Portion Four Housing Affordability: Lecture Note.ppt

Ethiopian Civil Service University
College of Urban Development & Engineering
Housing Affordability
By : Goitom Abraha Baraki(PhD)
Portion Four

Definition of 'Affordable Housing'
 Defining housing affordability problems is complicated and entails
subjective judgments.
 Standard measures of affordability fail to take into account tradeoffs
that people make to lower housing costs. These tradeoffs include
housing quality, neighborhood quality, and location.
 There are significant differences in house prices, rents, and
affordability among different countries.
 The term affordable housing can be explained to any type of housing
that is rented or purchased at a cost that is not beyond the financial
capacity of a household.
 Low quality housing is likely to be available at lower prices or rents
and hence be more affordable. Conversely, high-quality housing is
likely to be more expensive and hence less affordable.
 Though different countries have different definitions for affordable
housing, but it is largely the same, i.e. affordable housing should
address the housing needs of the lower or middle income households.

Definition of 'Affordable Housing‘…Cont’d
 Affordable housing becomes a key issue especially in developing
nations where majority of the population not able to buy or rent
houses at the market price.
 The concept of affordability brings together three factors. These are
the quality of housing available, the price of housing, and the income
of families of seeking to buy or rent housing.
 Housing affordability at the household level and the affordable
housing stock more broadly have gradually declined for most low-,
very low-, and extremely low-income renters and homeowners in
many countries.
 If we take country’s level of economic development and its
distribution of income as given, then low house prices and rents are
the key to affordable housing.
 Housing costs typically include expenditure on rent or mortgage
payments and on rates , property taxes, household insurance , repairs
and maintenance.

Definition of 'Affordable Housing‘…Cont’d
 On the other hand, housing affordability examines paying capacity of
mortgage repayments and basic living expenses, which requires a
balance relationship between income, housing and non-housing
consumption.
 Therefore, affordability is not just only about access to and the cost of
housing ; it is also critically analyze about the non-housing
consumption(such as food, health, education, transport etc).
 The price of housing reflects the costs of housing production and the
balance between supply and demand in the market for housing.
 The concept of housing affordability expresses the challenge each
household faces in balancing the cost of its actual or potential
housing, on the one hand, and its non-housing expenditures, on the
other, within the constraints of its income.
 As such, any standard of housing affordability should address, beyond
the obvious question of what is affordable, i.e., to whom housing is
affordable, and by what standard of affordability?

Housing Affordability Perspectives
 Moreover, the concept of housing affordability has three
perspectives, namely, repayment, purchase, and income
affordability.
 Repayment affordability: studies burden imposed on a household
with regard to repaying mortgage.
 Purchase affordability: studies whether a household is capable of
borrowing enough funds to purchase a house.
 Income affordability: measures ratio of house prices to income.

Demand and Supply for Affordable Housing
 Affordable housing allows households with diverse incomes,
abilities and needs to live together in attractive, diverse and
dynamic neighborhoods.
 It allows lower-income employees to live close to business,
economically and socially disadvantaged children to attend good
schools , and creative people(students, artists and entrepreneurs )
to live, work and participate in a community.
 The task of housing needs assessment consists of identifying and
quantifying the types of housing products needed by each income
group(poor, lower-middle class, middle class, upper-middle class
and wealthy).
 It requires reliable data on income levels and expenditure patterns
of households, their savings capacity and prioritization of housing
vis-à-vis other forms of investment.
 Demand affordable housing typically consisted of lower-priced
apartments, townhouses, small single family and accessory suits.

Demand and Supply for Affordable Housing….Cont’d
 Increasing affordable housing development can help achieve
various economic, social and environmental objectives.
 Increasing affordable housing supply can provide various savings
and benefits, including direct benefits to occupants and it is
equivalent to increasing the incomes of society’s most
disadvantage members plus various indirect economic, social and
environmental benefits.
 Therefore, there is mass demand for serviced, healthy, affordable
housing that are accessible and affordable to transport, school,
hospital, market and recreation centers.
 The basic question associated with the affordability issue is: what
share of the households can afford to become owners or renters of
homes, providing the minimum necessary housing services?

