeding that level. Recent OECD data indicates the housing cost overburden rate in New Zealand for households in the bottom quintile of income distribution as the 2nd highest in the OECD for owners with a mortgage (at ~54%) and 3rd highest for private renters (at ~57%). The rankings vary each year but in short we’re performing very badly.
Politicians in New Zealand have successfully conflated the words ‘housing’ and ‘affordability’ to mean ‘housing supply’. Or more simply, a lack of housing. Whether that is due to ideological reasons or political expediency — we’ll leave it to the market to self-regulate or it’s just too hard — is unclear. What is clear, is that we do not have a shortage of housing here, we have a shortage of affordable housing. What is equally clear is that an increase in the supply of residential sections and housing does not by itself, especially if delegated to the private sector, result in improved ‘housing affordability’ — especially for low to middle income households. Any notion by politicians, economists or investors that delegation to the private sector, or deference to the laws of supply and demand, will result in lower housing prices, is not matched by reality.
Access to good quality and affordable housing is a foundation for any well functioning society. In some countries this is constitutionally enshrined as a ‘human right’. Notwithstanding this, there is a widening gap between any such constitutional principles, law, political rhetoric and housing affordability data. Opaqueness regarding ’affordable housing’ definitions, a multitude of housing typologies and ‘affordable’ and ‘social’ housing delineations don’t help.
What constitutes ‘affordable housing’ depends very much on the perspective of the individual/household. Some in higher income brackets may think nothing about spending more than 40% of disposable household income on housing costs. Depending on earning ability there may still be substantial residual income after deducting housing costs for expenditure on essential items and for discretionary spending. This will not be the case for many low income households, where even housing costs equivalent to say 10% of disposable income may represent a major financial burden — with the balance income barely sufficient to meet essential non-housing expenditure.
OECD guidance on the use of ratios as an expression of housing affordability is that they offer insights for policy makers but come with inherent restrictive weaknesses. The price-income ratio enables cross-country data comparisons and can illuminate systemic market dysfunction — but not the factors directly influencing housing price-income evolution. This ratio is criticised for offering little granularity in relation to distribution of housing costs, who does or doesn’t have access to housing, who is most in need, or the quality of the housing. But it ‘is what it is’ and it seems somewhat frivolous to fault it for what it isn’t.
The same could be said of the expenditure-income affordability and overburden ratios — where the affordable housing cost is set at ≤30% of gross disposable income and the housing overburden cost is set at ≥40% of gross disposable income. The OECD delimits the efficacy of these ratios to the extent they don’t identify a household’s ability to pay, what residual income may be left over for non-housing essentials, the quality of housing, or other subjective factors that might influence perceptions of housing affordability. But residual income, housing quality and subjective factors are housing affordability indicators in their own right and each should not be derogated for not being something it can’t be.
The residual income measure has generated a wide body of research and offers a convenient tool for state agencies charged with identifying those most acutely suffering from the high cost of housing, or simply unable to pay anything. Policy makers need to ensure such measures do not confuse the ‘cost of living’ with a ‘housing crisis' — when a household’s inability to pay for non-housing cost ‘essentials’ might more accurately reflect the high cost of those, or the combined cost of housing and essentials, or an inability to escape the low-wage economy.
Is one measure of housing affordability more important or relevant than another? That will depend on the country, regional, urban, or socio-economic context and even on the values, ideology and commercial agenda of the person posing the question. If the concern is with specific household need then residual income may be insightful. If the focus is illuminating systemic market issues, it won’t be.
In the Urban Research Institute article ‘The Residual Income Approach to Housing Affordability: The Theory and the Practice’ the authors contend that the “logical flaws in the ratio approach led inexorably to the residual income concept of affordability” and “the appropriate indicator of tension between housing costs and incomes is thus the difference between them—the residual income after paying for housing—rather than the ratio.” They traverse a wide field of housing affordability definitions to inform operationalisation of home purchase and renter residual income models and standards for varying household incomes and types to transcend limitations of current approaches. In backgrounding application of the model they note an inability of the current benchmark to explain market reality, “…it would suggest that prices have reached a level of affordability where there could not be any further growth, but in fact they keep growing”.
This statement encapsulates the limitations and value of quantitative approaches generally in addressing housing affordability. A residual income model may offer a helpful framework for measuring ‘ability to pay’ along a sliding scale of disposable incomes for varying household and tenure types — analysing the symptoms of a dysfunctional housing market — but offers no insights into the structural causes of that dysfunction or how to improve housing outcomes for all members of society. A residual income model also assumes housing affordability for households that do not meet the residual income standard or criteria is of no concern for policy makers. However, it is reasonable to expect that politicians should be very concerned with lifting the performance of the country across all income distributions. Indeed the authors note that “problems have well and truly reached up the income distribution ladder such that they are no longer limited to the lowest income tiers or to renters…”. This is very evident in the OECD data referred to earlier.
In New Zealand, the state provides (almost) free primary and secondary school education, and (almost) free or subsidised healthcare, for all citizens. It does not differentiate between or exclude households that may have the financial means to pay for private education or healthcare and is concerned with lifting educational and health outcomes for all citizens. Why would the state not be similarly invested in improving housing outcomes for all citizens through both direct provision and indirect enablement? Although secure, affordable and good quality housing for all citizens is fundamental to the success of any well-functioning society, the mechanisms to enable that are glaringly absent in New Zealand domestic law and policy.
Too many low income households have little disposable income left over after housing costs for essentials. Housing rent controls are weak, state subsidies are limited and the quality of housing outed by the ‘leaky homes crisis’ is a national disgrace. Disadvantaged or disaster prone communities are often reliant on regional and local support with only ad hoc state intervention. State policy has focused heavily on greenfield land development distant from public transport and employment opportunities and ill-conceived blanket densification of urban areas — to be delivered by ‘for-profit’ developers and investors. In addition, housing typologies are culturally ‘vanilla’. The outcome is that our housing affordability is amongst the worst in the OECD.
Governments (here and globally) seem stuck in a kind of neo-classical economics vacuum which has literally sucked affordability (and equality) out of housing markets. Policy reliance on the for-profit sector to increase land and housing supply, and in doing so somehow magic-up housing affordability out of thin air, has been ‘found-out’ to be flawed. We can do much better.
2026 © Níall Mayson