 Affordable Housing also means physically adequate and fit for
human habitation.
 In simple words, a house cannot be considered affordable if it is
overcrowded and unhealthy.
 To evaluate the real cost of housing then, housing-related
expenditures (housing, water, electricity, gas, etc.) should be
kept into consideration as well, since those are what make a
house healthy and appropriate for living.

 Can households afford formal (multi-storey) housing in Addis
Ababa?
 The demand for condominium housing before 2012 was
around one million, but the total houses delivered to the
beneficiaries with in eleven years are only180, 742 houses.
 The cost of condominium housing increasing from time to
time, for example, in 2012 the total price of studio was
45,288.99 birr, one bed room 82‚202.67 birr, two bed room
168‚233.64 birr and three bed room was 205‚479.32 birr. But
in 2016 the total price of studio is 92‚594.00 birr, one bed
room 175,525.00 birr, two bed room 329,469.00 birr and the
three bed room is 476,821.00 birr for the same purpose.

Challenges of Housing Affordability
 Housing affordability challenges may impact a household’s budget,
leaving less to pay for food, utilities, transportation to work, health
and child care expenditures and reducing savings for emergencies,
retirement, and other opportunities, such as pursuing higher
education or starting a small business.
 These challenges may affect the overall quality of life.
 Addressing housing affordability challenges, however, has been
difficult for at least three reasons.
 First, it is difficult to decrease household expenditures;
 Second, it is difficult to increase household incomes; and
 Third, household income grow slowly over time.
 Thus, the ‘housing affordability crisis’ has been in the headlines in
many parts of the world.

Factors Affecting Housing Affordability
 With respect to the target population, the housing affordability has external and
internal factors.
 The internal factors that affect affordability have to do mainly with the socio-
economic circumstances of the target group.
 It refers to the first set of these as ‘the economic character of the community’.
 This is defined by employment opportunities, kinds of occupation and incomes.
 Expenditure patterns are also an important part of the economic character. The
second set of internal factors has to do with the target group’s demographic and
social character.
 Household sizes, family structures, needs, customs, aspirations and priorities are
important, as they will determine, to a large extent, the behavior of the group.
 The external factors revolve around the cost of housing. This is the sum of land
acquisition, infrastructure, planning, designing, administration and community
facilities administration and community facilities.
 Other factors affecting project costs are related to the financing of the housing
project and include interest rates, amortization periods and subsidies.

Factors Affecting Housing Affordability…Cont’d
 There are several factors identified in the literature to the affordability of
housing:
 Income (current and expected lifetime): directly impacts on a household’s
ability to purchase and make housing payments.
 House prices and rents: represents the level of payment that is required to
secure housing.
 Interest rates: determines the cost of borrowing for home owners.
 Labor market conditions: affects a household’s ability to participate in the
labor market and earn an income, and thus be able to maintain housing costs
over a period of time.
 Mortgage and rent payments: directly impacts on a household’s ability to
save and increase their housing consumption in the future. This is especially
relevant for households in the rental market who are looking to purchase a
house.
 Supply constraints: may limit the ability of the market to respond to excess
demand for housing.

Components of Housing Affordabilitity
 Furthermore, housing affordability is affected by many housing
affordability components.
 Affordability is principally set by two main variables: capital variables
(house purchase costs) and occupation variables (costs associated
with keeping the house).
 The ability of a household to purchase a house is affected by the
purchase cost (which is the sum cost of land, infrastructure, building
materials and labor and profit) and the ability to finance the purchase
(principally set by the finance down payment requirement and the
balance of household savings).
 Once a house is purchased, the ability of a household to occupy and
pay for the house is influenced by material inputs (land lease and
rates, services costs, and building maintenance) and finance inputs
(loan repayment period and interest rates, and household income
minus non-housing expenditure).

Components of Housing Affordability…Cont’d

 Generally, affordable housing is assessed by examining the
following affordable housing assessment components:
 Income ratios: the component income ratios involve house price
in relation to income, and rental cost in relation to income.
 Loans and accommodations: the component loans and
accommodations contain interest rates and mortgage availability,
availability of rented accommodation (private and social),
availability of low-cost home ownership products, and market-
value home ownership products.
 Facilities and services: the component facilities and services
include access to employment opportunities, public transport
services, quality education (i.e., schools), shopping facilities,
health services, early childhood care services, leisure facilities,
and open green public spaces.

 Safety and comfort: the component safety and comfort include
safety of a community, incidence of crime, and presence of
environmental problems. The decrease in affordability consequently
affects households, such as polarization of cities and social cohesion,
workforce market productivity, and economic performance, along
with environmental concerns.
 Quality management: the component quality management involves
quality of housing, energy efficiency of housing, waste management,
and deprivation in the area. Quality management is related to
conditions of the surrounding, such as population density, light, air,
energy, waste, and other houses conditions associated with housing.
 Grow Home: the component Grow Home includes land properties
such as size, location and price, number of workers needed to build
the house, Grow Home options, unfinished levels, and new spaces
that have being added after the household bought the house.

 Land Suitability: Suitability of land for residential development and for construction
of construction of the affordable housing.
 Accessibility: affordable housing obligation shall be made accessible for persons
with mobility impairments.
 Concurrency: the affordable units are to be built concurrently with the market rate
units. All affordable housing units shall be subject to recorded legal documents.

Components and Sub-Components of Housing Affordability
Component Sub-Component
Income ratios House price to income ratio, Rental cost to income ratio
Loans and
accommodations
Interest rates and mortgage availability, Availability of rented
accommodation, Availability of low cost home ownership
Products, Availability of market value home ownership
products.
Facilities and
services
Access to employment, Access to public transport services,
Access to good quality education (school), Access to shopping
facilities, Access to health services, Access to early years child
care services, Access to leisure facilities, Access to open
green public spaces.
Safety and
comfort
Safety- incidence of crime, Presence of environmental
problems
Quality
management
Quality of housing, Energy efficiency of housing, Waste
management, Deprivation in area
Grow Home Land properties, New spaces

Measurement of Housing Affordability
 Affordable housing is measured for different purposes, such as to
describe housing of a typical family, analyze trends, compare different
household types, and administrate rules defining individuals who can
access housing subsidies.
 The heterogeneous characteristics of the housing market’s relation to
the quality and quantity of housing make difficult to measure housing
affordability.
 The measurement of housing affordability is important to monitor
and the housing provision, develop housing policy and guide decisions
regarding future housing development.
 Housing Affordability measures whether or not a typical family earns
enough income to qualify for purchasing a typical home at the
national and regional levels based on the most recent price and
income data.

Measurement of Housing Affordability…Cont’d
 According to The Global Survey of Housing Indicators, there are
three measures of affordability:
 1. The house-price-to-income ratio, defined as the ratio of the
median house price and the median household income;
 2. The rent-to-income ratio, defined as the ratio of the median rent
of a dwelling unit and the median household income of renters; and
 3. Residual income approach , it focuses on the absolute amount
leftover after housing expenses, rather than the share of income
allocated to housing.

 The House-Price-to-Income Ratio
 The house-price-to-income ratio is a key measures of both housing
affordability and the overall performance of the housing market.
 The housing price to income ratio is the most common used approach
of measuring housing affordability and it represents the relationship
between house prices and incomes as a ratio.
 The housing price to income ratio claims if households paying for
housing expenditures more than a given proportion or ratio it should
be regarded as having affordability difficulties.
 The given proportion is defined as 25-30%, that means households
should not pay more than 30 percent of their income for housing
consumption otherwise will be considered as having difficulties of
housing affordability.

 The housing price-to-income ratio has the following
benefits:
 It is simple to calculate and understand, only two inputs
i.e, income and housing price are needed to calculate the
ratio ;
 It is based on readily available data;
 It can be applied across a range of places, to track
changes over time and to explore differences in these
ratios across households;
 It is very direct in that it measures actual outlays of
households relative to their actual incomes.

 The Rent-to-Income Ratio
 The rent-to-income ratio is measured as a rent to income ratio.
 We can then find the proportion of households income with house
rent above some pre-determined level (usually the conventional
benchmark of 25-30%).
 The more households above this benchmark, the less affordable is
renting.
 Despite the many benefits of the conventional measures of rental
housing affordability, it has several drawbacks and limitations.
 The measures fail into account the tradeoffs households make to
lower housing rent costs.
 Besides, the rent-to-income ratio measures do not address the
changes in housing quality over time.

 Residual Income Approach
 The third measure of affordability is the residual income assessment.
 It is represented as a percentage of household income spent on
housing-related expenses and demonstrates a household’s ability to
financially service housing without compromising on necessary non-
housing expenditure.
 The residual income approach to housing affordability is one that
looks at what different household size can afford to spend on
housing after taking into account the other necessary non-housing
expenditure of living.
 It focuses on the absolute amount leftover after housing expenses,
rather than the share of income allocated to housing, to identify
affordability problems. Households with too little leftover to meet
basic needs ought to be classified as shelter poor.
 As for the residual income method, we need to determine how much
money we have left over after housing costs have been incurred.

Approaches Affordability Measures
 Two broad groups of affordability measures approach have been adopted in
measuring affordability, namely: ‘shelter’ first and ‘non shelter’ first measures.
 The shelter first approach
 The shelter first approach assumes that housing has first claim on the household
budget, and other expenditure is met from the residual income.
 The non-shelter first approach
 The non-shelter first approach prioritizes other expenditure to have first claim, with
housing costs met from the remainder.
 The approach requires some estimate of the cost of all non-housing necessities.
 Non- shelter first is exclusively a residual income approach, representing the income
left over for housing once a minimum living standard is deducted from income.
 Another often cited measure in Stone’s ‘shelter –poverty’ standard .
 The residual-income approach identifies households as being in “shelter poverty”
when they cannot meet basic non-housing needs after paying for housing.
 A household could be in shelter poverty even if it spends less than 30% of income
on housing if it cannot afford fixed costs of food, transportation, and other basic
needs.

Benchmark of Housing Affordability
 Although there is no universally agreed percentage, housing is generally deemed
affordable when a household spends less than 30 percent of their income on
housing related expenses, such as mortgage repayments (for owner-occupiers),
rent payments(for tenants), and direct operational expenses such as taxes,
insurance and service payments.
 How affordability is calculated can vary, leading to confusion. Maximum budget
shares range from 25 % to 30% for housing, but even these values may be
excessive to allow low-income households to purchase other necessities such as
healthy food and healthcare.
 Some housing cost data consider only rents and mortgages, while others include
maintenance and utility costs.
 Income can be gross or net, all income or only wages.
 We could look at individual income, or household income.
 We can also calculate average individual income as that for all people or of only
those employed.

Benchmark of Housing Affordability…Cont’d
 Housing affordability is usually measured in terms of the share of income that a
household spends on its housing.
 Households allocating above some share of income are classified as having a
housing affordability problem while the rest are not .
 The standard threshold is 30 percent of income spent on housing, including
utilities.
 By convention, housing is considered ‘affordable’ to households if they spent on
housing no more than 30 percent of their pre-tax income. Households spending
more than 30 percent are labeled cost burdened and those spending more than
50 percent are labeled severely cost burdened.
 It has also become common to refer to those households spending more than
half their income on housing as severely or seriously cost burdened.
 These ratios, which are in fact rule of thumb measures, are used for different
purposes such as explaining a typical household expenditure pattern, analyzing
administrative rules for allocating subsidies, defining housing needs, public policy
purposes, predicting the ability of a household to pay rent or to repay a mortgage
loan, and selecting households for rental unit or mortgage loan.

Benchmark of Housing Affordability…Cont’d
 One justification for the 30 percent benchmark is based on a rule of thumb that
housing costs are normally around a quarter of a household’s income, and the
evidence emerged from longitudinal studies and historical observation of people’s
housing practices and financial institutions’ lending practices in the private sector
in the developed world.
 However, such rule of thumb benchmarks are set by private market requirements,
not necessarily by what a household can afford.
 The conventional benchmark to measure housing affordability is to count any
household that spends more than 30 percent of its pre-tax income on housing as
having affordability problem.
 Therefore, when a household spends more than 30 percent of income on housing it
is unaffordable and if it spends more than 50 percent it constitutes a serious cost
burden.
 Households those for whom housing cost burdens leave them too little leftover to
meet basic needs have housing problems worthy of government action, it is far less
clear if households who have too little leftover to save for retirement, education
and security should be constructed as having a housing affordability problem.
 Most homeless individuals have little have little income and no assets and they
would be identified as cost burdened.

Housing Cost Burdens
 Housing cost burdens have greatly increased for low- and moderate-income
households.
 These high housing cost burdens can reflect distinct economic issues and how
housing supply constraints and lags, declining or stagnating household incomes, or
a combination of those conditions can result in housing costs that are high relative
to income.
 High housing cost burdens may result from stable housing costs coupled with
declining household incomes, whereas in other areas, high housing cost burdens
may be driven by housing costs increasing more quickly than household incomes.
 When the costs of available housing options in an area are high relative to
household income, households may need to make tradeoffs.
 In an effort to curb high costs, households may choose housing that is far from
employment centers and would require long commutes or share housing with
other households, which could lead to overcrowding.
 Alternatively, households might reduce spending in other areas, such as
transportation, health care, food, and education, to offset high housing
expenditures.

Policy Implications of Housing Affordability
 In addition to meeting the basic need for shelter, housing can also be
a component of efforts to promote positive life outcomes for low- and
moderate-income families.
 Research shows that affordable housing has the capacity to help
improve residents’ health, access to education, and employment
prospects.
 Conversely, high housing cost burdens are associated with negative
life outcomes such as declines in mental health, reduced parental
enrichment spending and cognitive achievement for low- and
moderate-income children, and reduced educational attainment
among children.
 Housing policymakers should define and envisage housing
affordability in a way that allows families to obtain quality housing.
 The efforts to overcome housing affordability problems by financing
housing improvements and the provision of basic services and
infrastructure seem to be strategically more important.

Policy Implications of Housing Affordability….Cont’d
 Many other countries have tried to solve the affordable housing
issue, both in developing and western countries.
 The different strategies used to reach the goal can be basically
grouped into three categories:
 The clearance of all slums and the re-housing of their residents
in new standard and sanitary housing.
 Public housing construction of low-cost dwelling units for lower
income groups.
 Government subsidy or rent control.
• Countries applied one of the above or a mixture of them,
depending on the situation.
 But, problem of housing affordability remains one of the biggest
challenges across the world.

Policy Implications of Housing Affordability….Cont’d
 We need more efficiency in the affordable housing system with a
renewed focus on helping the neediest.
 We also need to expand supply by relaxing zoning rules and other
impediments to new construction.
 In parallel, cities globally need to carefully review the set of
regulations that affect housing supply and housing affordability.
 The housing affordability crisis cannot be addressed unless it
considers all segments of the housing stock—including public housing
and informal housing, that are now the only housing options
affordable to large segments of the urban population—while creating
conditions for the private housing sector.
 In a nutshell, housing affordability deals with a number of issues: the
distribution of housing prices, housing quality, the distribution of
household income and the ability of households to borrow mortgage,
public policies, housing market and the choices that people make
about how much housing to consume relative to other goods.

Portion Four Housing Affordability: Lecture Note.ppt

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